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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2002

OR

For the transition period from                              to                             

Commission File Number: 0-31913

Aerogen, Inc.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (650) 864-7300

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        As of October 31, 2002, there were 20,403,746 shares of the Registrant's Common Stock, par value $0.001, outstanding.

Aerogen, Inc.
(a development stage enterprise)
Form 10-Q
Table of Contents

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Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Aerogen, Inc.
(a development stage enterprise)
Condensed Consolidated Balance Sheets
(unaudited; in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Aerogen, Inc.
(a development stage enterprise)
Condensed Consolidated Statements of Operations
(unaudited; in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Aerogen, Inc.
(a development stage enterprise)
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Aerogen, Inc.
(a development stage enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business of the Company

        Aerogen, Inc. (the "Company" or "Aerogen") was incorporated in November 1991 to develop products using a proprietary aerosol generator. The Company is in the development stage and, since inception, has devoted substantially all of its efforts to developing products, including engaging in research and development activities with and without partners, raising capital, marketing of its initial products and recruiting personnel. The Company has incurred net losses since inception and expects to incur substantial losses for the next several years. To date, the Company has funded its operations primarily through the sale of equity securities, payments from collaboration partners, interest income and debt. The process of developing products will continue to require significant research and development, clinical trials and regulatory approvals. These activities, together with selling, general and administrative expenses, are expected to result in substantial operating losses for the next several years.

        These financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company requires additional financing and may raise funds by selling shares of its common or preferred stock through private placements or public offerings, by collaborative relationships or other arrangements. There can be no assurance that the Company will be able to obtain additional financing on terms acceptable to the Company. Additional equity or debt financing may involve substantial dilution to the Company's stockholders, restrictive covenants or high interest costs. Collaborative arrangements, if necessary to raise additional funds, may require the Company to relinquish rights to certain products, technologies or marketing territories. The failure to raise needed funds on sufficiently favorable terms could have a material adverse effect on the Company's business, operating results and financial condition.

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the Company's interim financial information. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002.

        The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the operating results that may be reported for the fiscal year ending December 31, 2002, or for any other future period.

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Inventories

        Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Inventories are summarized as follows:

Comprehensive Income (Loss)

        Comprehensive income (loss) generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The Company's unrealized gains and losses on available-for-sale securities and foreign currency translation gains and losses represent the only components of comprehensive income (loss) that are excluded from the Company's net loss.

Net Loss Per Common Share

        Basic net loss per share is computed by dividing the net loss by the weighted average number of vested common shares outstanding for the period. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including options and warrants. Options and warrants are not included in the diluted net loss per share calculations for periods in which the effect would be anti-dilutive.

        A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share as follows:

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        The following outstanding options, common stock subject to repurchase and warrants were excluded from the computation of diluted net loss per share as they had an antidilutive effect:

Note 2—RECENT ACCOUNTING PRONOUNCEMENTS

        The Company adopted Statement of Financial Accounting Standards ("SFAS") No.142 "Goodwill and other Intangible Assets" on January 1, 2002. Under the new rules, goodwill is no longer amortized, but is subject to an annual impairment test. The annual goodwill impairment test was completed in the first quarter of 2002 and it was determined that there was no impairment of goodwill at that time.

        The following table reconciles the Company's net loss for the three and nine months ended September 30, 2002 and 2001, adjusted, pursuant to SFAS No.142, to exclude goodwill amortization from amounts previously reported:

        In April of 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. Under SFAS No. 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS No. 145 also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS No. 145 will not have a material impact on the consolidated financial position or results of the operations of the Company.

        In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination, or with a retirement or disposal activity covered by FASB Statements No. 143, "Accounting for Asset Retirement Obligations," or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company believes that the adoption of SFAS No. 146 will not have a material impact on the consolidated financial position or results of the operations of the Company.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        In addition to historical information, this report contains predictions, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from any future performance suggested in this report as a result of many factors, including those referred to in "Factors That May Affect Future Operating Results," at the end of this Item 2. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this report and the information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002 ("Form 10-K").

Critical Accounting Policies and Estimates

        Our critical accounting policies and estimates are described in Item 7 of our Form 10-K for the year ended December 31, 2001, and have not changed materially since that date.

Overview

        Aerogen was incorporated in November 1991. We specialize in the controlled delivery of drugs to the lungs for respiratory therapy or systemic drug delivery. We are using our technology to develop respiratory products for marketing by us, and we are developing products for ourselves and for collaboration with pharmaceutical and biotechnology companies for both respiratory therapy and for the delivery of drugs via the lungs to the bloodstream.

        We are in the development stage and, since inception, have devoted substantially all of our efforts to the development of products. We have an accumulated deficit of approximately $86.9 million as of September 30, 2002. We expect to incur significant additional operating losses over the next several years, and cumulative losses may increase, primarily due to the expansion of our research and development activities, an increase in the number and size of clinical trials, the costs associated with marketing recently introduced and additional products and the general expansion of our business activities. We anticipate that our quarterly financial results will fluctuate for the foreseeable future. Therefore, period to period comparisons should not be relied upon as predictive of the results in future periods. Our sources of working capital have been equity financings, research and development revenues, product revenues, interest earned on investments, equipment lease financings and royalties.

Results of Operations

Revenues

        Total revenues for the three and nine months ended September 30, 2002 were $0.7 million and $1.0 million, respectively, compared with $0.6 million and $2.2 million for the same periods of 2001. Total revenues include revenue from research and development activities for unrelated third parties, from product sales, and from royalties associated with the licensing of our technology for use outside of the medical field.

        Research and development revenues for the three and nine months ended September 30, 2002 were $0.1 million and $0.2 million, respectively, compared with $0.4 million and $1.9 million for the same periods of 2001. The decrease for both the three and nine months ended September 30, 2002 resulted primarily from a lower level of product development activities performed for one partner program with Chiron, Inc. In December 2001, we announced the termination of our development program with Chiron for the aerosol delivery of TOBI®, their proprietary formulation of the antibiotic tobramycin.

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        Research and development revenues can be expected to vary from period to period based on the activities requested by partner companies in any particular period and, therefore, are not predictable. Based on agreements we currently have in place, we would expect research and development revenues for 2002 to be lower than those for 2001.

        Product sales for the three and nine months ended September 30, 2002 were $0.5 million and $0.6 million compared with $0.1 million and $0.1 million for the same respective periods of 2001. Product sales were significantly influenced by the launch of our second product, the Aeroneb® Professional Nebulizer System ("Aeroneb Pro") in June 2002. Our first product, the Aeroneb® Portable Nebulizer System ("Aeroneb Portable"), was launched in June 2001. The quarter ended September 30, 2002 showed stronger product sales than in prior quarters, and we expect that product sales will continue to increase.

        Royalty, fee and other revenues were approximately $62,000 and $187,000, for the three and nine month periods ended September 30, for both 2002 and 2001. Royalties represent a minimum royalty obligation associated with licensing our aerosol generator technology to a consumer product company for limited usage outside the medical field.

Cost of Products Sold and Manufacturing Start-up Costs

        Cost of products sold and manufacturing start-up costs for the three and nine months ended September 30, 2002 were $0.5 million and $1.0 million, respectively, compared with $0.1 million and $0.1 million for the same respective periods of 2001. Cost of products sold for the three and nine months ended September 30, 2002 include costs associated with the start-up of manufacturing production in the Company's new facility in Mountain View. As product sales volumes increase, we expect to see increasing cost of product sales. In the third quarter ended September 30, 2002, however, we saw improvements in cost of sales as a percent of revenue, both over the prior year and prior quarters. The introduction of Aeroneb® Pro, which contributes higher gross margins than the Aeroneb® Portable, contributed significantly to this improvement. During the three months ending September 30, 2002, we have seen yield improvements in the manufacturing process, resulting in lower costs per unit. As the Aeroneb Pro volumes increase, and as the manufacturing process matures, we anticipate further improvements to the cost of sales as a percent of product sales.

        As detailed in our previous quarterly reports on Form 10-Q, effective April 2002, we implemented a price reduction on the Aeroneb Portable to enhance our competitive position in the home nebulizer market. In the nine months ending September 30, 2002, we took a net $0.1 million charge to cost of products sold to reduce inventories to estimated market value and accrue future losses on purchase commitments based on the reduced selling price.

Research and Development Expenses

        Research and development expenses capture our own research and development projects, as well as the costs related to research and development activities for our partners. Research and development expenses for partner activities approximate our revenues from those partners. Research and development expenses include salaries and benefits for scientific and development personnel, laboratory supplies, consulting services, clinical expenses and the expenses associated with the development of manufacturing processes, including related overhead. Research and development spending may increase significantly over the next several years as we enter new clinical trials, expand our research and development activities to support our products and those which we develop in our collaborations. Future research and development and clinical expenditures cannot be predicted reliably, as they depend, in part, upon our success in expanding existing development collaborations, entering into new partnering agreements, potential changes in our partner's priorities, and the level of internally funded research and development efforts.

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        Research and development expenses for the three and nine months ended September 30, 2002 were $3.8 million and $13.7 million, respectively, compared with $5.5 million and $16.2 million for the same periods of 2001. The decrease in research and development expenses of $1.7 million for the three months ended September 30, 2002, as compared with the same period of 2001, was primarily due to a decrease in payroll and related expenses of $0.9 million associated with the reduction in force in June 2002; non-payroll related expenses for professional services, materials, and machining services for the development of the clinical version of the inhaled insulin product and clinical trials decreased by $0.5 million; non-payroll related expenses for professional and machining services associated with our development of clinical devices for respiratory products decreased by $0.4 million; deferred compensation decreased by $0.1 million; non-payroll related expenses for professional services, machining services, and materials for several other programs decreased by $0.5 million. These decreases were partially offset by incremental rent and information technology expenses, primarily associated with our newly leased facility, which were approximately $0.6 million higher, in comparison with the same period in the prior year.

        The decrease in research and development expenses of $2.5 million for the nine months ended September 30, 2002, as compared with the same period of 2001, was primarily due to decreases in non-payroll related expenses for professional design services, insulin formulation, and clinical studies, associated with our clinical version design of the inhaled insulin product and clinical trials of $1.4 million; decreases in non-payroll related expenses for professional design services associated with our development of clinical devices for respiratory products of $1.2 million; decreases in payroll related expenses of $1.4 million including stock-based compensation of $0.3 million; decreases in non-payroll related expenses for professional design services, machining, and materials for several other programs of $0.6 million; offset by increased rent and information technology expenses, primarily associated with our newly leased facility, of $2.1 million.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses for the three and nine months ended September 30, 2002 were $2.2 million and $6.5 million, respectively, compared with $2.1 million and $5.9 million for the same periods of 2001. The increase for the three months ended September 30, 2002 of $0.1 million compared with the same period of 2001 was due to $0.1 million of increased rent and information technology expenses, primarily associated with our newly leased facility, increased stock-based compensation costs of $0.1 million, an increase in professional marketing services of $0.2 million; partially offset by a decrease of $0.2 million in payroll related expenses associated with the reduction in force in June 2002, and by the cessation of goodwill amortization of $0.1 million.

        The increase of $0.6 million for the nine months ended September 30, 2002, compared with the same period of 2001, was due to $0.5 million of increased rent and information technology expense primarily associated with our newly leased facility; increased payroll related expenses of $0.6 million, including stock-based compensation of $0.4 million; these increases were partially offset by the cessation of goodwill amortization of $0.3 million; decrease in professional services of $0.1 million and decreases in other miscellaneous expenses of $0.1 million.

Litigation Settlement

        The litigation settlement charge of $2.0 million for the three and nine month periods ended September 30, 2001 resulted from the settlement of a lawsuit brought by the Company against Becton Dickinson and Company ("BD"). The settlement amount was paid in two equal installments, one in October of 2001 and the other in February of 2002. As the result of this settlement, we now own all of the intellectual property developed by either party under the now terminated development agreement between the parties, and BD retains a non-exclusive license to certain technology developed by BD under said agreement for use outside of the field of inhaled insulin.

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Interest Income, Net

        Interest income, net for the three and nine months ended September 30, 2002 was $0.1 million and $0.4 million, respectively, compared with $0.5 million and $1.9 million for the same periods of 2001. The decrease in interest income, net was primarily due to lower average cash, cash equivalents and investment balances resulting from cash used in operations and capital expenditures and, to a lesser extent, to lower interest rates. The Company currently has no outstanding debt.

Liquidity and Capital Resources

        Since inception, we have financed our operations primarily through equity financings, research and development revenues and the interest earned on these funds. We have received approximately $98.2 million aggregate net proceeds from sales of our common and preferred stock through September 30, 2002, including approximately $44.5 million of net proceeds from our initial public offering ("IPO").

        As of September 30, 2002, we had cash, cash equivalents and available-for-sale securities of approximately $14.8 million. Net cash used in operating activities during the nine months ended September 30, 2002 was $18.1 million resulting primarily from the net loss for the period of $19.8 million; decreased accounts payable and accrued liabilities of $1.5 million primarily due to payments to BD of $1.0 million for the settlement, and to payments of move related charges of $0.3 million; these uses were partially offset by non-cash related charges of approximately $2.3 million and a reduction in prepaid expenses of $0.5 million. Net cash used in operating activities for the nine months ended September 30, 2001 was $14.3 million resulting primarily from the net loss for the period of $20.1 million; partially offset by non-cash related charges of approximately $2.0 million and an increase in accounts payable and accrued liabilities of $3.7 million due primarily to accruals for the BD settlement of $2.0 million.

        Net cash provided by investing activities was $10.7 million for the nine months ended September 30, 2002, consisting primarily of proceeds from maturing available-for-sale securities over purchases of securities of $14.3 million, partially offset by $3.6 million of property and equipment acquisitions, primarily associated with leasehold improvements to our newly leased facility and equipment associated with the process improvements. Net cash used in investing activities was $4.4 million for the nine months ended September 30, 2001, consisting primarily of $3.6 million for net purchases of available-for-sale securities and acquisition of $0.8 million of property and equipment.

        Cash provided by financing activities for the nine months ending September 30, 2002 of $0.5 million included $0.2 million of proceeds from the issuance of common stock which was comparable with the same period of 2001. In addition, repayment of notes receivable from stockholders provided $0.3 million for the nine months ending September 30, 2002, compared with no repayments in the same period of 2001.

        The development of our technology and products requires a commitment of substantial funds to conduct the costly and time-consuming product development and clinical trials that are required to mature and expand our technology and products, and to bring any such products to market. Our future capital requirements and operating expenses will depend on many factors including, but not limited to: research and development activities; the timing, cost, extent and results of clinical trials; our success in licensing drugs for use in our products; regulatory approvals; the status of competitive products; marketing and manufacturing costs associated with commercialization of products; costs involved in obtaining and maintaining patents; and our ability to enter into collaborative agreements.

        Based upon our current internal analyses, which do not include potential upfront payments or offsets to ongoing expenses to us associated with anticipated partnering arrangements, we believe that our cash, cash equivalents and available-for-sale securities will be sufficient to meet our capital

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requirements into the second quarter of 2003. We will most likely need to secure additional funds through partner collaborations, sales of our securities, borrowing, or other sources of capital. There can be no assurance that we will be able to enter into such collaborations or raise additional funds on terms favorable to the Company.

Recent Accounting Pronouncements

        In April of 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS 145 also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS 145 will not have a material impact on the consolidated financial position or results of the operations of the Company.

        In June of 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered by FASB Statements No. 143, "Accounting for Asset Retirement Obligations," or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company believes that the adoption of SFAS No. 146 will not have a material impact on the consolidated financial position or results of the operations of the Company.

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Factors That May Affect Future Operating Results

        Our business and the value of our stock are subject to a number of risks, many of which are set out below. If any of these risks actually materialize, our business, financial condition or operating results could be materially adversely affected, which would likely have a corresponding impact on the value of our common stock. These risk factors should be reviewed carefully.

We are a development stage company and many of our products are in research and development stages, which makes it difficult to evaluate our business and prospects.

        Our Company must be evaluated in light of the uncertainties and complexities present in a development stage company. Other than the Aeroneb Portable Nebulizer System which was introduced in 2001, and the Aeroneb Professional Nebulizer System in 2002, our products are in the research or development stages. Before we can begin to sell our Aerodose® inhaler products commercially, we will need to invest in substantial, additional development activities, including the conduct of clinical trials. To further develop such products, we will need to address engineering and design issues, including ensuring that our products deliver a consistent and predictable amount of drug to the lung and that they can be manufactured successfully. We cannot assure that:

•

our research and development efforts will be successful;



•

any of our inhaler products will prove safe and effective;



•

we will obtain regulatory clearance or approval to sell any additional products; or



•

any of our existing or future products can be manufactured in commercial quantities or at an acceptable cost or marketed successfully.

We have a history of losses, anticipate future losses and may never achieve or maintain profitability.

        We have never been profitable. Through September 30, 2002, we have incurred a cumulative deficit of approximately $86.9 million. We expect to continue to incur substantial losses over at least the next several years as we: