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 June 30, 1998
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
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TARGETED GENETICS CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1549568
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(206) 623-7612
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(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 28,974,741
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(Class) (Outstanding at July 31, 1998)
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended June 30, 1998
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - June 30, 1998 and December 31, 1997 3
b) Condensed Statements of Operations - for the three and six months ended
June 30, 1998 and 1997 4
c) Condensed Statements of Cash Flows - for the six months ended
June 30, 1998 and 1997 5
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
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 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
* No information is provided due to inapplicability of the item.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
(a development stage company)
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents $ 1,689,877 $ 1,011,845
Securities available for sale 9,546,936 4,025,976
Prepaid expenses and other 296,304 248,278
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Total current assets 11,533,117 5,286,099
Property, plant and equipment, net 3,824,965 3,927,533
Other assets 467,167 553,452
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$ 15,825,249 $ 9,767,084
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,495,866 $ 1,352,297
Accrued payroll and other liabilities 278,230 275,876
Current portion of long-term obligations 1,172,590 1,030,562
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Total current liabilities 2,946,686 2,658,735
Long-term obligations 1,432,116 1,516,762
Shareholders' equity:
Preferred stock 0 0
Common stock (28,974,741 and 20,211,114 shares
outstanding at June 30, 1998 and December 31,
1997, respectively) 86,191,709 73,401,141
Deficit accumulated during development stage (74,745,444) (67,814,735)
Accumulated other comprehensive loss 182 5,181
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Total shareholders' equity 11,446,447 5,591,587
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$ 15,825,249 $ 9,767,084
============ ============
See accompanying notes.
3
Item 1. Financial Statements (continued)
TARGETED GENETICS CORPORATION
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
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1998 1997 1998 1997
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Revenues:
Collaborative agreements $ 0 $ 3,048 $ 8,339 $ 80,430
Investment income 135,020 180,478 177,324 410,814
Other 78,187 98,254 303,731 196,509
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Total revenues 213,207 281,780 489,394 687,753
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Expenses:
Research and development 2,628,305 3,316,897 5,834,879 6,368,435
In-process research and development 0 0 0 0
General and administrative 663,768 644,762 1,440,560 1,387,332
Interest 71,822 94,627 144,664 181,520
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Total expenses 3,363,895 4,056,286 7,420,103 7,937,287
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Net loss $ (3,150,688) $ (3,774,506) $ (6,930,709) $ (7,249,534)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.12) $ (0.19) $ (0.29) $ (0.36)
============ ============ ============ ============
Shares used in computation of
basic and diluted net loss per share 27,305,728 20,205,624 23,778,020 20,183,954
============ ============ ============ ============
Period from
March 9, 1989
(date of inception)
through
June 30, 1998
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Revenues:
Collaborative agreements $ 2,174,639
Investment income 3,829,218
Other 970,099
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Total revenues 6,973,956
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Expenses:
Research and development
In-process research and development 53,151,871
General and administrative 13,517,911
Interest 13,674,402
1,375,216
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Total expenses 81,719,400
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Net loss $ (74,745,444)
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See accompanying notes.
4
Item 1. Financial Statements (continued)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Six months ended March 9, 1989
June 30, (date of inception)
----------------------------------- through
1998 1997 June 30, 1998
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Operating activities:
Net Loss $ (6,930,709) $ (7,249,534) $ (74,745,444)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development 0 0 12,867,986
Depreciation and amortization 851,251 828,138 7,574,793
Expenses paid with common stock 0 0 78,500
Changes in operating assets and liabilities:
Increase in other assets (46,775) (30,342) (504,851)
(Increase) decrease in accrued interest on
securities available for sale (24,516) 48,707 (17,517)
Increase (decrease) in accounts payable
and accrued liabilities 73,721 (211,046) 1,793,991
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Net cash used in operating activities (6,077,028) (6,614,077) (52,952,542)
Investing activities:
Purchases of property, plant and equipment (81,782) (528,271) (9,499,869)
Purchases of securities available for sale (12,578,407) 0 (92,057,303)
Sales of securities available for sale 7,076,964 3,759,715 82,528,065
Net cash acquired in RGene acquisition 0 0 1,594,386
Increase in other assets (15,000) 0 (784,179)
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Net cash (used in) provided by investing activities (5,598,225) 3,231,444 (18,218,900)
Financing activities:
Net proceeds from sale of capital stock 12,890,886 283,007 68,551,665
Advances from Immunex 0 0 2,807,316
Proceeds from equipment financing 0 326,287 5,412,245
Payments under capital leases and installment loans (537,601) (593,276) (3,909,907)
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Net cash provided by financing activities 12,353,285 16,018 72,861,319
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Net increase (decrease) in cash and cash equivalents 678,032 (3,366,615) 1,689,877
Cash and cash equivalents, beginning of period 1,011,845 3,532,568 0
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Cash and cash equivalents, end of period $ 1,689,877 $ 165,953 $ 1,689,877
============ ============ =============
See accompanying notes.
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
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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 and six months ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
Note 2. Comprehensive Income
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In June 1997, the Financial Accounting Standards Board issued Statement
130, Reporting Comprehensive Income. Statement 130 established new rules for
the reporting and display of comprehensive income and its components; however,
adoption in 1998 will have no impact on the Company's net loss or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which currently are reported in shareholders'
equity, to be included in other comprehensive income and the disclosure of total
comprehensive income. The total of other comprehensive income was immaterial
during the first and second quarters of 1998 and 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Risks and Uncertainties
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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. The Company's future cash requirements and
expense levels will depend on numerous factors, including continued scientific
progress in the Company's research and development programs; the results of
research and development activities; preclinical studies and clinical trials;
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. Reference is made to the Company's Annual Report on Form 10-K for a
more detailed description of such factors. Readers are cautioned not to place
undue
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Risks and Uncertainties (continued)
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reliance on these forward-looking statements, which speak only as of the date of
this report. The Company undertakes 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.
Financial Condition
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The Company had $11.2 million in cash, cash equivalents and securities
available for sale as of June 30, 1998, compared to $5.0 million at December 31,
1997. The increase was primarily attributable to the completion of a private
placement of common stock and warrants in April 1998, which resulted in net
proceeds to the Company of approximately $12.7 million, offset by the use of
$6.1 million to fund operations and $538,000 of principal payments on capital
equipment leases and installment loans during the first six months of 1998.
The Company is a development stage company conducting gene and cell therapy
research and development. Income earned from investments and, to a lesser
degree, revenues under collaborative agreements have been its only sources of
revenue, covering less than ten percent of expenses. Gene and cell therapy
products are subject to the risks of failure inherent in the development of
products based on innovative technologies. Although the Company's technology
appears promising, it is unknown whether any commercially viable products will
result from the Company's research and development. It is not anticipated that
the Company will have any product-related revenues for a number of years.
Accordingly, the Company expects to incur substantial additional losses over the
next several years and to use its capital resources to fund preclinical and
clinical research programs, development of manufacturing capabilities and the
preparation for commercialization of its products under development.
The Company currently estimates that, assuming no new revenue sources and its
planned rate of spending, its existing cash, cash equivalents and securities
available for sale will be sufficient to meet its operating and capital
requirements through the second quarter of 1999. There can be no assurance that
the underlying assumed levels of revenue and expense will prove to be accurate.
Whether or not these assumptions prove to be accurate, the Company will need to
raise substantial additional capital. The Company intends to seek additional
funding through public or private financing, including equity financing and
through collaborative relationships with other companies. There can be no
assurance, however, that adequate funds will be available when needed or will be
available on terms favorable to the Company, if at all.
Results of Operations
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Over the past several years, the Company's net loss has grown, consistent with
the growth in the Company's scope and size of operations. In February 1998 the
Company announced a reorganization and restructuring plan designed to reduce
operating expenses. The plan focused the Company's resources on the advancement
of its three lead product opportunities: tgAAV-CFTR, a gene
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Results of Operations (continued)
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therapy to treat cystic fibrosis; tgDCC-E1A, a gene therapy product for cancer;
and cytotoxic T lymphocytes (CTLs), a cellular therapy for infectious diseases.
The reorganization plan called for reductions in operating costs throughout the
organization, including positions that were largely associated with programs in
very early stage development. As a result of the reorganization, the Company
recorded a restructuring charge during the first quarter of 1998 of
approximately $300,000.
Revenue under collaborative agreements for the periods presented primarily
consisted of amounts earned from Laboratoires Fournier S.C.A. related to tgDCC-
E1A manufacturing and development.
Investment income for the three and six months ended June 30, 1998 decreased
to $135,000 and $177,000, respectively, compared to $180,000 and $411,000 during
the three and six months ended June 30, 1997, respectively. The decreases were
largely attributable to lower average cash balances for investment in 1998
compared to the same periods in 1997.
Other revenue for the three and six months ended June 30, 1998 and 1997
represented proceeds from research grants awarded by the National Institutes of
Health.
Research and development expenses decreased to $2,628,000 and $5,835,000 for
the three and six months ended June 30, 1998, respectively, compared to
$3,317,000 and $6,368,000 in the same 1997 quarters. The decreases were a
result of the Company's reorganization and restructuring plan which was
implemented in February 1998. The Company expects to see continued modest year-
to-year decreases in research and development expenses during the remainder of
1998.
8
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the Company's shareholders ("Shareholders") was held on
May 5, 1998 (the "Annual Meeting"). Of the 20,216,714 shares outstanding as of
the record date, March 6, 1998, 16,751,893 shares, or 83% of the total shares
eligible to vote at the Annual Meeting, were represented in person or by proxy.
Two matters were submitted to a vote of the Shareholders at the Annual
Meeting. First, an amendment to the 1992 Stock Option Plan providing for an
increase in the number of shares available for grant from 2,000,000 to 2,500,000
was approved by 91% of the votes represented at the meeting. Second, Jack L.
Bowman and Jeremy Curnock Cook were elected as Directors of the Company, each
receiving greater than 99% of the votes cast at the meeting.
No other matters were submitted to a vote of the Shareholders.
ITEM 5. OTHER INFORMATION
In accordance with the Company's Bylaws, a shareholder proposing to transact
business at the Company's annual meeting must provide written notice of such
proposal, in the manner provided by the Company's Bylaws, not fewer than 60 nor
more than 90 days prior to the date of such annual meeting (or, if the Company
provides less than 60 days notice of such meeting, no later than 10 days after
the date of the Company's notice). In addition, if the Company receives notice
of a shareholder proposal after February 12, 1999, the persons named as proxies
in such proxy statement and proxy will have discretionary authority to vote on
such shareholder proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Description
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27.1 Financial Data Schedule
(b) A Current Report on Form 8-K, dated April 17, 1998, was filed with the
Securities and Exchange Commission reporting that Targeted Genetics Corporation
had completed a private placement of common stock and warrants to four
institutional investors, raising an aggregate of $13,000,000 based on a per
share price of $1.50.
A Current Report on Form 8-K, dated May 20, 1998, was filed with the
Securities and Exchange Commission containing the Company's April 30, 1998
unaudited balance sheet, showing the effect of the completed private placement
referred to above.
9
SIGNATURES
Pursuant to the requirements of the Securities 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
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(Registrant)
Date August 7, 1998 /s/ H. STEWART PARKER
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H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date August 7, 1998 /s/ JAMES A. JOHNSON
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James A. Johnson, Vice President, Finance
(Principal Financial and Accounting Officer)
10