**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****           ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE**

**            ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001**

** **

**o****           ****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE**

**            ACT OF 1934FOR THE TRANSITION PERIOD FROM____ TO _____.**

 

**Commission File 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.) |
|                                         |   |                 |
| **4130 N.W. 37th Street, Lincoln, Nebraska** |   | **68524-1637**       |
| (Address  of principal executive offices)    |   | Zip  Code            |

 

**(402)470-2100**

(Issuer'sTelephone Number)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such report), and (2) has been subjectto such filing requirements for the past 90 days.    YES ý    NO o

 

Asof November 13, 2001, the Company had 7,379,408 shares of Common Stock, $.01par value per share, outstanding.

 

 

 

**RESTORAGEN,INC.**

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION**                                                                                  |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                     |   |
| ITEM 1. FINANCIAL STATEMENTS                                                                                             |   |
| Condensed  Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                                    |   |
| Condensed  Consolidated Statements of Operations for the three and nine month periods  ended September 30, 2001 and 2000 |   |
| Condensed  Consolidated Statements of Cash Flows for the nine month periods ended  September 30, 2001 and 2000           |   |
| 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                                                                                         |   |
| 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**                                                                                                           |   |
|                                                                                                                     |   |

 

 

**RESTORAGEN, INC.**

(a development stage company)

Condensed Consolidated Balance Sheets

(unaudited)

 
|                                                                                                                                                                                         |   | **September 30,** |         | **December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------------|------------------|--------|
|                                                                                                                                                                                         |   | **2001**          |         | **2000**         |   |
| ASSETS                                                                                                                                                                                       |   |              |         |             |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Current assets                                                                                                                                                                               |   |              |         |             |   |
| Cash and cash equivalents                                                                                                                                                                    |   | $                 | 2,669,696    |             | $      | 9,492,135 |   |
| Prepaid expenses                                                                                                                                                                             |   | 210,936           |         | 174,499          |   |
| Other current assets                                                                                                                                                                         |   | 53,042            |         | 45,734           |   |
| Total current assets                                                                                                                                                                         |   | 2,933,674         |         | 9,712,368        |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Property and equipment, net of accumulateddepreciation of $3,516,411 and $2,973,722                                                                                                          |   | 6,068,343         |         | 5,780,172        |   |
| Patents and patents licensed, net of accumulatedamortization of $208,984 and $170,529                                                                                                        |   | 676,660           |         | 663,437          |   |
| Deferred financing costs, net of accumulatedamortization of $320,430 and $128,172                                                                                                            |   | 192,259           |         | 384,517          |   |
| Other assets                                                                                                                                                                                 |   | 77,717            |         | 32,599           |   |
| Total assets                                                                                                                                                                                 |   | $                 | 9,948,653    |             | $      | 16,573,093 |   |
|                                                                                                                                                                                         |   |              |         |             |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                                                                                                        |   |              |         |             |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Current liabilities:                                                                                                                                                                         |   |              |         |             |   |
| Accounts payable                                                                                                                                                                             |   | $                 | 891,290      |             | $      | 628,374 |   |
| Accrued expenses                                                                                                                                                                             |   | 278,558           |         | 288,354          |   |
| Capital lease obligations - current portion                                                                                                                                                  |   | 601,746           |         | 617,251          |   |
| Notes payable - current portion                                                                                                                                                              |   | 673,047           |         | 608,299          |   |
| Total current liabilities                                                                                                                                                                    |   | 2,444,641         |         | 2,142,278        |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Long-term liabilities:                                                                                                                                                                       |   |              |         |             |   |
| Capital lease obligations - less current portion                                                                                                                                             |   | 776,528           |         | 1,036,871        |   |
| Notes payable - less current portion                                                                                                                                                         |   | 1,042,268         |         | 1,555,465        |   |
| Total long-term liabilities                                                                                                                                                                  |   | 1,818,796         |         | 2,592,336        |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Total liabilities                                                                                                                                                                            |   | 4,263,437         |         | 4,734,614        |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Redeemable preferred stock                                                                                                                                                                   |   |              |         |             |   |
| Series A,F and A,E,F ($0.01 par value, 211,750  and 411,750 shares authorized, 121,018 and 138,088  issued and outstanding, at redemption value)                                        |   | 16,298,605        |         | 16,675,502       |   |
|                                                                                                                                                                                         |   |              |         |             |   |
| Shareholders' deficit                                                                                                                                                                        |   |              |         |             |   |
| Common stock, ($0.01 par value, 40,000,000 and  20,000,000 shares authorized, 7,379,408 and 7,329,845 shares issued and outstanding)                                               |   | 73,794            |         | 73,298           |   |
| Convertible preferred stock, Series B,C,D,E,G,H  and  B,C,D,G  ($0.01 par value; 496,500 and 216,500 shares  authorized,  245,174 and 148,104 shares issued  and outstanding) |   | 2,452             |    | 1,481            |   |
| Additional paid-in capital                                                                                                                                                                   |   | 66,947,518        |         | 58,603,886       |   |
| Deficit accumulated during development stage                                                                                                                                                 |   | (77,637,153       | )            | (63,515,688      | )      |
| Total shareholders' deficit                                                                                                                                                                  |   | (10,613,389       | )            | (4,837,023       | )      |
|                                                                                                                                                                                         |   |              |         |             |   |
| Total liabilities and shareholders' deficit                                                                                                                                                  |   | $                 | 9,948,653    |             | $      | 16,573,093 |   |

 

Seeaccompanying notes to condensed consolidated financial statements

 

 

**RESTORAGEN, INC.**

(a development stage company)

Condensed Consolidated Statement of Operations

(unaudited)

 
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              | **Cumulative period**     |   |
|-----------------------------------------------------------------------|--------|---------------------------------------|------------------|--------------------------------------------|--------|-------------------------|--------|-------------|-------------------|---------------------------|--------|
|                                                                  |   | **Three Months Ended  September 30,** |             | **Nine Months Ended********September 30,** |   | **From April 15, 1988** |   |
|                                                                  |   |                                  |             | **(date of incorporation)**                |   |
|                                                                  |   | **2001**                              |             | **2000**                                   |   | **2001**                |   | **2000**    |              | **to September 30, 2001** |   |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Revenues                                                              |   | $                                     | 4,503            |                                       | $      | 2,545                   |   | $           | 6,996             |                      | $      | 10,040 |   | $ | 3,667,373 |   |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Operating costs and expenses:                                         |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| General and administrative                                            |   | 928,254                               |             | 653,167                                    |   | 2,483,651               |   | 1,848,809   |              | 21,486,201                |   |
| Research and development                                              |   | 4,625,789                             |             | 2,764,632                                  |   | 11,284,251              |   | 9,201,970   |              | 59,570,834                |   |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Total operating costs and expenses                                    |   | 5,554,043                             |             | 3,417,799                                  |   | 13,767,902              |   | 11,050,779  |              | 81,057,035                |   |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Operating loss                                                        |   | (5,549,540                            | )                | (3,415,254                                 | )      | (13,760,906             | )      | (11,040,739 | )                 | (77,389,662               | )      |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Other income (expense)                                                |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Interest income                                                       |   | 50,593                                |             | 164,140                                    |   | 254,235                 |   | 577,865     |              | 1,851,494                 |   |
| Interest expense                                                      |   | (211,165                              | )                | (150,612                                   | )      | (614,794                | )      | (299,401    | )                 | (2,098,986                | )      |
|                                                                  |   | (160,572)                             |             | 13,528                                     |   | (360,559                | )      | 278,464     |              | (247,492                  | )      |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| NET LOSS                                                              |   | $                                     | (5,710,112       | )                                          | $      | (3,401,726              | )      | $           | (14,121,465       | )                         | $      | (10,762,275 | ) | $ | (77,637,154 | ) |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Preferred stock dividends accreted and  accumulating but not declared |   | $                                     | (810,984         | )                                          | $      | (693,055                | )      | $           | (2,312,952        | )                         | $      | (2,079,166 | ) | $ | (12,178,871 | ) |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Net loss applicable to common  stock                             |   | $                                     |  (6,521,096 | )                                          | $      |  (4,094,781        | )      | $           |  (16,434,417 | )                         | $      |  (12,841,441 | ) | $ |  (89,816,025 | ) |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Basic and diluted loss percommon share                                |   | $                                     |  (0.88      | )                                          | $      |  (0.57             | )      | $           |  (2.23       | )                         | $      |  (1.82 | ) | $ |  (20.34 | ) |
|                                                                  |   |                                  |             |                                       |   |                    |   |        |              |                      |   |
| Average number of common shares outstanding -  basic and diluted      |   | 7,373,357                             |             | 7,184,721                                  |   | 7,361,768               |   | 7,042,125   |              | 4,416,488                 |   |

 

Seeaccompanying notes to condensed consolidated financial statements

 

 

**RESTORAGEN, INC.**

(a development stage company)

Condensed Consolidated Statement of Cash Flows

(unaudited)

 
|                                                                            |   |                                             |                        |                    |   | **Cumulative period**     |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------------------------|-------------------------|--------|---------------------------|--------|
|                                                                            |   | **Nine Months Ended**** ****September 30,** |                        | **From April 15, 1988** |   |
|                                                                            |   |                                             | **(date of incorporation)** |                    |
|                                                                            |   | **2001**                                         |                        | **2000**                |   | **to September 30, 2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                                             |                        |                    |   |                      |   |
| Net loss                                                                        |   | $                                                | (14,121,465                 | )                       | $      | (10,762,275               | )      | $ | (77,637,153 | ) |
| Adjustments  to reconcile net loss to net cash flows from operating activities: |   |                                             |                        |                    |   |                      |   |
| Depreciation  and amortization                                                  |   | 581,143                                          |                        | 669,499                 |   | 3,964,370                 |   |
| Amortization  of deferred financing costs                                       |   | 192,259                                          |                        | 64,086                  |   | 320,431                   |   |
| Acquired  in process research & development                                 |   | -                                                |                        | -                       |   | 1,200,000                 |   |
| Stock-based  compensation expense                                               |   | 261,261                                          |                        | -                       |   | 7,107,046                 |   |
| Change  in operating assets and liabilities:                                    |   |                                             |                        |                    |   |                      |   |
| Prepaid  expenses and other current assets                                      |   | (43,745                                          | )                           | (199                    | )      | (263,978                  | )      |
| Accounts  payable and accrued expenses                                          |   | 253,120                                          |                        | (628,146                | )      | 1,169,848                 |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| Net cash flows from operating activities                                        |   | (12,877,427                                      | )                           | (10,657,035             | )      | (64,139,436               | )      |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                                             |                        |                    |   |                      |   |
| Purchase  of property and equipment                                             |   | (830,860                                         | )                           | (2,230,050              | )      | (9,584,754                | )      |
| Increase  in deposits and other assets                                          |   | (45,118                                          | )                           | (10,157                 | )      | (309,396                  | )      |
| Increase  in patents                                                            |   | (51,678                                          | )                           | -                       |   | (892,938                  | )      |
| Acquisition  of GRFCo                                                           |   | -                                                |                        | -                       |   | (1,200,000                | )      |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| Net  cash flows from investing activities                                       |   | (927,656                                         | )                           | (2,240,207              | )      | (11,987,088               | )      |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                                             |                        |                    |   |                      |   |
| Net  proceeds from issuance of common stock                                     |   | 346,941                                          |                        | 5,760,730               |   | 39,710,261                |   |
| Net  proceeds from issuance of preferred stock                                  |   | 7,360,000                                        |                        | -                       |   | 34,591,371                |   |
| Proceeds  from long-term obligations                                            |   | 185,994                                          |                        | 1,429,797               |   | 5,625,426                 |   |
| Payments  on long-term obligations                                              |   | (910,291                                         | )                           | (587,018                | )      | (2,531,838                | )      |
| Proceeds  from bridge notes payable                                             |   | -                                                |                        | -                       |   | 3,765,500                 |   |
| Payments  on bridge notes payable                                               |   | -                                                |                        | -                       |   | (2,364,500                | )      |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| Net  cash flows from financing activities                                       |   | 6,982,644                                        |                        | 6,603,509               |   | 78,796,220                |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                           |   | (6,822,439                                       | )                           | (6,293,733              | )      | 2,669,696                 |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                |   | 9,492,135                                        |                        | 18,393,567              |   | -                         |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      |   | $                                                | 2,669,696                   |                    | $      | 12,099,834                |   | $ | 2,669,696 |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| Supplemental disclosure of cash flow information:                               |   |                                             |                        |                    |   |                      |   |
|                                                                            |   |                                             |                        |                    |   |                      |   |
| Interest paid                                                                   |   | $                                                | 422,536                     |                    | $      | 235,315                   |   | $ | 1,499,983 |   |

 

See accompanying notes to condensed consolidatedfinancial statements

 

**Restoragen, Inc.**

Notes to Condensed ConsolidatedFinancial Statements

September30, 2001 and 2000

(unaudited)

 

(1)           **Summaryof Significant Accounting Policies**

 

**Company Name Change** – Duringthe nine month period ended September 30, 2001, the Company changed its namefrom BioNebraska, Inc. to Restoragen, Inc.

 

**Basis of Presentation -**Thecondensed consolidated balance sheet as of September 30, 2001, the condensedconsolidated statements of operations for the three and nine month periodsended September 30, 2001 and 2000 and the condensed consolidated statements ofcash flows for the nine month periods ended September 30, 2001 and 2000 havebeen prepared by the Company without audit in accordance with accountingprinciples generally accepted in the United States of America.  They do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited 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, 2001, 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, 2000, included in the Company’s Form 10-K filedwith the Securities and Exchange Commission.

 

TheCompany adopted Statement of Financial Accounting Standards (SFAS) No. 133“Accounting for Derivatives and Similar Financial Instruments and for HedgingActivities”, as amended by SFAS No. 137 and SFAS No. 138 on January 1, 2001.  There was no impact to the condensedconsolidated financial statements as a result of adopting this standard.

 

In July 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS141”), “Business Combinations.”  SFAS141 requires the purchase method of accounting for business combinationsinitiated after June 30, 2001 and eliminates the pooling-of-interestsmethod.  The Company does not believethat the adoption of SFAS 141 will have an impact on the consolidated financialstatements.

 

InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effectiveJanuary 1, 2002.  SFAS 142 requires,among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing recognized intangiblesas 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. The Company does not believe that the adoption of SFAS 142 will have animpact on the consolidated financial statements.

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.  TheCompany does not expect its adoption of this standard to have a significantimpact on the consolidated financial statements.

 

**Shareholders Equity -**During thenine month period ended September 30, 2001, warrants to purchase a total of49,563 shares of common stock were exercised with gross proceeds of$346,941.  In addition, holderredemption rights on Series E Preferred Stock expired on March 31, 2001.  In connection with the expiration of theserights, the Series E Preferred Stock has been reclassified to shareholders’equity as of March 31, 2001.

 

InApril of 2001, the Company sold 80,000 shares of Series H Convertible PreferredStock at $100 per share.  The Series HPreferred Stock resulted in net proceeds to the Company of approximately $7.4million.

 

Eachshare of Series H Convertible Preferred Stock is convertible at the option ofthe holder at any time into approximately 6.666 shares of the Company’s commonstock, which is based on an initial conversion price of $15.00 per share and issubject to adjustment.  In the event theCompany closes an initial public offering of common stock which raises at least$7 million, the Series H Convertible Preferred Stock will automatically convertto common stock and any accrued dividends will be extinguished.

 

Duringthe nine months ended September 30, 2001, the shareholders of the Companyapproved a change in the number of authorized shares to 40,000,000 shares.

 

Duringthe nine months ended September 30, 2001, the Company’s Certificates ofDesignation for the Series C, F and G Preferred Stock were amended to providethat the Company may pay accrued dividends in either cash or shares of CommonStock in certain circumstances at the discretion of the Company’s Board ofDirectors.

 

**Going Concern Considerations** - TheCompany, from inception, has experienced losses from its activities in researchand development and has had minimal revenues. This and the fact that the Company is a development stage businesscreate a substantial doubt as to its ability to continue as a going concern.

 

TheCompany has obtained financing through private placement offerings.  As in the past, the Company is pursuingadditional financing in the form of both equity and debt to fund several of itsprograms as well as its corporate overhead.

 

TheCompany’s ability to obtain profitability on substantial portions of itsoperations will also depend in large part on: obtaining additional financing through equity or debt issues ordevelopment collaborations, as necessary; obtaining regulatory approvals of itsproducts; entering into satisfactory agreements for product commercialization;and making the transition from a developmental stage business to amanufacturing and marketing company.

 

Thefinancial statements do not include any adjustments relating to therecoverability and classification of recorded asset amounts or the amounts andclassification of liabilities that might be necessary should the Company beunable to continue as a going concern.

 

 

**Item 2.****    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**              **Following isa discussion and analysis of the Company’s consolidated condensed financialcondition and results of operations for the three and nine months endedSeptember 30, 2001 and 2000.  Thesection should be read in conjunction with the Company’s audited financialstatements for the year ended December 31, 2000, and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in theCompany’s Form 10-K for the year ended December 31, 2000, as filed with theSecurities and Exchange Commission.

 

**CautionaryStatement About Forward-Looking Statements**

 

               This Form 10-Q contains, inaddition to historical information, forward-looking statements that are basedon the Company’s current expectations, beliefs, intentions or futurestrategies.  We use words such as“anticipate,” “believe,” “plan,” “expect,” “intend,” and similar expressions toidentify forward-looking statements.

 

               These statements are subject torisks and uncertainties that could cause actual results to differ materiallyfrom the statements, including the Company’s dependence on obtaining futurefinancing, the uncertainties involved in the additional development of theCompany’s new pharmaceutical products, the outcomes of clinical trials,obtaining regulatory approvals or clearances, the ability of the Company’sproducts to be manufactured in commercial quantities, construction ofadditional facilities for commercial production, the development of internal orcontractual distribution and marketing capabilities, the extent to whichreimbursement for the costs of the products and treatments will be availablefrom government health administration authorities, private health insurers andother organizations, protection of the Company’s patent and proprietary rightsand avoiding infringement of other parties’ patents and proprietary rights, andpotential competition.  These risks arefurther described in the Company’s Form 10-K for the year ended December 31,2000 under the heading, “Management’s Discussion and Analysis of FinancialCondition and Results 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**

 

               We are a development stagetherapeutics company engaged in the recombinant production and clinicaldevelopment of middle range peptide hormones (referred to generally as “MRPeptides”) to treat diseases of aging, such as type 2 diabetes, obesity,advanced cases of osteoporosis and other various acute conditions.  We have developed the capability tobiologically produce, purify and amidate MR Peptides in a natural form.  Our MR Peptide hormones serve to naturallyactivate certain endocrine hormone systems governing bodily functions inpersons whose hormones are deficient or lacking as a result of advancing age orbody malfunctions.  We are conductingclinical trials for several of these applications.  No regulatory approvals have been obtained, and consequently, wehave derived no revenues from the sale of these products.  We have financed operations to dateprimarily through the sale of equity securities.

 

               Since inception in 1989, we haveexperienced operating losses and anticipate that our operating losses willcontinue for the foreseeable future until such time as one or more therapeuticproducts receive regulatory approval and are successfully marketed.  Expenditures will be primarily related toresearch and development activities, clinical trials, and scale-up ofcommercial manufacturing.

**Resultsof Operations**

 

               Research and development expensesinclude those costs associated with the research, development, production andtesting of our pharmaceutical products, including all direct costs incurred inconducting our clinical trials and all costs related to the protection ofproprietary rights.  These costs haveaggregated $59.6 million since our inception. Research and development costs were $4.6 million and $11.3 million forthe three and nine month periods ended September 30, 2001, as compared to $2.8million and $9.2 million for the same periods in the prior fiscal year.  The increase primarily reflects higherclinical trial expenditures.  In October2001, we commenced a clinical trial of our lead product, Betatropin, for thetreatment of Type II Diabetes, involving 400 patients in approximately 40centers.

 

               General and administrativeexpenses increased to $0.9 million and $2.5 million for the three and ninemonth periods ended September 30, 2001, as compared to $0.7 million and $1.8million for the same periods in 2000. The increase primarily reflects the strengthening of our administrativesupport structure, together with a non-cash compensation charge associated withthe modification of stock option terms.

 

               Interest income decreased to$0.05 million and $0.3 million for the three and nine month periods endedSeptember 30, 2001 as compared to $0.2 million and $0.6 million for the sameperiods in 2000.  Higher interest incomein the prior year is due to higher average cash and cash equivalent balances,following the sale of equity securities in the fourth quarter of 1999.  We incurred interest expense of $0.2 millionand $0.6 million for the three and nine month periods ended September 30, 2001compared to $0.15 million and $0.3 million for the same periods in 2000.  The increase reflects non-cash interestcharges associated with the extension of certain redeemable preferred stockterms and an increase in equipment financing costs.

 

**Liquidityand Capital Resources**

 

                Duringthe nine months ended September 30, 2001, we used $12.9 million for researchand development and administrative activities and $0.8 million for equipmentacquisitions. In April 2001, we received net proceeds of approximately $7.4million from the sale of 80,000 shares of Series H Convertible Preferred Stock.  As of September 30, 2001, we had total cashand cash equivalents of $2.7 million, and as of October 31, 2001, our cash wasreduced to $1.1 million.  Based on ourcurrent operating plan and spending levels, we believe that existing cash willbe exhausted by the end of November 2001.

 

                FromMay through September 2001, we undertook a private placement of preferred stockthrough a national investment banking firm with the goal of raisingapproximately $30 million to fund operations. Despite significant efforts, including road shows and individualinvestor meetings throughout the United States and Europe, we were notsuccessful in placing those securities.

            Weare now negotiating to obtain interim financing, in the form of both debt andequity, with a number of potential investors. We anticipate that the amount ofthis interim financing, if received, will be approximately $15 million and willbe sufficient to fund operations under our current operating plan into thesecond quarter of 2002.  This assumes weare not required to repurchase any Series F Preferred Stock (see below).  We are hopeful that we can concludenegotiations and receive this funding within the next two weeks.  There can be no assurance that we will beable to successfully conclude this financing or any other financing.  Even if we conclude a transaction, the termsof the financing will likely be more onerous to the Company than pastfinancings.

 

                Ifwe are unable to obtain suitable financing by month end, we may be required tosuspend or cease operations, and possibly pursue bankruptcy or liquidation ofsome or all of our business.  We do nothave a guaranteed future source of funding and we will continue to requiresignificant additional working capital on an on-going basis to fund ouroperations.

 

                Duringa 90 day period beginning January 1, 2002, any holder of Series F PreferredStock has the right to give notice to the Company requiring the Company torepurchase his, her or its Series F Preferred shares at face value plus accrueddividends.  If all holders of Series FPreferred Stock were to exercise their right, the Company’s total repurchaseobligation would be approximately $14.7 million.  These payments would be due in installments over 12 months.

 

               At September 30, 2001, we had ashareholders’ deficit accumulated during the development stage of $77.6million. We will continue to incur additional losses as we incur substantialexpenses related to clinical trials, research and development activities, andscale-up of commercial manufacturing. The auditors’ reports on our financialstatements contain an explanatory paragraph concerning our ability to continueas a going concern.

 

 

**Market Risk**

 

**              **We areexposed to market risk related to changes in interest rates. The Company doesnot use derivative financial instruments for speculative or tradingpurposes.  Due to the nature of cash andcash equivalents, we believe that there is no material market risk exposure.

 

 

**Item 3.   QUALITATIVEAND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

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

 

### **PART II**

 

**OTHERINFORMATION**

 

 

**Item 1.**   **LEGAL PROCEEDINGS.**

 

               None

 

**Item 2.**   **CHANGES IN SECURITIES.**

 

Duringthe three month period ending September 30, 2001, warrants to purchase a totalof 18,954 shares of Common Stock were exercised for gross proceeds of$132,678.  These shares were issued witha restrictive legend.  The Companybelieves that these transactions were exempt under Section 4(2) of theSecurities Act of 1933 and from the registration and prospectus deliveryrequirements of the Act and from applicable state securities laws in the stateswhere the purchasers reside.

 

**Item 3.   DEFAULTS UPONSENIOR SECURITIES.**

 

None

 

**Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

               TheCompany’s Annual Meeting of Shareholders was held on July 26, 2001.  The shareholders took the following actions:

 

(1)  The stockholders authorized an amendment tothe Company’s Certificate of Incorporation to change the name of the Company to“Restoragen, Inc.”  The amendment waspassed by the following vote:

 
| For     | 8,134,566 |
|---------|-----------|
| Against | 19,707    |

 

 

(2)  The stockholders authorized an amendment tothe Company’s Certificate of Incorporation to increase the number of authorizedshares of Common Stock of the Company. The amendment was passed by the following vote:

 
| For     | 8,087,060 |
|---------|-----------|
| Against | 67,213    |

 

 

(3)           The stockholders voted on anamendment to the Company’s Certificates of Designation for the Series B, C, D,E, F and G Preferred Stock to provide that the Company may pay accrueddividends in either cash or shares of Common Stock in certain circumstances atthe discretion of the Company’s Board of Directors.  The amendment was adopted with respect to Series C, E and G andwas not adopted with respect to Series B, D and F.  The related votes are as follows:

 
|     |   | **Total** |   | **Class**    |   |
|----------|--------|-----------|--------|--------------|--------|
|     |   | **For**   |   | **Withheld** |   | **Abstain** |   | **For** |   | **Withheld** |   | **Abstain** |   |
|     |   |      |   |         |   |   |   |   |   |   |   |   |   |
| Series B |   | 8,154,273 |   | 140,143      |   | 81,061 |   | 106,136 |   | 32,111 |   | 27,112 |   |
| Series C |   | 8,014,130 |   | 140,143      |   | 85,061 |   | 187,981 |   | 4,284 |   | 1,428 |   |
| Series D |   | 8,010,559 |   | 143,714      |   | 85,061 |   | 300,561 |   | 22,226 |   | 2,228 |   |
| Series E |   | 8,014,130 |   | 140,143      |   | 85,061 |   | 198,991 |   | 0 |   | 0 |   |
| Series F |   | 8,014,130 |   | 140,143      |   | 85,061 |   | 567,875 |   | 0 |   | 0 |   |
| Series G |   | 8,013,930 |   | 140,343      |   | 85,261 |   | 645,161 |   | 0 |   | 0 |   |

 

Althougha sufficient number of the total votes (Common plus all classes of Preferred)was obtained to amend the Series B, D and F Certificates, the requisite classvote of a majority of the outstanding shares of each of those three individualclasses was not obtained.  The requirednumber of “for” votes to authorize the amendment for each of those classeswas:  Series B – 116,894; Series D –433,851 and Series F – 682,926.

 

(4)          The stockholders ratified an amendmentto the Company’s 1993 Stock Plan (the “Stock Plan”) to increase the number ofshares available under the Stock Plan and to renew the duration of the StockPlan.  The ratification passed by thefollowing vote:

 
| For     | 7,864,877 |
|---------|-----------|
| Against | 289,396   |

 

 

(5)          The stockholders elected eight directors to hold office until the annualmeeting of stockholders.  Thestockholders present in person or by proxy cast the following numbers of votesin connection with the election of directors, resulting in the election of allof the nominees:

 
| **Name**              |   | **Votes For** |   | **Votes Withheld** |   |
|-----------------------|--------|---------------|--------|--------------------|--------|
| Walter R. Barry,  III |   | 8,097,373     |   | 56,900             |   |
| Thomas R. Coolidge    |   | 8,109,210     |   | 45,063             |   |
| Grant W. Denison, Jr. |   | 8,097,373     |   | 56,900             |   |
| Richard A. De Souza   |   | 8,109,210     |   | 45,063             |   |
| William A Jenkins     |   | 8,109,210     |   | 45,063             |   |
| Stephen W. Jenks      |   | 7,486,585     |   | 667,688            |   |
| Erich Sager           |   | 8,097,373     |   | 56,900             |   |
| Fred W. Wagner        |   | 8,109,210     |   | 45,063             |   |

 

  On September 20, 2001, the Company’s Boardof Directors increased the size of the Board of Directors to nine directors andappointed Peter Tattle to serve until the next election of directors by theshareholders.

 

**Item 5.   OTHER INFORMATION.**

 

None

 

**Item 6.    EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)  Exhibits

 

None

 

(b)  Reports on Form 8-K

 

None

**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:  November 13, 2001 |   | /s/ Thomas R. Coolidge                             |
|                           |   | Thomas R. Coolidge                                 |
|                           |   | Chief Executive  Officer and Chairman              |
|                           |   | (Duly Authorized  Officer)                         |
|                           |   |                                               |
|                           |   | /s/ David S. Walker                                |
|                           |   | David S. Walker                                    |
|                           |   | Senior Vice President  and Chief Financial Officer |
|                           |   | (Principal  Financial Officer)                     |