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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 0-22332

INSITE VISION INCORPORATED

Registrant’s telephone number, including area code (510) 865-8800

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

     The number of shares of Registrant’s common stock, $0.01 par value, outstanding as of October 31, 2002: 25,079,279.

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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

InSite Vision Incorporated
Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 2002

(Unaudited)

Note 1 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2002, are not necessarily indicative of the results that may be expected for any future period.

     These financial statements and notes should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001.

Critical Accounting Policies and Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     The following are items in our financial statements that require significant estimates and judgments:

     Inventory. Our inventories are stated at the lower of cost or market. The cost of the inventory is based on the first-in first-out method. If the cost of the inventory exceeds the expected market value a provision is recorded for the difference between cost and market. At September 30, 2002, our inventories solely consisted of OcuGene kits.

     Revenue Recognition. We recognize up-front fees over the expected term of the research and development services using the straight-line method. When changes in the expected term of ongoing services are identified, the amortization period for the remaining fees is appropriately modified.

     Revenue related to performance milestones is recognized when the milestone is achieved based on the terms set forth in the related agreements.

     We directly reduce expenses for amounts reimbursed due to cost sharing agreements. We recognize cost sharing payments when persuasive evidence of an arrangement exists, the services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured.

     We receive royalties from licensees based on third-party sales and the royalties are recorded as earned in accordance with contract terms, when third party results are reliably measured and collectibility is reasonably assured.

     Revenue related to the sales of our product, the OcuGene glaucoma genetic test, is recognized when all related services have been rendered and collectibility is reasonably assured.

     Cost of goods. We recognize the cost of inventory shipped and other costs related to the conduct of the OcuGene glaucoma genetic test when they are incurred.

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     Research and Development (R&D) Expenses. R&D expenses include salaries, benefits, facility costs, services provided by outside consultants and contractors, administrative costs and materials for research and development activities. We also fund research at a variety of academic institutions based on agreements that are generally cancelable. We recognize such costs as they are incurred.

Note 2 — Agreements; Preferred Stock

     In August 2002, the Company signed a license agreement with Bausch & Lomb Incorporated, or Bausch & Lomb, to develop the Company’s product candidate ISV-403 for the treatment of ocular bacterial infections. The transaction consists of two parts, the ISV-403 Technology License Agreement, or the Bausch & Lomb License Agreement and the Preferred Stock Purchase Agreement.

     Bausch & Lomb License Agreement

     Under the terms of the Bausch & Lomb License Agreement, the Company is responsible for the clinical development of ISV-403 through New Drug Application, or NDA, approval from the U.S. Food and Drug Administration, or FDA, with Bausch & Lomb responsible for subsequent commercial manufacturing and marketing. Bausch & Lomb is required to make preferred equity investments in the Company as product milestones are achieved. The Bausch & Lomb License Agreement grants Bausch & Lomb rights to market ISV-403, subject to payment of royalties, in all geographies except Japan, with such rights being shared in Asia (except Japan) and exclusive elsewhere.

     Stock Purchase Agreement

     The Stock Purchase Agreement provides for Bausch & Lomb to purchase up to 15,000 shares of Series A-1 Preferred Stock for a purchase price equal to $1,000 per share for an aggregate investment of up to $15.0 million. The initial investment, which occurred contemporaneously with the execution of the Bausch & Lomb License Agreement, was for 2,000 shares of Series A-1 Preferred Stock, for a total investment equal to $2.0 million. Upon the achievement of certain milestones, Bausch & Lomb is required to invest up to an additional $13.0 million in various closings from time to time. The Series A-1 Preferred Stock does not contain voting rights, except as otherwise provided by the Delaware General Corporation law and each share of Series A-1 Preferred Stock is entitled to a $60 per annum cumulative dividend.

     The Stock Purchase Agreement provides for the conversion of the Series A-1 Preferred Stock into shares of common stock, and potentially into a note payable, if the Bausch & Lomb License Agreement is terminated by Bausch & Lomb at any time for cause, or without cause prior to the later of the commencement of a Phase II/III clinical trial for ISV-403 or January 1, 2004.

     If Bausch & Lomb elects to convert any shares of Series A-1 Preferred Stock into common stock, and potentially into a note payable, all shares of Series A-1 Preferred Stock will be converted at the same time. The actual number of shares of common stock issuable upon conversion of the Series A-1 Preferred Stock shall be equal to:

	•		the actual purchase price of the Series A-1 Preferred Stock then outstanding plus all accumulated and unpaid dividends on the shares of Series A-1 Preferred Stock then outstanding, divided by
	•		the fair market value of our common stock, up to a maximum of 4,300,000 shares of common stock, as may be adjusted for stock splits, stock dividends, recapitalizations and the like.

     Upon the conversion of the Series A-1 Preferred Stock, the excess, if any, of:

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	•		the actual purchase price of the Series A-1 Preferred Stock outstanding immediately prior to the conversion plus all accumulated and unpaid dividends on the shares of Series A-1 Preferred Stock outstanding immediately prior to the conversion, over
	•		the fair market value of 4,300,000 shares of our common stock shall be converted into a note payable. The note will bear interest at a rate of prime plus 2% per annum and will have a term of 5 years.

     In addition, under certain circumstances, as more fully described in the Certificate of Designations, Preferences and Rights of Series A-1 Preferred Stock, in the event of the first commercial sale of the product pursuant to the terms of the Bausch and Lomb License Agreement, two-thirds of the Series A-1 Preferred Stock shall be redeemed by us for $1.00 and the remaining one-third of the Series A-1 Preferred Stock outstanding shall be redeemed by us in exchange for a pre-paid royalty having a value equal to the actual purchase price one-third of the Series A-1 Preferred Stock then outstanding plus all accumulated and unpaid dividends on those shares of Series A-1 Preferred Stock.

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

     The following discussion should be read in conjunction with the financial statements and notes thereto included in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2001.

Overview

     In addition to the historical information contained herein, the discussion in this Quarterly Report on Form 10-Q may contain certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements whenever they appear in this document. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below and under the heading “Risk Factors,” as well as those discussed elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

     We are an ophthalmic product development company focused on developing genetically-based tools, for the diagnosis, prognosis and management of glaucoma, as well as ophthalmic pharmaceutical products based on our proprietary DuraSite® eyedrop-based drug delivery technology. Our retinal programs include both a therapeutic agent and a retinal drug delivery technology.

     We are focusing our commercial efforts and research and development on the following:

	•		continued launch of our OcuGene™ glaucoma genetic test based on our ISV-900 technology;
	•		expanding our ISV-900 technology for the diagnosis, prognosis and management of glaucoma;
	•		ISV-205, a DuraSite formulation for the treatment of glaucoma;
	•		ISV-401, a DuraSite formulation of a novel antibiotic not currently used in ophthalmology;
	•		ISV-403, a DuraSite formulation of a fourth generation fluoroquinolone;
	•		ISV-014, a retinal drug delivery device; and
	•		treatments for diabetic retinopathy and macular degeneration.

     Glaucoma Genetics. Our glaucoma genetics program, which is being carried out in collaboration with academic researchers, is focused on discovering genes that are associated with glaucoma, and the mutations on these genes that cause the disease. This genetic information then may be applied to develop new glaucoma diagnostic, prognostic and management tools. The first of these new tools, OcuGene, is still in the launch phase and was first introduced to the medical community at the end of 2001.

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     A clinical study published in the September 2001 issue of Clinical Genetics, showed a correlation between the presence of the TIGR promoter region variant in individuals with primary open-angle glaucoma, or POAG, and the likelihood of that individual developing a more aggressive form of glaucoma including more visual field damage. Published studies have also shown the correlation of the coding region mutations detected by our OcuGene glaucoma genetic test and a high probability of developing glaucoma. Additional studies demonstrating key scientific results on the relationship of these promoter variants on glaucoma progression are ongoing.

     To date, our academic collaborators have identified genes associated with POAG (the most prevalent form of the disease in adults), normal tension glaucoma, juvenile glaucoma and primary congenital glaucoma, or PCG. Our academic collaborators for our glaucoma genetics program are: the University of California, San Francisco, or UCSF; the University of Connecticut Health Center, or UCHC; Institute National de la Sante et de la Recherche Medicale, or INSERM, the French equivalent of the U.S. National Institutes of Health; Okayama University in Japan; and other institutions in North America and Europe. This research, other than what has been incorporated into our OcuGene glaucoma genetic test, still must be converted into commercial products.

     In December 2001, we entered into an agreement under which we obtained certain exclusive rights for the Optineuron, or OPTN, gene and associated mutations with UCHC. In early tests, this gene has been linked to POAG, and the normal-tension glaucoma subset. We are in the process of conducting additional research on the Optineuron gene and mutations and we believe we may be able to introduce a test incorporating this gene early in 2003.

     DuraSite-Based Product and Candidates. Our DuraSite delivery system is a patented eyedrop formulation comprising a cross-linked carboxyl-containing polymer that incorporates the drug to be delivered to the eye. The formulation is instilled in the cul-de-sac of the eye as a small volume eyedrop and remains in the eye for up to several hours during which time the active drug ingredient is gradually released. This increased residence time is designed to permit lower concentrations of a drug to be administered over a longer period of time, thereby minimizing the inconvenience of frequent dosing and reducing potential related adverse side effects. Eyedrops delivered in the DuraSite system contrast to conventional eyedrops, which typically only last a few minutes in the eye and, thus, require delivery of a highly concentrated burst of drug and frequent administration to sustain therapeutic levels. DuraSite can be customized to deliver a variety of compounds with a broad range of molecular weights and other properties.

     The development of the ISV-205 product candidate, containing diclofenac, is another result of our glaucoma genetics research. This DuraSite formulation contains a drug that has been shown in cell and organ culture systems to inhibit the production of a protein that appears to cause glaucoma.

     A Phase II clinical study was successfully completed in 1999 to evaluate the efficacy of two concentrations of diclofenac. Analysis of the data from this study, conducted in 136 subjects, indicates that ISV-205 was safe and associated with a 75% reduction in the number of subjects with clinically significant IOP elevation following steroid use.

     A second Phase II clinical study was conducted in 233 subjects with ocular hypertension. Genetic information was collected on the subjects using our ISV-900 technology and the subjects were dosed twice daily for six months with ISV-205. Our ISV-900 technology detected the TIGR mt-1 or mt-11 variants in approximately 70% of the ocular hypertensive subjects participating in the study. The results indicate that the intraocular pressure at the first measurement each day over the twenty-four weeks of therapy in subjects with either the mt-1 variant or the mt-1 and mt-11 variants was significantly lower compared to vehicle (p=0.0079 and 0.0048 respectively). ISV-205 was similar to placebo in ocular safety and comfort in all patients. We are planning further clinical studies before filing for product approval with the FDA and there is no guarantee that similar clinical results will be achieved.

     ISV-401 is a DuraSite formulation of an antibiotic that has not previously been used in ophthalmology. ISV-401 contains an antibiotic that is effective for gram-negative and gram-positive bacteria and may enable reduced dosing frequency. ISV-401 may be effective for a broad-spectrum of bacteria and may enable physicians the ability to use it to treat a variety of ophthalmic diseases.

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     In September 2001, we conducted a Phase I clinical trial that indicated the formulation was safe and well tolerated. In September 2002, we announced the results of our Phase II clinical trial using a 1.0% formulation of ISV-401, compared to a placebo, to treat bacterial conjunctivitis. The study results indicated that ISV-401 elicited both clinical resolution and bacterial eradication over both gram-positive and gram-negative strains of acute bacterial conjunctivitis. This study demonstrated that a total of six drops of ISV-401 administered over five consecutive days produced comparable clinical results to those achieved with currently marketed drugs, which require dosing of approximately thirty-five drops administered over seven consecutive days. We are planning further clinical studies after the data from the Phase II trial is analyzed and our plans for the studies have been presented to the FDA.

     ISV-403 is a formulation of a fluoroquinolone in the DuraSite system. Fluoroquinolones are effective against gram-positive and gram-negative bacteria including pseudomonas, and are often used as prophylaxis during ophthalmic surgery. Based on preclinical testing, we have determined this is a fourth-generation fluoroquinolone, which has expanded bacterial sensitivities and may be effective against the bacteria that have developed resistance to prior generation fluoroquinolones and other antibiotics. In addition, based on preclinical studies we believe the ISV-403 formulation may provide for reduced dosing frequency compared to other formulations currently on the market.

     ISV-403 was licensed to Bausch & Lomb in August 2002. Under the terms of the Bausch & Lomb License Agreement, we are responsible for the clinical development of ISV-403 through NDA approval from the FDA, with Bausch & Lomb responsible for subsequent commercial manufacturing and marketing. Bausch & Lomb is required to make preferred equity investments in us as product milestones are achieved. The Bausch & Lomb License Agreement grants Bausch & Lomb rights to market ISV-403, subject to payment of royalties, in all geographies except Japan, with such rights being shared in Asia (except Japan) and exclusive elsewhere.

     The first product utilizing our DuraSite technology, AquaSite® dry eye treatment, was launched as an over-the-counter, or OTC, medication in 1992 by CIBA Vision Ophthalmics, or CIBA Vision, to which we have licensed certain co-exclusive rights. In 2000, Global Damon Pharm launched AquaSite in Korea, based on a licensing agreement signed in 1999. In 1999, we also licensed AquaSite to SSP Co., Ltd., or SSP, for sale in Japan. (See “—Collaborative and Licensing Agreements” in our Annual Report on Form 10-K for the year ended December 31, 2001 for additional information on the agreements.) In connection with our DuraSite development efforts, we have licensed marketing rights to certain DuraSite-based product candidates to CIBA Vision and Bausch & Lomb.

     Retinal Delivery Device. ISV-014 is a device designed to provide controlled, non-surgical delivery of ophthalmic drugs to the retina and surrounding tissues. We are continuing to enhance the device and are collaborating with various academic researchers to perform in vivo experiments delivering products with a variety of molecular sizes to retinal tissues. The combination of this device technology with polymer-based drug platforms may permit long-term delivery of therapeutic agents to treat several retinal diseases that currently cannot be effectively treated.

     Business Strategy. Our business strategy is to license promising product candidates and technologies from academic institutions and other companies, to conduct preclinical and clinical testing, if necessary, and to partner with pharmaceutical companies to complete clinical development and regulatory filings as needed and to manufacture and market our products. We also have internally developed DuraSite-based product candidates using either non-proprietary drugs or compounds developed by others for non-ophthalmic indications. As with in-licensed product candidates, we either have or plan to partner with pharmaceutical companies to complete clinical development and commercialization of our own product candidates.

     Since our inception through the end of 2001, we had not received any revenues from the sale of our products, although we have received a small amount of royalties from the sale of products using our licensed technology. However, at the end of 2001, we commercially launched our OcuGene glaucoma genetic test and in the beginning of 2002 we began to receive a small amount of revenues from the sale of this test. With the exception of 1999, we have been unprofitable since our inception due to continuing research and development efforts, including preclinical studies, clinical trials and manufacturing of our product candidates. We have financed our research and development activities and operations primarily through private and public placement of our equity securities and, to a lesser extent, from collaborative agreements.

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     As of September 30, 2002, our accumulated deficit was approximately $106.4 million. There can be no assurance that we will ever achieve or be able to maintain either significant revenues from product sales or profitable operations.

Results of Operations

     We earned revenues in the third quarter of 2002 and 2001 of $9,000 and $1,000, respectively, and $26,000 and $4,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively, from sales of OcuGene by our limited initial contract sales force and AquaSite® by CIBA Vision and Kukje Pharma Ind. Co., Ltd., our AquaSite manufacturing partner in Korea. We recognize revenue when all services have been performed and collectibility is reasonably assured. Accordingly, revenue for the sales of OcuGene may be recognized in a later period than the associated recognition of costs of the services provided, especially during the initial launch of the product.

     Cost of goods sold of $25,000 in the third quarter of 2002, and $57,000 for the nine months ended September 30, 2002, reflects the cost of OcuGene tests performed as well as the cost of sample collection kits distributed for use. As the product was launched at the end of 2001, this is the first full nine-month period that such expenses were incurred.

     Research and development expenses were $1.9 million for each of the third quarter of 2002 and the third quarter of 2001. While total expenditures were consistent between the two periods the underlying costs shifted. The cost of temporary personnel and consultants decreased in the third quarter of 2002 compared to the third quarter of 2001, while the replacement of some of the external personnel by employees resulted in a comparable increase in the cost of internal personnel. Expenditures for external research related to the ISV-900 program decreased as the focus shifted to the commercial launch activities. External laboratory testing related to ISV-403 preclinical activities increased to support the filing of an IND. Our facility costs increased consistent with the terms of our lease extension that went into effect at the beginning of 2002. Patent costs decreased for certain programs we are no longer pursuing.

     Research and development expenses increased to $5.7 million from $5.5 million for the first nine months of 2002 compared to the first nine months of 2001. The increase mainly reflects the license of the Optineuron gene from UCHC and the related cost of new patent filings and financial support of the research. Other expenditures related to temporary personnel and consultants decreased in 2002. Some of the temporary personnel used in 2001 were replaced with employees, which resulted in higher costs. Additionally, certain accrued employee related expenses were adjusted based on operating results in 2002 and resulted in lower expenses compared to 2001. External laboratory and clinical trial costs increased in 2002 related to ISV-403 preclinical activities and the ISV-401 clinical study. Also, facility costs increased consistent with the terms of the lease extension that went into effect at the beginning of 2002.

     In the first nine months of 2002, cost reimbursement decreased to $66,000 from $693,000 in the first nine months of 2001. This reflects the termination in May 2001 of our ISV-205 licensing agreement, entered into in January 1999 with Pharmacia that provided for reimbursement of the on-going development costs for the program in 2001. The cost reimbursement in 2002 reflected work completed on the preliminary formulation of a compound for the potential treatment of retinal diseases, which is being funded by a potential corporate partner.

     Selling, general and administrative expenses increased to $1.2 million during the third quarter of 2002 from $847,000 during the third quarter of 2001, and to $3.1 million from $2.5 million for the nine months ended September 30, 2002 and September 30, 2001, respectively. Expenses increased mainly due to the higher level of sales and marketing activities, such as advertising and our limited initial contract sales force related to the ongoing launch of OcuGene. Also, facility costs increased consistent with the terms of the lease extension that went into effect at the beginning of 2002.

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     Net interest and other income was $10,000 and $105,000 in the third quarter of 2002 and 2001, respectively, and $53,000 and $505,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively. This decrease is due to lower average cash balances and lower interest rates. Interest earned in the future will be dependent on our funding cycles and prevailing interest rates.

     We incurred net losses applicable to common stockholders of $3.1 million and $2.5 million during the third quarter of 2002 and 2001, respectively, and $8.7 million and $6.8 million for the nine months ended September 30, 2002 and September 30, 2001, respectively. The increase for the third quarter of 2002 compared to the third quarter of 2001 was due primarily to our sales and marketing activities to support the ongoing launch of OcuGene, increased facility costs and the decrease in interest income. The increase for the nine-month period was primarily related to licensing of the Optineuron gene and the related patent activities, the external laboratory and clinical costs related to our antibiotic programs ISV-403 and ISV-401, the decrease in reimbursement of research expenses by Pharmacia, our increased selling, general and administrative expenses to support OcuGene, increased facility costs related to the our lease renewal and the decrease in interest income. We may incur substantial additional losses over the next several years. These losses are expected to fluctuate from period to period based primarily on the level of our product development and clinical activities, the commercial acceptance of our OcuGene product and any other products we may launch in the future, our ability to enter into collaborations for our products and the level of third-party reimbursement and milestone payments received by us, if any.

Liquidity and Capital Resources

     Through 1995, we financed our operations primarily through private placements of preferred stock, totaling approximately $32 million, and an October 1993 public offering of Common Stock, which resulted in net proceeds of approximately $30 million. After 1995, we financed our operations primarily through a January 1996 private placement of Common Stock and warrants resulting in net proceeds of approximately $4.7 million and an April 1996 public offering which raised net proceeds of approximately $8.1 million. In accordance with a July 1996 agreement with Bausch & Lomb, we received a total of $2.0 million from the sale of Common Stock in August 1996 and 1997. In September 1997, we completed a $7.0 million private placement of 7,000 shares of Series A Redeemable Convertible Preferred Stock resulting in net proceeds of approximately $6.5 million. In January 1999, we entered into a transaction with Pharmacia from which we received a total of $3.5 million from the sale of Common Stock in January 1999 and September 1999. In November 1999, we entered into another transaction with Pharmacia from which we received a $5.0 million licensing fee and, in January 2000, received $2.0 million from the sale of Common Stock. In April 2000, we received $0.6 million from the issuance of Common Stock from the exercise of warrants issued as part of the 1995 private placement. In May 2000, we completed a private placement of Common Stock and warrants from which we received net proceeds of approximately $13.0 million. During 2000, 2001, and 2002, we also received $243,000, $71,000 and $93,000, respectively, from the issuance of Common Stock upon the exercise of stock options and sales of Common Stock through our Employee Stock Purchase Plan. In August 2002, we received $2.0 million from the issuance of 2,000 shares of Series A-1 Preferred Stock to Bausch & Lomb in connection with the licensing of our antibiotic program ISV-403.

     At September 30, 2002, we had cash and cash equivalents totaling $3.5 million compared to $10.1 million as of December 31, 2001. It is our policy to invest these funds in highly liquid securities, such as interest bearing money market funds, Treasury and federal agency notes and corporate debt.

     Net cash used in operating activities of $8.6 million for the nine months ended September 30, 2002 related primarily to research and development expenditures for our antibiotic programs and recently licensed glaucoma genetic technology, decreased cost reimbursements, and the expenses incurred related to the on-going launch of OcuGene.

     We purchased $58,000 of laboratory and other equipment and leasehold improvements in the first nine months of 2002 compared with $409,000 in the first nine months of 2001. We also made $18,000 of payments on capital leases for certain laboratory equipment in the first nine months of 2002 compared to $6,000 in the first nine months of 2001.

     We received $93,000 and $47,000 in the first nine months of 2002 and 2001, respectively, from the

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issuance of Common Stock from the exercise of stock options by employees and through the employee stock purchase program. We also received $26,000 in the first nine months of 2002 as a payment on a note receivable from a stockholder.

     Our future capital expenditures and requirements will depend on numerous factors, including the progress of our research and development programs and preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, our ability to successfully commercialize OcuGene and any other products that we may launch in the future, our ability to establish collaborative arrangements, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in our existing collaborative and licensing relationships, acquisition of new businesses, products and technologies, the completion of commercialization activities and arrangements, and the purchase of additional property and equipment.

     We anticipate no material capital expenditures to be incurred for environmental compliance in fiscal year 2002. Based on our good environmental compliance record to date, and our current compliance with applicable environmental laws and regulations