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 March 31, 1999
[ ] 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 (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 30,677,379
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(Class) (Outstanding at May 3, 1999)
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended March 31, 1999
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - March 31, 1999 3
and December 31, 1998
b) Condensed Statements of Operations - for the three months 4
ended March 31, 1999 and 1998
c) Condensed Statements of Cash Flows - for the three months 5
ended March 31, 1999 and 1998
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
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 10
SIGNATURES 10
* 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
March 31, December 31,
1999 1998
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents $ 569,348 $ 1,870,841
Securities available for sale 8,227,537 10,085,955
Accounts receivable 265,793 102,359
Prepaid expenses and other 158,712 387,408
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Total current assets 9,221,390 12,446,563
Property, plant and equipment, net 3,525,804 3,299,253
Other assets 440,867 458,267
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$ 13,188,061 $ 16,204,083
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 1,405,156 $ 1,664,074
Accrued payroll and other liabilities 196,915 486,206
Current portion of long-term obligations 1,255,460 1,171,836
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Total current liabilities 2,857,531 3,322,116
Long-term obligations 1,038,057 900,208
Shareholders' equity:
Preferred stock 0 0
Common stock (30,677,379 and 30,652,375 shares
outstanding at March 31, 1999 and December 31,
1998, respectively) 88,476,471 88,455,138
Accumulated deficit (79,186,030) (76,501,784)
Accumulated other comprehensive income 2,032 28,405
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Total shareholders' equity 9,292,473 11,981,759
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$ 13,188,061 $ 16,204,083
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The accompanying notes are an integral part of this statement.
3
TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
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1999 1998
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Revenue:
Collaborative agreements $ 1,204,725 $ 8,339
Investment income 126,774 42,304
Other -- 225,544
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Total revenue 1,331,499 276,187
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Expenses:
Research and development 3,177,960 3,206,574
General and administrative 786,465 776,792
Interest 51,320 72,842
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Total expenses 4,015,745 4,056,208
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Net loss $ (2,684,246) $ (3,780,021)
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Basic and diluted net loss per share $ (0.09) $ (0.19)
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Shares used in computation of
basic and diluted net loss
per share 30,655,477 20,213,614
============ ============
The accompanying notes are an integral part of this statement.
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TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
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1999 1998
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Operating activities:
Net loss $ (2,684,246) $ (3,780,021)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 395,569 438,683
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable (317,780) 451,886
Increase (decrease) in accrued payroll and other liabilities (289,291) 9,957
Decrease in prepaids and other current assets 208,499 17,062
Decrease (increase) in accounts receivable (163,434) 18,849
Other (1,838) 47,598
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Net cash used in operating activities (2,852,521) (2,795,986)
Investing activities:
Sales and maturities of securities available for sale 2,338,261 4,486,555
Purchases of securities available for sale (504,378) (1,805,472)
Purchases of property, plant and equipment (471,103) (48,968)
Increase in other assets -- (15,000)
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Net cash provided by investing activities 1,362,780 2,617,115
Financing activities:
Proceeds from equipment financing 466,197 --
Payments under capital leases and installment loans (299,282) (279,535)
Net proceeds from stock option exercises 21,333 2,960
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Net cash provided by (used in) financing activities 188,248 (276,575)
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Net decrease in cash and cash equivalents (1,301,493) (455,446)
Cash and cash equivalents, beginning of period 1,870,841 1,011,845
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Cash and cash equivalents, end of period $ 569,348 $ 556,399
============ ============
Supplemental disclosure of cash flow information:
Equipment financed through capital lease $ 54,558 $ --
Interest paid on capital leases and installment loans 48,050 72,842
The accompanying notes are an integral part of this statement.
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Item 1. Financial Statements (continued)
TARGETED GENETICS CORPORATION
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 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 ended March 31, 1999, are
not necessarily indicative of the results to be expected for the full year.
Note 2. Revenue Recognition
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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 our cystic
fibrosis collaboration with Medeva PLC comprised 90% of total company revenue
during the first quarter ended March 31, 1999.
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. 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; 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
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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
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Revenue for the quarter ended March 31, 1999 was $1.3 million, compared to
$276,000 in the first quarter of 1998. First quarter 1999 revenue under
collaborative agreements consisted of $1.2 million compared to $8,000 of
collaborative revenue in the first quarter of 1998. This revenue increase was
generated from our newly formed collaboration with Medeva PLC to develop
potential cystic fibrosis gene therapy products. Investment income for the
three months ended March 31, 1999 increased to $127,000 compared to $42,000
during the three months ended March 31, 1998. The increase was largely
attributable to a higher average cash balance for investment in 1999 compared to
the same period in 1998. We had no grant revenue in 1999, reflecting our recent
focus on product development.
Research and development expenses decreased slightly to $3,178,000 for the
three months ended March 31, 1999, compared to $3,207,000 in the 1998 quarter.
The slight decrease can be explained by two offsetting factors. Approximately
$220,000 of employee severance costs were recorded as research and development
expense in the first quarter of 1998 as a result of the February 1998
restructuring that reduced total staffing by about 25% and concentrated
resources on developing our core technologies. After removing the effect of
these non-recurring expenses from the 1998 results, research and development
expenses showed an increase in the current 1999 quarter. This increase was
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 fluctuations in costs associated with developing our cystic fibrosis
product, as well as costs related to ongoing clinical trials.
General and administrative expenses increased to $786,000 for the three
months ended March 31, 1999, compared to $777,000 in the 1998 quarter. Results
for 1998 include a reorganization and restructuring charge of approximately
$80,000. As with research and development expenses, after removing the effect of
these non-recurring expenses, general and administrative expenses showed an
increase over the first quarter of 1998. This was primarily due to additional
employees hired to support our cystic fibrosis product development
collaboration.
Interest expense decreased to $51,000 for the quarter ending March 31,
1999, compared to $73,000 in the three months ended March 31, 1998. This was
primarily due to lower average principal balances as compared to the prior year.
Financial Condition
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As of March 31, 1999, we had $8.8 million in cash, cash equivalents and
securities available for sale, compared to a total of $12.0 million at December
31, 1998. This decrease was primarily attributable to operating losses
experienced during the quarter. Net cash used for operations was $2.9 million
for the quarter ended March 31, 1999, compared to $2.8 million for the first
quarter of 1998. Our capital expenditures totaled $471,000 in the quarter ended
March 31, 1999 compared to $49,000 in the same quarter of 1998. The majority of
the expenditures in the current quarter related to
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construction of our pilot 100-liter scale AAV vector manufacturing facility and
improvements to our information systems. We expect the manufacturing facility to
be substantially complete before the end of the third quarter. We currently fund
substantially all of our equipment purchases with capital leases.
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, assuming no new revenue sources and our current
planned rate of spending, our existing cash, cash equivalents and securities
available for sale, together with the net funding provided by our collaborative
partners, will be sufficient to meet our operating and capital requirements into
the second quarter of 2000. 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, 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
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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 the 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.
Because we have been in business for a relatively short time, our exposure
to the Year 2000 Issue is limited in comparison to more established companies.
Based on recent and ongoing assessments, we believe that we will not be required
to undertake any major activities or incur any significant costs related to the
Year 2000 Issue.
We are addressing 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).
For our IT systems and operations equipment exposure, we have completed our
assessment of systems that could be affected by the Year 2000 Issue. All of our
software applications are purchased from established vendors and we believe
substantially all IT systems and operations equipment are
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compliant with Year 2000 requirements or can be remediated with currently
available upgrades. We are approximately 85% complete implementing the upgrades
that we believe are necessary to make our IT systems and operations equipment
year 2000 compliant. No significant issues have been identified to date that
cannot be resolved through minor upgrades that are currently available or
expected to be available soon. Completion of remediation and upgrades for IT
systems and operations equipment is expected by the third quarter of 1999.
We have queried all significant external agents regarding the status of
their IT systems with respect to the Year 2000 Issue. Responses to date have
not indicated any external agent with a Year 2000 compliance issue that would
materially impact our operations. We expect to complete evaluating our external
agents' Year 2000 compliance during the second quarter of 1999. To the extent
any external agents currently have Year 2000 issues, we have no means of
ensuring that such issues will be communicated on a timely basis or that
external agents will achieve Year 2000 readiness. 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 is expected
to be less than $100,000 and is being expensed as incurred. If we encounter
significant unforeseen Year 2000 problems, in our IT systems and equipment,
operations equipment or with our external agents, actual remediation costs could
be significant. All phases of the Year 2000 readiness effort are expected to be
completed by the third quarter of 1999. All parts of the company are involved
in the Year 2000 effort.
Management of the company believes it has an effective program in place to
resolve the Year 2000 issue within an acceptable time frame. As noted above, we
have not yet completed all necessary phases of the Year 2000 program. In the
event that we do not complete the additional work required, our research and
development activities may be adversely impacted. In this event, the
significance of the impact cannot be reasonably estimated at this time.
We currently have no contingency plans in place in the event we are unable
to achieve Year 2000 readiness for our critical operations. Additionally, the
most reasonably likely worst case scenario has not yet been clearly identified.
We plan to evaluate the status of completion of our Year 2000 efforts no later
than June 30, 1999 and determine whether we need a contingency plan. There can
be no assurance that we will be able to develop contingency plans that will
adequately address all Year 2000 issues that may arise.
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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
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27.1 Financial Data Schedule
(b) On January 6, 1999, we filed a current Report on Form 8-K, with the
Securities and Exchange Commission reporting that we had formed a collaboration
with Medeva PLC and Medeva Pharmaceuticals, Inc., an affiliate of Medeva PLC, to
develop and commercialize tgAAV-CF, our potential gene therapy product for the
treatment of cystic fibrosis.
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
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(Registrant)
Date: May 7, 1999 /s/ H. STEWART PARKER
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H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 1999 /s/ JAMES A. JOHNSON
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James A. Johnson, Chief Financial Officer
(Principal Financial and Accounting Officer)
10