-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OrT+3Zd+5oBUbG+xO9dIaspCuzOp5ZW8Fe+fASvC+tLo8SQzGMe09nnBr2HQ5tda Fbii5ONPNg+bUMTdirfO3w== 0001032210-99-001554.txt : 19991111 0001032210-99-001554.hdr.sgml : 19991111 ACCESSION NUMBER: 0001032210-99-001554 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARGETED GENETICS CORP /WA/ CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23930 FILM NUMBER: 99746233 BUSINESS ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066237612 MAIL ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to Commission File Number: 0-23930 ------- TARGETED GENETICS CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Washington 91-1549568 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1100 Olive Way, Suite 100, Seattle, Washington 98101 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (206) 623-7612 -------------- (Registrant's telephone number, including area code) 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 [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 33,999,168 - ---------------------------- --------------------------------- (Class) (Outstanding at November 1, 1999) 1 TARGETED GENETICS CORPORATION Quarterly Report on Form 10-Q For the quarter ended September 30, 1999 TABLE OF CONTENTS Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Balance Sheets - September 30, 1999 and 3 December 31, 1998 b) Condensed Statements of Operations - for the three and nine 4 months ended September 30, 1999 and 1998 c) Condensed Statements of Cash Flows - for the nine months 5 ended September 30, 1999 and 1998 d) Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative 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 11 SIGNATURES 11 * No information is provided due to inapplicability of the item. 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements TARGETED GENETICS CORPORATION CONDENSED BALANCE SHEETS
September 30, December 31, 1999 1998 ------------ ----------- ASSETS (Unaudited) - ------ Current assets: Cash and cash equivalents $ 4,976,358 $ 1,870,841 Securities available for sale 3,576,912 10,085,955 Accounts receivable 1,342,558 102,359 Prepaid expenses and other 125,894 387,408 ------------- ------------ Total current assets 10,021,722 12,446,563 Property, plant and equipment, net 3,716,868 3,299,253 Other assets 441,067 458,267 ------------- ------------ $ 14,179,657 $ 16,204,083 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 1,694,377 $ 1,664,074 Accrued payroll and other liabilities 275,976 486,206 Current portion of long-term obligations 1,240,912 1,171,836 ------------- ------------ Total current liabilities 3,211,265 3,322,116 Long-term obligations 1,132,515 900,208 Shareholders' equity: Series A Preferred stock, $.01 par value; 6,000,000 shares authorized, none outstanding -- -- Series B Convertible Exchangeable Preferred stock, $.001 par value; 12,015 shares authorized, 12,015 and no shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 12,178,602 -- Common stock (33,999,168 and 30,652,375 shares outstanding at September 30, 1999 and December 31, 1998, respectively) 98,088,077 88,455,138 Accumulated deficit (100,416,658) (76,501,784) Accumulated other comprehensive income (loss) (14,144) 28,405 ------------- ------------ Total shareholders' equity 9,835,877 11,981,759 ------------- ------------ $ 14,179,657 $ 16,204,083 ============= ============
The accompanying notes are an integral part of this statement. 3 TARGETED GENETICS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------- Revenue: Collaborative agreements $ 1,364,545 $ 111,629 $ 3,987,662 $ 119,968 Other - 14,473 - 318,204 ------------ ----------- ------------ ------------ Total revenue 1,364,545 126,102 3,987,662 438,172 Operating expenses: Research and development 3,636,415 2,898,981 10,296,869 8,733,860 Technology license fee - - 3,200,000 - General and administrative 967,624 651,300 2,408,474 2,091,860 ------------ ----------- ------------ ------------ Total operating expenses 4,604,039 3,550,281 15,905,343 10,825,720 ------------ ----------- ------------ ------------ Loss from operations (3,239,494) (3,424,179) (11,917,681) (10,387,548) Equity in loss of joint venture (12,015,000) - (12,015,000) - Investment income 123,589 136,133 344,744 313,457 Interest expense (57,632) (64,833) (163,335) (209,497) ------------ ----------- ------------ ------------ Net loss (15,188,537) (3,352,879) (23,751,272) (10,283,588) Accretion of dividend on preferred stock (163,602) - (163,602) - ------------ ----------- ------------ ------------ Net loss applicable to common stock $(15,352,139) $(3,352,879) $(23,914,874) $(10,283,588) ============ =========== ============ ============ Basic and diluted net loss per common share $ (0.46) $ (0.12) $ (0.76) $ (0.40) ============ =========== ============ ============ Shares used in computation of basic and diluted net loss per common share 33,190,783 28,974,741 31,559,622 25,529,296 ============ =========== ============ ============
The accompanying notes are an integral part of this statement. 4 TARGETED GENETICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, ----------------- 1999 1998 -------------- ------------- Operating activities: - -------------------- Net loss $(23,914,874) $(10,283,588) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of joint venture 12,015,000 - Technology fee paid with common stock and warrants 3,200,000 - Depreciation and amortization 1,133,704 1,240,331 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (1,240,199) 24,258 Decrease (increase) in other assets 206,317 (69,830) Decrease in accounts payable and accrued liabilities (143,322) (28,508) Decrease (increase) in accrued interest on securities available for sale 79,531 (59,099) ------------ ------------ Net cash used in operating activities (8,663,843) (9,176,436) Investing activities: - -------------------- Sales of securities available for sale 6,881,277 10,495,650 Purchases of property, plant and equipment (1,379,568) (150,995) Purchases of securities available for sale (494,314) (12,569,056) Increase in other assets - (15,000) ------------ ------------ Net cash provided by (used in) investing activities 5,007,395 (2,239,401) Financing activities: - -------------------- Net proceeds from issuance of equity securities 6,575,208 12,813,844 Proceeds from equipment financing 960,283 - Payments under capital leases and installment loans (794,859) (798,895) Net proceeds from stock option exercises 21,333 82,643 ------------ ------------ Net cash provided by financing activities 6,761,965 12,097,592 ------------ ------------ Net increase in cash and cash equivalents 3,105,517 681,755 Cash and cash equivalents, beginning of period 1,870,841 1,011,845 ------------ ------------ Cash and cash equivalents, end of period $ 4,976,358 $ 1,693,600 ============ ============ Supplemental disclosure of noncash investing and financing activities: Investment in joint venture $ 12,015,000 $ - Equipment financed through capital lease 153,677 594,983 Interest paid on capital lease and installment loans 153,525 209,497
The accompanying notes are an integral part of this statement. 5 TARGETED GENETICS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The condensed financial statements included herein have been prepared by Targeted Genetics Corporation (the "Company") without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (which consist solely of normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three months and nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year. Note 2. Revenue Recognition Revenue under collaborative agreements is recognized as defined under the terms of the respective collaborative agreements. Nonrefundable signing or licensing fees that are not dependent on future performance are recognized as revenue when received. Milestone revenue is recognized upon the achievement of the related milestone and when collection is probable. Revenue earned from the performance of research and development is recognized ratably over the period in which the related work is performed. Advance payments received in excess of amounts earned are classified as deferred revenue. Revenue from the cystic fibrosis collaboration with Medeva PLC comprised substantially all of total Company revenue during the third quarter and nine months ended September 30, 1999. Note 3. Strategic Alliance On July 21, 1999, the Company and Elan Corporation, plc ("Elan") formed a joint venture to develop enhanced gene delivery technology and products utilizing the Company's gene therapy expertise and Elan's drug delivery expertise. This joint venture, Emerald Gene Systems, Ltd. ("Emerald"), a Bermuda limited company, is initially owned 80.1% by the Company and 19.9% by Elan. Emerald will subcontract research and development efforts mainly to the joint venturers. Under the terms of related agreements, Emerald paid $15 million to Elan for a license giving Emerald exclusive rights to use Elan drug delivery technologies, as defined, within the gene delivery field. In a related transaction, Elan purchased $12,015,000 of Targeted Genetics Series B convertible exchangeable preferred stock on July 21, 1999. This preferred stock bears a dividend of 7%, accrued semi-annually and added to principal, and is convertible, at Elan's option, to Targeted Genetics common stock at a price equivalent to $3.32 per share until July 21, 2005. 6 Additionally, Elan has an option to exchange this preferred stock for a 30.1% interest in Emerald, increasing Elan's ownership in Emerald to 50%. This exchange option is exercisable up to 6 months after the completion of a research and development program that is currently anticipated to be 36 to 48 months in length. This exchange right will terminate if the preferred stock is converted into Targeted Genetics common stock unless this conversion occurs as a result of a liquidation or certain transactions involving a change of control of the Company. Targeted Genetics used the proceeds of the convertible exchangeable preferred stock sale to purchase 6,000 shares of Emerald common stock and 3,612 shares of Emerald preferred stock to fund the company's share of Emerald's initial capitalization. Elan will also loan Targeted Genetics up to $12 million to support its share of the joint venture's research and development costs pursuant to a convertible promissory note issued by the Company to Elan. The note has a six year term, will accrue interest at 12% per annum, and is convertible into Targeted Genetics' common stock at conversion prices set at 150% of the average closing price of the Company's common stock for the 60 trading days ending two business days prior to the time the Company draws loan proceeds. The agreement includes provisions allowing Targeted Genetics to convert this debt into Targeted Genetics common stock at the current market price at its option. Also, the Company entered into an agreement with Elan that requires Elan to purchase up to $10 million of Targeted Genetics common stock at a premium to the market price. Elan purchased $5 million in connection with closing of the joint venture transaction, representing 2,148,899 shares of common stock, and will purchase an additional $5 million at the Company's option, one year from closing of the joint venture transaction at 120% of the market price at that time. While Targeted Genetics owns 80.1% of the outstanding common stock of Emerald, Elan and its subsidiaries have retained significant minority investor rights that are considered "participating rights" as defined in EITF 96-16. Accordingly, Targeted Genetics will not consolidate the financial statements of Emerald, but will instead account for its investment in Emerald under the equity method of accounting. During the quarter ended September 30, 1999, the Company recognized no contract revenues for research and development activity performed for Emerald. Emerald Gene Systems' for the quarter ended September 30, 1999 had a net loss of $15,000,000 reflecting a charge to research and development expense of $15 million for a license fee paid by Emerald to Elan for exclusive access to Elan drug delivery technologies for use in the area of gene delivery. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Risks and Uncertainties This discussion contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Our future cash requirements and expense levels will depend on numerous factors, including continued scientific progress in our research and development programs; the results of research and development activities; preclinical studies and clinical trials; joint venture activity; acquisition of products or technology, if any; relationships with existing and future corporate collaborators, if any; competing technological and market developments; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; the time and costs of manufacturing scale-up and commercialization activities; and other factors. Please refer to our Annual Report on Form 10-K for a more detailed description of such factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Results of Operations Revenue for the quarter ended September 30, 1999 was $1.4 million, compared to $126,000 in the third quarter of 1998. Revenue for the nine-month period ended September 30, 1999 was $4.0 million, compared to $438,000 in the same period in 1998. The increase in 1999 revenue primarily results from our collaboration with Medeva PLC to develop tgAAV-CF, our potential cystic fibrosis gene therapy product. This collaboration, which began in the fourth quarter of 1998, contributed substantially all of our third quarter and year to date 1999 revenue. Research and development expenses increased to $3.6 million and $10.3 million for the three and nine months ended September 30, 1999, respectively, compared to $2.9 million and $8.7 million in the same periods in 1998. These increases were attributable to the hiring of additional scientists to support our Medeva collaboration, as well as increased process development costs associated with tgAAV-CF product development. We expect to see continued modest quarter-to-quarter increases in costs associated with developing our cystic fibrosis product and providing research services to Emerald Gene Systems, our joint venture collaboration with Elan Corporation plc. Our costs will also vary based on clinical trial activity occurring in each quarter. Technology license fees for the first nine months of 1999 were attributable to a $3.2 million non-cash charge related to the issuance of stock and warrants to Alkermes, Inc. in exchange for an exclusive sub-license to a patent for the manufacture of Adeno-Associated Viral (AAV) vectors, which are used in our tgAAV-CF cystic fibrosis program. We issued 500,000 shares of our common stock and warrants to purchase up to 2,000,000 additional shares in exchange for this technology license. General and administrative expenses for the third quarter of 1999 and 1998 were $968,000 and $651,000, respectively. General and administrative expenses for the first nine months of 1999 increased by $317,000 to $2.4 million compared to $2.1 million in the first nine months of 1998. Both periods reflect increases from Medeva collaboration support costs and 8 costs associated with initiating the Emerald joint venture. Results for the first three quarters of 1998 included costs associated with a first quarter 1998 reduction in force and second quarter 1998 non-recurring corporate development costs. Investment income for the third quarter ended September 30, 1999 was $124,000, compared to $136,000 in the third quarter of 1998 as average cash balances in last year's third quarter were higher resulting from a private placement of securities early in the second quarter of 1998. Investment income for the first nine months of 1999 was $345,000, compared to $313,000 for the same period in 1998 due to higher average balances in the 1999 period. Interest expense decreased to $58,000 for the quarter ending September 30, 1999 from $65,000 for the quarter ended September 30, 1998. Interest expense was $163,000 and $209,000 for the nine months ended September 30, 1999 and 1998, respectively. The decreases in both periods were primarily due to lower average principal balances as compared to the prior year. Financial Condition As of September 30, 1999, we had $8.6 million in cash, cash equivalents and securities available for sale and working capital of $6.8 million. By comparison, we had a total of $12.0 million of cash, cash equivalents and securities at December 31, 1998 and working capital of $9.1 million. The decreases in cash and working capital are attributable to operating losses, investments in capital equipment and principal payments on capital lease obligations. The decrease was offset by net proceeds of $6.5 million from the sale of our common stock ($5.0 million connected to the Emerald joint venture). We currently fund substantially all of our equipment purchases with capital leases. In conjunction with the Emerald joint venture, Elan agreed to loan us up to $12 million in the form of convertible debt bearing 12% interest per annum to fund our share of Emerald's research and development costs. As of September 30, 1999, we have not drawn any proceeds on this convertible debt. Since we began operations, our primary sources of revenue have been from license fees and research funding under collaborative agreements and income earned from investments. These sources have covered less than twenty percent of our expenses since we started business. Gene and cell therapy products are subject to long development timelines and the risks of failure inherent in the development of products based on innovative technologies. Although our technology appears promising, it is unknown whether any commercially viable products will result from our research and development activities. Since we do not anticipate that we will have any product-related revenue for a number of years, we expect to incur substantial additional losses over the next several years. We currently estimate that based on established sources of cash flow (predominantly our cystic fibrosis partnership and our newly formed joint venture with Elan) and our current planned rate of spending, that our existing cash, cash equivalents and securities available for sale, together with the funding expected to be provided by our collaborative partners, will be sufficient to meet our operating and capital requirements into the second quarter of 2001. There can be no 9 assurance that the underlying assumed levels of revenue and expense will prove to be accurate. Whether or not these assumptions prove to be accurate, we will need to raise substantial additional capital. We intend to seek additional funding through more collaborative arrangements and may seek additional funding through government grants, public or private equity or debt financing. There can be no assurance, however, that adequate funds will be available when needed or on terms favorable to us, if at all. Impact of Year 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded computer chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activity. We addressed three potential areas of impact for review and remediation with respect to the Year 2000 Issue: (1) information technology including computer hardware, networked equipment, PC based software applications and financial systems (IT systems), (2) operating equipment including research and development and manufacturing equipment with embedded chips and software (operations equipment) and (3) third party vendors, suppliers and subcontractors (external agents). We have completed all stages of these processes with respect to our information technology and operating equipment and they are now Year 2000 compliant. We have queried all significant external agents regarding the status of their IT systems with respect to the Year 2000 Issue. Responses have not indicated any external agent with a Year 2000 compliance issue that would materially impact our operations. To the extent any external agents have Year 2000 issues, we have no means of ensuring that such issues will be identified and communicated on a timely basis or that external agents will achieve Year 2000 readiness. We have identified certain external agents as key to our processes and identified "most reasonably likely worst case Year 2000 scenarios" and how those identified scenarios will be handled. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact our operations. The total estimated cost of our Year 2000 remediation project was less than $100,000 and was expensed as incurred. If we encounter significant unforeseen Year 2000 problems actual remediation costs could be significant. All parts of the company were involved in the Year 2000 effort. As noted above, while we believe that we have completed all necessary phases of the Year 2000 program, there may be unforeseen Year 2000 problems that generate additional remediation work during the fourth quarter of 1999 and after January 1, 2000. In the event that we do not complete any additional work required, our research and development activities may be adversely impacted. The significance of any such potential impact cannot be reasonably estimated at this time. 10 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report. Exhibit No. Description - ---------- ----------- 27.1 Financial Data Schedule (b) Reports filed on Form 8-K during the quarter ended September 30, 1999. On July 23, 1999 the Company filed a Form 8-K with respect to the formation of Emerald Gene Systems, a joint venture with Elan Corporation, plc. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TARGETED GENETICS CORPORATION ----------------------------- (Registrant) Date: November 10, 1999 /s/ H. Stewart Parker ----------------- ------------------------------------ H. Stewart Parker, Chief Executive Officer (Principal Executive Officer) Date: November 10, 1999 /s/ James A. Johnson ----------------- ------------------------------------ James A. Johnson, Chief Financial Officer (Principal Financial and Accounting Officer) 11 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,976,358 3,576,912 1,342,558 0 0 10,021,722 10,334,826 (6,617,958) 14,179,657 3,211,265 0 0 12,178,602 98,088,077 (100,430,802) 14,179,657 3,987,662 3,987,662 0 0 28,083,945 0 163,335 0 0 (23,914,874) 0 0 0 (23,914,874) (.76) (.76)
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