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

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **(Mark  One)** |
|-----------------|
|            |   |   |
| **ý**      |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |   |   |
|            |   | **FOR  THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002** |
|            |   |   |
| **o**           |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |   |   |
|            |   | **FOR  THE TRANSITION PERIOD  FROM          TO          .** |

 

**CommissionFile Number 000-30493**

** **

**Restoragen, Inc.**

(Exact name ofsmall business issuer as specified in its charter)

 

| **Delaware**                                                     |   | **47-0727668**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **3820  N.W. 46th Street, Lincoln, Nebraska**                    |   | **68524-1637**                        |
| (Address of  principal executive offices)                        |   | Zip Code                              |
|                                                             |   |                                  |
| **(402)  470-2100**                                              |
| (Issuer’s  Telephone 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  November 12, 2002, the Company had 7,379,415shares of Common Stock, $.01 par value per share, outstanding.

 

 

----

 

**RESTORAGEN, INC.**

**INDEX**

 
|               | **Page**                  |
|--------------------|---------------------------|
| **PART I.**        | **FINANCIAL INFORMATION** |   |
|               |                      |   |
|               | ITEM 1.                   | FINANCIAL STATEMENTS |   |
|               |                      | Condensed  Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 | 3 |
|               |                      | Condensed  Consolidated Statements of Operations for the three and nine month periods  ended September 30, 2002 and 2001 | 4 |
|               |                      | Condensed  Consolidated Statements of Cash Flows for the nine month periods ended  September 30, 2002 and 2001 | 5 |
|               |                      | Notes  to Condensed Consolidated Financial Statements | 6 |
|               |                      |   |   |
|               | ITEM  2.                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 10 |
|               |                      | Cautionary  Statement About Forward-Looking Statements | 10 |
|               |                      | Overview | 11 |
|               |                      | Results  of Operations | 12 |
|               |                      | Liquidity and Capital  Resources | 13 |
|               |                      | New Accounting  Pronouncements | 14 |
|               |                      | Critical Accounting  Policies | 14 |
|               |                      | Contractual  Obligations and Commitments | 15 |
|               |                      | Market Risk | 15 |
|               |                      |   |   |
|               | ITEM  3.                  | QUALITATIVE  AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK | 15 |
|               |                      |   |   |
|               | ITEM 4.                   | CONTROLS AND  PROCEDURES | 16 |
|               |                      |   |   |
| **PART II.**       | **OTHER INFORMATION**     | 16 |
|               |                      |   |
|               | ITEM 1.                   | LEGAL PROCEEDINGS | 16 |
|               |                      |   |   |
|               | ITEM 2.                   | CHANGES IN SECURITIES | 16 |
|               |                      |   |   |
|               | ITEM 3.                   | DEFAULTS UPON  SENIOR SECURITIES | 17 |
|               |                      |   |   |
|               | ITEM  4.                  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |   |
|               |                      |   | 17 |
|               | ITEM 5.                   | OTHER INFORMATION | 17 |
|               |                      |   |   |
|               | ITEM 6.                   | EXHIBITS AND  REPORTS ON FORM 8-K | 17 |
|               |                      |   |   |   |
| **SIGNATURES**     | 18                        |
| **CERTIFICATIONS** |                      | 19 |
|                    |                           |  |  |  |  |

 

2

----

 

**RESTORAGEN, INC.**

(adevelopment stage company)

CondensedConsolidated Balance Sheets

(unaudited)

 
|                                                                                                                                                              |   | **September 30,  2002** |      | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
| ASSETS                                                                                                                                                            |   |                    |      |                   |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Current assets                                                                                                                                                    |   |                    |      |                   |   |
| Cash and cash equivalents                                                                                                                                         |   | $                       | 1,808,157 |                   | $      | 13,010,711 |   |
| Short-term investments                                                                                                                                            |   | —                  |      | 1,999,314              |   |
| Prepaid expenses                                                                                                                                                  |   | 295,972                 |      | 146,655                |   |
| Property and equipment held for sale                                                                                                                              |   | 1,200,000               |      | —                 |   |
| Other current assets                                                                                                                                              |   | 20,840                  |      | 41,100                 |   |
| Total current assets                                                                                                                                              |   | 3,324,969               |      | 15,197,780             |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Property and equipment, net of accumulated depreciation $9,408 and  $3,798,251                                                                                    |   | 18,522                  |      | 5,845,068              |   |
| Patents and patents licensed, net of accumulated amortization of  $222,007                                                                                        |   | —                  |      | 663,637                |   |
| Deferred financing costs, net of accumulated amortization of $700,189  and $384,516                                                                               |   | 312,501                 |      | 628,173                |   |
| Other assets                                                                                                                                                      |   | 73,055                  |      | 76,118                 |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Total assets                                                                                                                                                      |   | $                       | 3,729,047 |                   | $      | 22,410,776 |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT                                                                                                                        |   |                    |      |                   |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Current liabilities:                                                                                                                                              |   |                    |      |                   |   |
| Accounts payable                                                                                                                                                  |   | $                       | 630,520   |                   | $      | 2,803,131 |   |
| Accrued expenses                                                                                                                                                  |   | 127,612                 |      | 427,817                |   |
| Accrued restructuring charges                                                                                                                                     |   | 817,997                 |      | —                 |   |
| Capital lease obligations - current portion                                                                                                                       |   | 524,428                 |      | 564,362                |   |
| Notes payable - current portion                                                                                                                                   |   | 685,128                 |      | 696,127                |   |
| Total current liabilities                                                                                                                                         |   | 2,785,685               |      | 4,491,437              |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Long-term liabilities:                                                                                                                                            |   |                    |      |                   |   |
| Accrued interest - convertible notes payable                                                                                                                      |   | 1,135,530               |      | —                 |   |
| Accrued restructuring charges - less current portion                                                                                                              |   | 412,320                 |      | —                 |   |
| Capital lease obligations - less current portion                                                                                                                  |   | 460,697                 |      | 649,984                |   |
| Notes payable - less current portion                                                                                                                              |   | 498,396                 |      | 859,338                |   |
| Convertible notes payable                                                                                                                                         |   | 18,000,000              |      | 18,000,000             |   |
| Total long-term liabilities                                                                                                                                       |   | 20,506,943              |      | 19,509,322             |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Total liabilities                                                                                                                                                 |   | 23,292,628              |      | 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 20,092 issued and outstanding, at redemption value)                          |   | 1,997,500               |      | 3,050,277              |   |
|                                                                                                                                                              |   |                    |      |                   |   |
| Shareholders’ deficit                                                                                                                                        |   |                    |      |                   |   |
| Common stock, ($0.01 par value, 40,000,000 shares authorized,  7,379,415 and 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                                                                                                                                        |   | 81,359,914              |      | 80,281,920             |   |
| Deficit accumulated during development stage                                                                                                                      |   | (102,998,333            | )         | (84,999,435            | )      |
| Total shareholders’ deficit                                                                                                                                  |   | (21,561,081             | )         | (4,640,260             | )      |
|                                                                                                                                                              |   |                    |      |                   |   |
| Total liabilities and shareholders’ deficit                                                                                                                  |   | $                       | 3,729,047 |                   | $      | 22,410,776 |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

3

----

 

**RESTORAGEN, INC.**

(adevelopment stage company)

Condensed ConsolidatedStatements of Operations

(unaudited)

 
|                                                                 |   | **Three Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |   | **Cumulative  period  From April 15, 1988  (date of incorporation)  to September 30, 2002** |   |
|----------------------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|
| **2002**                                                             |   | **2001**                              |       | **2002**                              |   | **2001**                                                                                    |   |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Revenues                                                             |   | $                                     | 670,480    |                                  | $      | 4,503                                                                                       |   | $ | 870,480 |   | $ | 6,996 |   | $ | 4,539,643 |   |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Operating costs and expenses:                                        |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| General and administrative                                           |   | 441,778                               |       | 928,254                               |   | 1,958,461                                                                                   |   | 2,483,651 |   | 24,482,936 |   |
| Research and development                                             |   | 1,239,695                             |       | 4,625,789                             |   | 7,240,715                                                                                   |   | 11,284,251 |   | 72,936,728 |   |
| Corporate restructuring costs                                        |   | 248,721                               |       | —                                |   | 8,335,381                                                                                   |   | — |   | 8,335,381 |   |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Total operating costs and expenses                                   |   | 1,930,194                             |       | 5,554,043                             |   | 17,534,557                                                                                  |   | 13,767,902 |   | 105,755,045 |   |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Operating loss                                                       |   | (1,259,714                            | )          | (5,549,540                            | )      | (16,664,077                                                                                 | )      | (13,760,906 | ) | (101,215,402 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Other income (expense)                                               |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Interest income                                                      |   | 10,525                                |       | 50,593                                |   | 84,934                                                                                      |   | 254,235 |   | 1,949,874 |   |
| Interest expense                                                     |   | (403,124                              | )          | (211,165                              | )      | (1,419,756                                                                                  | )      | (614,794 | ) | (3,732,806 | ) |
|                                                                 |   | (392,599)                             |       | (160,572                              | )      | (1,334,822                                                                                  | )      | (360,559 | ) | (1,782,932 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| NET LOSS                                                             |   | $                                     | (1,652,313 | )                                     | $      | (5,710,112                                                                                  | )      | $ | (17,998,899 | ) | $ | (14,121,465 | ) | $ | (102,998,334 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Preferred stock dividends accreted and accumulating but not declared |   | $                                     | (810,984   | )                                     | $      | (810,984                                                                                    | )      | $ | (2,432,951 | ) | $ | (2,312,952 | ) | $ | (15,212,072 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Net loss applicable to common stock                                  |   | $                                     | (2,463,297 | )                                     | $      | (6,521,096                                                                                  | )      | $ | (20,431,850 | ) | $ | (16,434,417 | ) | $ | (118,210,406 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Basic and diluted loss per common share                              |   | $                                     | (0.33      | )                                     | $      | (0.88                                                                                       | )      | $ | (2.77 | ) | $ | (2.23 | ) | $ | (27.75 | ) |
|                                                                 |   |                                  |       |                                  |   |                                                                                        |   |   |   |   |   |
| Average number of common shares outstanding - basic and diluted      |   | 7,379,413                             |       | 7,373,357                             |   | 7,379,410                                                                                   |   | 7,361,768 |   | 4,259,836 |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

4

----

 

**RESTORAGEN,INC.**

(a development stagecompany)

Condensed ConsolidatedStatements of Cash Flows

(unaudited)

 
|                                                                            |   | **Nine Months Ended  September 30,** |        | **Cumulative period****From April 15, 1988  (date of incorporation)  to September 30, 2002** |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------|-------------|----------------------------------------------------------------------------------------------|--------|
| **2002**                                                                        |   | **2001**                             |        |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                                 |        |                                                                                         |   |   |   |
| Net loss                                                                        |   | $                                    | (17,998,899 | )                                                                                            | $      | (14,121,465 | ) | $ | (102,998,334 | ) |
| Adjustments to reconcile net loss to net cash flows from operating  activities: |   |                                 |        |                                                                                         |   |   |   |
| Depreciation and amortization                                                   |   | 391,959                              |        | 581,143                                                                                      |   | 4,652,039 |   |
| Restructuring charges                                                           |   | 5,225,929                            |        | —                                                                                       |   | 5,225,929 |   |
| Amortization of deferred financing costs                                        |   | 315,673                              |        | 192,259                                                                                      |   | 700,189 |   |
| Acquired in process research and development                                    |   | —                               |        | —                                                                                       |   | 1,200,000 |   |
| Stock-based compensation expense                                                |   | 25,255                               |        | 261,261                                                                                      |   | 6,263,006 |   |
| Changes in operating assets and liabilities:                                    |   |                                 |        |                                                                                         |   |   |   |
| Accounts receivable and other current assets                                    |   | (129,059                             | )           | (43,745                                                                                      | )      | (316,812 | ) |
| Accounts payable and accrued expenses                                           |   | (106,969                             | )           | 253,120                                                                                      |   | 3,123,979 |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| Net cash flows from operating activities                                        |   | (12,276,111                          | )           | (12,877,427                                                                                  | )      | (82,150,004 | ) |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                                 |        |                                                                                         |   |   |   |
| Purchase of property and equipment                                              |   | (78,983                              | )           | (830,860                                                                                     | )      | (9,954,828 | ) |
| Purchase of Short term investments                                              |   | —                               |        | —                                                                                       |   | (1,999,314 | ) |
| Maturity of short term investments                                              |   | 1,999,314                            |        | —                                                                                       |   | 1,999,314 |   |
| (Increase) / decrease in deposits and other assets                              |   | 3,063                                |        | (45,118                                                                                      | )      | (73,056 | ) |
| Increase in patents                                                             |   | —                               |        | (51,678                                                                                      | )      | (892,938 | ) |
| Acquisition of R&C, Inc. and GRFCo                                          |   | —                               |        | —                                                                                       |   | (1,200,000 | ) |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| Net cash flows from investing activities                                        |   | 1,923,394                            |        | (927,656                                                                                     | )      | (12,120,822 | ) |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                                 |        |                                                                                         |   |   |   |
| Net proceeds from issuance of common stock                                      |   | 46                                   |        | 346,941                                                                                      |   | 40,666,684 |   |
| Net proceeds from issuance of preferred stock                                   |   | —                               |        | 7,360,000                                                                                    |   | 34,591,371 |   |
| Proceeds from long-term obligations                                             |   | —                               |        | 185,994                                                                                      |   | 23,125,426 |   |
| Payments on notes payable and capital leases                                    |   | (849,882                             | )           | (910,291                                                                                     | )      | (3,705,498 | ) |
| Proceeds from bridge notes payable                                              |   | —                               |        | —                                                                                       |   | 3,765,500 |   |
| Payments on bridge notes payable                                                |   | —                               |        | —                                                                                       |   | (2,364,500 | ) |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| Net cash flows from financing activities                                        |   | (849,837                             | )           | 6,982,644                                                                                    |   | 96,078,983 |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            |   | (11,202,554                          | )           | (6,822,439                                                                                   | )      | 1,808,157 |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                |   | 13,010,711                           |        | 9,492,135                                                                                    |   | — |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      |   | $                                    | 1,808,157   |                                                                                         | $      | 2,669,696 |   | $ | 1,808,157 |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| Supplemental Disclosures of Investing Financing Activities:                     |   |                                 |        |                                                                                         |   |   |   |
|                                                                            |   |                                 |        |                                                                                         |   |   |   |
| Interest paid                                                                   |   | $                                    | 245,334     |                                                                                         | $      | 422,536 |   |   |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

5

----

 

**Restoragen, Inc.**

Notes to Condensed Consolidated Financial Statements

September 30, 2002and 2001

(unaudited)

 

(1)           **Summary of Significant Accounting Policies**

 

**Basis of Presentation -**Thecondensed consolidated balance sheet as of September 30, 2002, the condensedconsolidated statements of operations for the three and nine month periodsended September 30, 2002 and 2001 and the condensed consolidated statements ofcash flows for the nine month periods ended September 30, 2002 and 2001 havebeen prepared by the Company without audit in accordance with accountingprinciples generally accepted in the United States of America.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America.  In theopinion of management, all adjustments (all of which are normal and recurringin nature) considered necessary to present fairly the financial position atSeptember 30, 2002, and results of operations and cash flows for the periodspresented have been included.  Resultsof operations for the interim periods are not necessarily indicative of theresults that may be expected for the full fiscal year, or any otherperiod.  These financial statements andnotes should be read in conjunction with the audited financial statements forthe year ended December 31, 2001, included in the Company’s Form 10-K filedwith the Securities and Exchange Commission.

 

In July 2001, theFASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”),“Goodwill and Other Intangible Assets”, which was 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.

 

In June 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 an impact on the consolidated financial statements.

 

In August 2001, the Financial Accounting Standards Board issued SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whichwas effective January 1, 2002.  Thisstandard addresses financial accounting and reporting for the impairment ordisposal of certain long-lived assets. There was no impact to the Company’s financialstatements as a result of adopting this standard.

 

In June 2002, the Financial Accounting Standards Board issued SFAS No.146 “Accounting for Costs Associated with Exit or Disposal Activities”. Thisstandard requires the Company to recognize a liability for a cost associatedwith an exit or disposal activity when the liability is

 

6

----

 

incurred rather than recognition of the liability at the date of acommitment to an exit plan and is effective for exit or disposal activitiesthat are initiated after December 31, 2002.

 

**Propertyand equipment held for sale –**Property and equipment held forsale is carried at the lower of carrying amount or estimated net realizablevalue.

 

**ShareholdersEquity -**In connection with the issuance of the convertiblenotes in December 2001, the Company issued 999,997 warrants to purchase commonstock of the Company at a per share warrant exercise price equal to the lowerof $9.00 or the lowest per common equivalent share price at which the Companysells equity after the date of the warrants. Each lender initially received warrants to purchase a number of sharesof common stock equal to 50% of the amount of notes held divided by the warrantexercise price.  Commencing with the 90thday after the initial date of issuance of the warrants, the number of shares ofcommon stock into which the warrants are exercisable increases by an additional10% of the notes held divided by the warrant exercise price for each 30-dayperiod in which the notes continue to remain outstanding and not converted, upto 100% of the outstanding notes divided by the warrant exercise price.  Pursuant to this provision, the number ofshares of the Company’s common stock issuable under the warrants increased by 200,000shares in each month of March, April, May, June and July 2002. As of September30, 2002, the warrants issued in connection with the convertible notes inDecember 2001 entitle the holders to purchase 1,999,998 shares of common stock.

 

Holder redemption rights on Series F Preferred Stock expired on March31, 2002.  In connection with theexpiration of these rights, the Series F Preferred Stock has been reclassifiedto shareholders’ equity as of March 31, 2002.

 

**Going Concern Considerations**- The Company, from inception, has experienced losses from its activities inresearch and development and has had minimal revenues.  This and the fact that the Company is adevelopment stage business create a substantial doubt as to its ability tocontinue as a going concern. The Independent Auditors’ Report accompanying theCompany’s audited financial statements for the year ended December 31, 2001contained a going concern opinion.

 

The Company’sability to continue as a going concern in the short term will depend onobtaining additional working capital to finance operations beyond 2002. TheCompany’s ability to achieve profitability in the long term will  depend in large part on: obtainingadditional financing through equity or debt issues or development collaborations,as necessary; obtaining regulatory approvals of its products and entering intosatisfactory agreements for product commercialization.

 

7

----

 

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)           **Corporate Restructuring**

 

On February 21, 2002, the Company announced a consolidation offacilities and reduction in workforce from 121 employees to 60 employees.  On May 22, 2002, the Company announced arevised corporate strategy that resulted in the Company ceasing itsnon-strategic recombinant peptide production operations and closing its peptideproduction facilities. It is anticipated that third party contractmanufacturers will source all future production requirements. ** **The May 2002 announcement hasresulted in the reduction of the workforce by an additional 55 employees. Asmall number of these employees have been retained to complete transitionactivities. The Company is currently being operated by four full-timeemployees.

 

The following is a summary of restructuring charges related to thestaff reduction, consolidation of facilities and discontinuance of peptideproduction resulting from the revised corporate strategy.

 
|                                                          |   | **Quarter  ended  March 31, 2002** |      | **Quarter  ended  June 30, 2002** |    | **Quarter  ended  Sept 30, 2002** |   | **Nine  months  Sept 30, 2002** |    |
|---------------------------------------------------------------|--------|------------------------------------|-----------|-----------------------------------|---------|-----------------------------------|--------|---------------------------------|---------|
| Employee compensation  & benefits:                        |   |                               |      |                              |    |                              |   |                            |    |
| Severance pay  & benefits                                 |   | $                                  | 923,249   |                              | $       | 1,222,879                         |   | —                          |    | $ | 2,146,128 |   |
| Occupancy &  equipment costs:                             |   |                               |      |                              |    |                              |   |                            |    |
| Non-cancelable  lease costs, net of Estimated sublease income |   | $                                  | 115,350   |                              | $       | 626,217                           |   | —                          |    | $ | 741,567 |   |
| Loss on  impairment and abandonment of property and equipment |   | $                                  | 142,505   |                              | $       | 4,192,771                         |   | —                          |    | $ | 4,335,276 |   |
| Write down of  patents                                        |   | —                             |      | $                                 | 641,932 |                              | — |                            | $       | 641,932 |   |
| Other                                                         |   | —                             |      | $                                 | 221,757 |                              | $      | 248,721                         |    | $ | 470,478 |   |
| Total corporate  restructuring Charges                        |   | $                                  | 1,181,104 |                              | $       | 6,905,556                         |   | $                               | 248,721 |   | $ | 8,335,381 |   |

 

8

----

 

In September 2002, the Company ceased paying remainingemployee severance obligations to employees no longer providing services to theCompany, until further notice. As indicated below, severance obligations in theamount of $442,692 remain to be paid. The liability established relating tonon-cancelable facility leases covers the period through May 2005. The Companyhas negotiated an arrangement with the property owner for the period Septemberthrough December 2002, to pay only 25% of the facility lease obligations owedand defer remaining obligations. Further discussions with the landlord will berequired before year-end regarding lease arrangements and payments afterDecember 2002. The Company has actively sought to license or sell theproduction technology and facilities associated with its peptide production. Todate no targeted party has been willing to pursue this opportunity.  The Company has begun the process of closingdown the production facilities and is seeking to sell all production equipment.The Company has written down the value of the production equipment to reflectanticipated net proceeds from sale and has written down to zero the building andleasehold improvements. The majority of the patents issued to the Company havehistorically been in respect of production processes or for medicalapplications which are no longer being pursued by the Company in its revisedstrategy. Therefore, the Company has written down to zero all previouslycapitalized patent expenses. In September 2002, an additional restructuringcharge of $248,721 was recorded to recognize additional obligations to certainthird party equipment lessors based on agreements to suspend lease payments fora limited period and proceed with the sale of leased assets.

 

The following is asummary of activity relating to the restructuring charges during 2002:

 
|                                  |   | **Restructuring  Charges** |      | **Cash  Payments** |   | **Non-cash  Charges(1)** |   | **Sept 30,  2002  Balance** |      |
|---------------------------------------|--------|----------------------------|-----------|--------------------|--------|--------------------------|--------|-----------------------------|-----------|
| Employee  compensation & benefits |   | $                          | 2,146,128 |               | $      | 1,703,436                |   | —                      |      | $ | 442,692 |   |
|                                  |   |                       |      |               |   |                     |   |                        |      |
| Occupancy &  equipment costs      |   | $                          | 5,076,843 |               | $      | 102,834                  |   | $                           | 4,335,276 |   | $ | 638,733 |   |
|                                  |   |                       |      |               |   |                     |   |                        |      |
| Patents                               |   | $                          | 641,932   |               | — |                     | $      | 641,932                     |      | — |   |
|                                  |   |                       |      |               |   |                     |   |                        |      |
| Other                                 |   | $                          | 470,478   |               | $      | 54,296                   |   | $                           | 267,290   |   | $ | 148,892 |   |
|                                  |   |                       |      |               |   |                     |   |                        |      |
| Total                                 |   | $                          | 8,335,381 |               | $      | 1,860,566                |   | $                           | 5,244,498 |   | $ | 1,230,317 |   |

 

----

(1) Non-cashcharges include impairment and abandonment charges

 

9

----

 

 

**Item 2.****                                   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 and nine months ended September 30, 2002 and2001. The section should be read in conjunction with the Company’s auditedfinancial statements for the year ended December 31, 2001, and Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in the Company’s Form 10-K for the year ended December 31, 2001, asfiled 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 are basedon the Company’s current expectations, beliefs, intentions or futurestrategies.  These forward lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause the actual results, performance or achievements of the Companyto be materially different from any future results, performance orachievements, expressed or implied by such forward-looking statements. Thewords “believe,” “expect,” “anticipate,” “plan,” “seek” and similar expressionsidentify forward-looking statements. Readers are cautioned not to place undue reliance on theseforward-looking statements that speak only as of the date the statement wasmade.  These statements are subject torisks and uncertainties that could cause actual results to differ materiallyfrom the statements, including the dependence of the Company on obtainingfuture financing and its ability to continue operations, uncertainties involvedin the additional development of the Company’s new pharmaceutical products,including securing strategic partners to fund further development, the outcomesof clinical trials, obtaining regulatory approvals or clearances, the abilityof the Company’s products to be manufactured in commercial quantities,availability of commercial production capacity, the development of partnershipsfor distribution and marketing, protection of the Company’s patent andproprietary rights, avoiding infringement of competitor’s proprietary rights,potential competition and the extent to which reimbursement for the costs ofthe 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.

 

10

----

 

**Overview**

 

The Company is adevelopment stage biotechnology company that is seeking to commercializerecombinant human GLP-1 (rGLP-1) for certain niche cardiovascularindications.  GLP-1 is believed to be aninsulinotropic peptide involved in the regulation of metabolism.  Prior to May 2002, the Company had pursuedapplications for rGLP-1 in the treatment of type II diabetes.  Because of potential patent obstacles, theshort duration of action of a first generation product (requiring continuoussubcutaneous infusion), and other strategic issues, the Company in the firsthalf of 2002 terminated its efforts directed at the treatment of diabetes andcommercial scale manufacture of rGLP-1.

 

As a result of its research in type II diabetes, theCompany has postulated that rGLP-1 may have the potential to decrease insulinresistance.  It appears that insulinresistance is a major risk factor for many serious and common cardiovasculardiseases.  The Company’s intention is toestablish a partnership with a large pharmaceutical company to develop and toattempt to commercialize rGLP-1 for these indications.  The Company has filed patent applicationsfor uses of rGLP-1 and its analogs for treatment of various cardiovasculardiseases.  In September 2002 patientenrollment began for a phase 2(a) proof of concept study as to the use ofrGLP-1 for the management of severe heart failure in patents who are ineligiblefor heart transplant. The results from this concept study are expected by theend of the first quarter of 2003, assuming no unforeseen delays.

 

In order to conserve limited cash and focus onpossible cardiovascular indications for rGLP-1, the Company has ceased itsresearch and development efforts that were aimed at recombinant peptideproduction and at scaling up its rGLP-1 manufacturing activities.  In February 2002 the workforce was reducedfrom 121 to 60 employees, and in May 2002 there was a further reduction from 55to 4 employees. The Company has actively sought to license or sell theproduction technology and facilities associated with its peptide production. Todate the Company has contacted over thirty potential acquirers for theproduction technology or facilities. Despite offering these non-strategicassets for substantially discounted amounts, to date no targeted party has beenwilling to pursue the opportunity.  TheCompany has therefore begun the process of closing down the productionfacilities and will seek to auction all physical assets no longer being used,including laboratory and production equipment and supplies, computer equipmentand office and furniture equipment.

 

The Company currently has available very limitedworking capital to fund ongoing activities. Unless additional funds areobtained, the Company expects to exhaust its cash in December 2002.

 

From May through September 2001, the Company undertooka private placement of preferred stock. This offering, which focused on the Company’s previous diabetesstrategy, was conducted through a national investment-banking firm with thegoal of raising approximately $30 million to fund operations. Despitesignificant efforts, including road shows and individual investor meetingsthroughout the United States and Europe, the Company was not successful inplacing those securities or raising the money.

 

11

----

 

Following the unsuccessful private equity offering, inDecember 2001 the Company entered into a bridge loan agreement with severalcurrent shareholders and their affiliates, including Medtronic, Inc., RockyMountain Associates, S.A. and Equity Four Life (Bahamas) Ltd.   The Company received a loan in theprincipal amount of $18 million. The loan is due on December 18, 2003 and bearsinterest at prime plus three percent per annum. The loans are secured by afirst priority security interest in the Company’s intellectual property and allproceeds from licensing of the Company’s intellectual property.

 

The Company is attempting to raise additional workingcapital from the sale of non-strategic assets (such as equipment andintellectual property unrelated to cardiovascular indications) and fromcollaboration payments from potential strategic partners. If the Company isunable to raise additional funds by December 2002, it will be unable to meetobligations in the ordinary course and the Company may be forced to discontinueits remaining operations. In an effort to conserve cash, non-essential paymentsto creditors have been suspended, including severance payments to formeremployees and lease payments for equipment no longer being used. The Companymay face lawsuits by creditors and may need to seek protection under the USBankruptcy Code if it is unable to meet its obligations or obtain relief fromits creditors.

 

**Resultsof Operations**

 

The Company recorded revenues of  $0.7 million in the third quarter of 2002,reflecting licensing fees from the license of non-strategic intellectualproperty. Year to date revenues total $0.9 million.

 

Research and development expenses include those costsassociated with the research, development, production and testing of ourpharmaceutical products, including all direct costs incurred in conducting ourclinical trials and all costs related to the protection of proprietaryrights.  These costs have aggregated$72.9 million since our inception. Research and development costs were $1.2 million and $7.2 million forthe three and nine-month periods ended September 30, 2002, as compared to $4.6million and $11.3 million for the same periods in the prior fiscal year.Research and development activities have been scaled back significantlyfollowing the corporate restructuring initiatives announced in February and Mayof 2002. General and administrative expenses were $0.4 million and $2.0 millionfor the three and nine-month periods ended September 30, 2002, as compared to$0.9 million and $2.5 million for the same periods in 2001. Administrativecosts have also decreased as a result of the restructuring initiatives.

 

In February 2002, Restoragen announced a restructuringand a reduction of total workforce from 121 to 60 employees. In May 2002, theCompany announced a revised corporate strategy that would result in the Companyceasing its non-strategic recombinant peptide production operations and closingits peptide production facilities. The May 2002 announcement has resulted inthe reduction of the workforce by an additional 55 employees. A small number ofthese employees have been retained to complete transition activities. TheCompany is currently being operated by four full time employees.

 

12

----

 

In connection with the restructuring, the Companyrecorded restructuring costs of approximately $1.2 million during the firstquarter of 2002, $6.9 million during the second quarter of 2002 and $0.2million during the third quarter of 2002. The second quarter charge included a non-cash charge of $4.9 million relatedto the write down of tangible and intangible assets. The Company has writtendown production equipment to reflect anticipated net proceeds from sale and haswritten down to zero the building and leasehold improvements. The majority ofthe patents issued to the Company have historically been in respect ofproduction processes or for medical applications, which are no longer beingpursued by the Company in its revised strategy. The third quarter charge wasrecorded to recognize additional obligations to certain third party lessorsbased on agreements to terminate immediate lease payments and proceed with thesale of leased assets.

 

Interest income decreased to $0.01 million and $0.08million for the three and nine month periods ended September 30, 2002, ascompared to $0.05 million and $0.25 million for the same periods in 2001,reflecting lower interest rates and lower interest earning assets. Interestexpense increased to $0.4 million and $1.4 million for the three and nine-monthperiods ended September 30, 2002 compared to $0.2 million and $0.6 million forthe same period in 2001.  The increasereflects interest charges associated with the bridge loan financing secured inDecember 2001.

 

**Liquidityand Capital Resources**

 

Working capital was $0.5 million as of September 30,2002, compared to $10.7 million as of December 31, 2001.  Cash and cash equivalents were $1.8 millionas of September 30, 2002.

 

During the nine months ended September 30, 2002, theCompany used approximately $12.3 million of cash for operating activities and$0.1 million for asset acquisitions. Cash payments for financing activities totaled $0.8 million for thenine-month period.  Based on itsanticipated revised operating plan, the Company believes that existing cash andcash equivalents will not be sufficient to fund operations past December 2002.

 

The Company is attempting to raise additional workingcapital from the sale of non-strategic assets, and from collaboration paymentsfrom potential strategic partners. Any additional financing may require afinancial restructuring or re-capitalization. The restructuring orre-capitalization could take one of several forms, including conversion of allor a portion of the outstanding secured notes to equity, refinancing theindebtedness using new funds from third party sources, or voluntary orinvoluntary bankruptcy or re-capitalization under Chapter 11 of the UnitedStates Bankruptcy Code. In any form of restructuring or re-capitalizationinvolving conversion of the indebtedness to equity, the interests of existingshareholders could be substantially diluted or eliminated. The success of anyfinancing would likely depend on obtaining the co-operation of thenote-holders. If the Company is unable to restructure or obtain financing fromanother source, the Company will be required to discontinue all of itsoperations.

 

As of September 30, 2002, the Company had negativeshareholders equity of $21.6 million and shareholders’ deficit accumulatedduring the development stage of $103.0 million. Historically the auditors’reports on the Company’s financial statements have contained an 

 

13

----

 

explanatory paragraph concerning the Company’s ability to continue as agoing concern and its status as a development stage company. The Company willincur additional losses as it continues to operate.

 

**NewAccounting Pronouncements**

 

In July 2001, the FASB issued Statement of FinancialAccounting Standards No. 142 (“SFAS 142”), “Goodwill and Other IntangibleAssets”, which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwillamortization.  In addition, the standardincludes provisions for the reclassification of certain existing recognizedintangibles as goodwill, reassessment of the useful lives of existing recognizedintangibles, reclassification of certain intangibles out of previously reportedgoodwill and the identification of reporting units for purposes of assessingpotential future impairments of goodwill. There was no impact to the Company’s financial statements as a result ofadopting this standard.

 

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 143, “Accounting for Asset Retirement Obligations”.  This standard addresses financial accountingand reporting for obligations related to the retirement of tangible long-livedassets and the related asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15,2002. The Company does not expect its adoption of this standard to have animpact on the consolidated financial statements.

 

In August 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, “Accounting for the Impairment or Disposal of LongLived Assets” which was effective January 1, 2002.  This standard addresses financial accounting and reporting forthe impairment or disposal of certain long-lived assets.  There was no impact to the Company’sfinancial statements as a result of adopting this standard.

 

In June 2002, the Financial Accounting Standards Boardissued SFAS No. 146 “Accounting for Costs Associated with Exit or DisposalActivities”. This standard requires the Company to recognize a liability for acost associated with an exit or disposal activity when the liability isincurred rather than recognition of the liability at the date of a commitmentto an exit plan and is effective for exit or disposal activities that areinitiated after December 31, 2002.

 

**CriticalAccounting Policies**

 

The Company recorded restructuring charges totaling$8.3 million during the nine months ended September 30, 2002.  Estimates were utilized in determining theserestructuring charges including estimates of fair values for property andequipment held for sale, estimated costs to maintain vacated facilities, and estimatedlength of time necessary to sublease the Company’s vacated facilities.  The Company will adjust such estimates asadditional information is available or as circumstances change.

 

The Company reviews long-lived assets and certainintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  An evaluation of recoverability is performedby comparing the undiscounted cash 

 

14

----

 

flows associated with the asset to the asset’s carrying amount todetermine if a write down is required.

 

As permitted by SFAS No. 123, “Accounting forStock-based Compensation”, the Company accounts for its stock-based awards toemployees under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” andrelated interpretations.  Allstock-based awards to independent consultants are accounted for under the fairvalue method as required by SFAS No. 123 and related interpretations.

 

**Contractual Obligations and Commitments**

 

The Company’s contractual obligations and commitments,consisting of capital and operating lease obligations, notes payable andconvertible notes payable have not changed significantly during the nine monthperiod ended September 30, 2002. However, the Company has discontinued paymentsto third party equipment lessors for equipment not being used. An  agreement has been reached with the twomajor equipment lessors to suspend immediate payments for a limited period andproceed with the sale of leased assets. In addition, for the period Septemberthrough December 2002, the Company has negotiated to pay only 25% of thefacility lease obligations owed and defer remaining obligations.

 

In September 2002, the Board of Directors determinedthat it was important to retain the services of the four remaining employees ofthe Company in order to manage and operate the Company at this critical time.The Board established an independent committee to develop a Retention andIncentive Plan for Senior Managers. The Plan, which was unanimously approved bythe Board of Directors, is included as Exhibit 10.1 to this Form 10Q.

 

**Market Risk**

 

The Company is exposed to market risk related tochanges in interest rates. The Company does not use derivative financialinstruments for speculative or trading purposes.  Due to the nature of cash and cash equivalents, the Companybelieves that there is no material market risk exposure.

 

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

 

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

 

15

----

 

**Item4.****                                   CONTROLSAND PROCEDURES.**

 

(a) Evaluation ofDisclosure Controls and Procedures.

 

The Company’s Chief Executive Officer, Mr. AshleighPalmer, and Chief Financial Officer, Mr. David Walker, have reviewed theCompany’s disclosure controls and procedures within 90 days prior to the filingof this report.  Based upon this review,these officers believe that the Company’s disclosure controls and proceduresare effective in ensuring that material information related to the Company ismade known to them by others within the Company.

 

(b) Changes inInternal Controls.

 

During the quarter ended September 30, 2002, theCompany modified its system of processing, recording and reporting financialinformation. Previously, the Company performed the majority of accountingfunctions internally, except for payroll processing. In connection with thecorporate restructuring and related personnel reductions, the Company isutilizing an unrelated firm to process and record financial information underthe direction and review of the Company’s Chief Financial Officer.

 

**PART II**

 

**OTHERINFORMATION**

 

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

 

None

 

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

 

In connection with the issuance of the convertiblenotes in December 2001, the Company issued 999,997 warrants to purchase commonstock of the Company at a per share warrant exercise price equal to the lowerof $9.00 or the lowest per common equivalent share price at which the Companysells equity after the date of the warrants. Each lender initially received warrants to purchase a number of shares ofcommon stock equal to 50% of the amount of notes held divided by the warrantexercise price.  Commencing with the90th day after the initial date of issuance of the warrants, the number ofshares of common stock into which the warrants are exercisable increased by anadditional 10% of the notes held divided by the warrant exercise price for each30-day period in which the notes continued to remain outstanding and notconverted, up to 100% of the outstanding notes divided by the warrant exerciseprice. Pursuant to this provision, the number of shares of the Company’s commonstock issuable under the warrants increased by 200,000 shares in each month ofMarch, April, May, June and July 2002. As of September 30, 2002, the warrantsissued in connection with the convertible notes in December

 

16

----

 

2001 entitle the holders to purchase 1,999,998 shares of common stock.

 

The Company issued seven shares of common stock inJuly 2002 upon the exercise of a stock option by a former employee. The shareswere issued in reliance upon the exemption contained in Rule 701 under theSecurities Act of 1933 for offers and sales of securities pursuant to acompensatory benefit plan. The options were issued prior to the Companybecoming a reporting company

 

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

 

None

 

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

 

None

 

**Item5.****                                   OTHERINFORMATION.**

 

None

 

**Item6.****                                   EXHIBITSAND REPORTS ON FORM 8-K.**

 

(a)                                            Exhibits

 

##### 10.1Retention and Incentive Plan for Senior Managers. **

 

##### 99.1 Certificate of ChiefExecutive Officer and Chief Financial Officer pursuant to 18 U.S.C. section1350

 

(b)                                           Reportson Form 8-K

 

                                                None

 

----

                                                **Denotes compensatory arrangements

 

17

----

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                           | RESTORAGEN, INC.               |   |
|--------------------------------|--------------------------------|--------|
|                           |                           |   |
|                           |                           |   |
| Dated:  November 12, 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) |   |

 

18

----

 

**CERTIFICATIONS**

 

I, Ashleigh Palmer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Restoragen,Inc;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

19

----

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officer and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 | /s/ Ashleigh W.   Palmer |   |
|-------------------------|-------------------------------|--------|
|                    |                          |
|                    | Ashleigh W. Palmer            |
|                    | Chief Executive Officer       |

 

 

I, David Walker, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Restoragen,Inc;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

20

----

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officer and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date: November 12, 2002 | /s/ David  S.  Walker |   |
|-------------------------|----------------------------|--------|
|                    |                       |
|                    | David S.Walker             |
|                    | Chief Financial Officer    |

 

21

----