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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
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 NO. 0-29608
GENETRONICS BIOMEDICAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA 33-002-4450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
for Genetronics, Inc.)
11199 SORRENTO VALLEY ROAD 92121-1334
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (858) 597-6006
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Company's Common Stock, no par
value, was 33,606,718 as of February 9, 2001.
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GENETRONICS BIOMEDICAL LTD.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
------
a) Consolidated Balance Sheets
as of December 31, 2000 and March 31, 2000.........................1
b) Consolidated Statements of Loss and Deficit
for the Three Months and Nine Months Ended December 31, 2000
and 1999 ..........................................................2
c) Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 2000
and 1999 ..........................................................3
d) Notes to Consolidated Financial Statements.........................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................17
Item 6. Exhibits and Reports on Form 8-K......................................18
SIGNATURES..............................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Expressed in U.S. dollars)
December 31 March 31
2000 2000
$ $
----------- -----------
ASSETS
CURRENT
Cash and cash equivalents 3,287,004 9,742,344
Short term investments 688,010 --
Accounts receivable, net of allowance for
uncollectible accounts of $16,685
[March 31, 2000 - $54,925] 823,367 1,120,450
Inventories [note 5] 961,622 611,642
Prepaid expenses and other 61,199 139,423
----------- -----------
TOTAL CURRENT ASSETS 5,821,202 11,613,859
----------- -----------
Fixed assets, net 994,442 1,014,811
Other assets, net [note 12] 2,368,152 1,383,634
----------- -----------
9,183,796 14,012,304
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued expenses [note 6] 1,320,637 1,784,084
Current portion of obligations under
capital leases 72,810 53,098
Deferred revenue 144,217 268,665
----------- -----------
TOTAL CURRENT LIABILITIES 1,537,664 2,105,847
----------- -----------
Obligations under capital leases 62,616 65,286
Deferred rent 31,161 9,972
----------- -----------
TOTAL LIABILITIES 1,631,441 2,181,105
----------- -----------
SHAREHOLDERS' EQUITY
Shares to be issued [notes 7 and 12] 346,500 --
Share capital [note 7] 42,287,237 30,491,793
Additional paid in capital [notes 7 and 12] 589,718 35,768
Special warrants -- 11,002,992
Cumulative translation adjustment (102,238) (100,911)
Deficit (35,568,862) (29,598,443)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,552,355 11,831,199
----------- -----------
9,183,796 14,012,304
----------- -----------
See accompanying notes
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GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
LOSS AND DEFICIT
(Unaudited)
(Expressed in U.S. dollars)
Three Months Ended December 31 Nine Months Ended December 31
------------------------------ -----------------------------
2000 1999 2000 1999
$ $ $ $
----------- ----------- ----------- -----------
REVENUE
Net sales 1,049,238 1,025,822 3,386,977 2,806,200
License fee and milestone payments -- 83,333 83,333 416,667
Grant funding 28,958 71,156 97,054 313,061
Revenues under collaborative research
and development arrangements 141,668 33,334 314,448 48,334
Interest income 83,384 164,898 340,048 409,591
----------- ----------- ----------- -----------
1,303,248 1,378,543 4,221,860 3,993,853
----------- ----------- ----------- -----------
EXPENSES
Cost of sales 462,421 523,868 1,508,606 1,289,461
Research and development 1,824,034 1,360,739 4,650,069 5,003,359
Selling, general and administrative 1,172,020 1,242,656 4,018,836 4,257,062
Interest expense 5,026 6,001 14,768 19,260
Restructuring charges [note 6] -- 231,481 -- 599,060
----------- ----------- ----------- -----------
3,463,501 3,364,745 10,192,279 11,168,202
----------- ----------- ----------- -----------
NET LOSS FOR THE PERIOD (2,160,253) (1,986,202) (5,970,419) (7,174,349)
Deficit, beginning of period (33,408,609) (25,186,648) (29,598,443) (19,998,501)
----------- ----------- ----------- -----------
DEFICIT, END OF PERIOD (35,568,862) (27,172,850) (35,568,862) (27,172,850)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED [note 8] (0.08) (0.09) (0.23) (0.32)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 27,289,218 22,212,606 26,072,635 22,583,825
=========== =========== =========== ===========
See accompanying notes
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GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
(Expressed in U.S. dollars)
NINE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31 DECEMBER 31
2000 1999
$ $
------------ ----------
OPERATING ACTIVITIES
Net loss for the period (5,970,419) (7,174,349)
Items not involving cash:
Depreciation and amortization 426,391 388,402
Provision for (recovery of) uncollectible accounts (38,240) 41,808
Provision for inventory obsolescence (32,240) 18,700
Loss on disposal of fixed assets 4,354 --
Deferred rent 21,189 (7,071)
Changes in non-cash working capital items:
Accounts receivable 335,323 (240,223)
Inventories (317,740) (242,697)
Prepaid expenses and other 78,224 (186,340)
Accounts payable and accrued expenses (463,447) 382,512
Deferred revenue (124,448) 266,666
---------- ----------
CASH USED IN OPERATING ACTIVITIES (6,081,053) (6,752,592)
---------- ----------
INVESTING ACTIVITIES
Purchase of short-term investments (688,010) (6,354,840)
Purchase of capital assets (189,096) (82,191)
Increase in other assets (219,185) (423,544)
---------- ----------
CASH USED IN INVESTING ACTIVITIES (1,096,291) (6,860,575)
---------- ----------
FINANCING ACTIVITIES
Payments on obligations under capital leases (40,372) (33,785)
Proceeds from issuance of Special Warrants - net -- 11,157,853
Proceeds from issuance of common shares - net 763,703 834,510
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 723,331 11,958,578
---------- ----------
Effect of exchange rate changes on cash (1,327) 319
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (6,455,340) (1,654,270)
Cash and cash equivalents, beginning of period 9,742,344 6,189,284
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,287,004 4,535,014
---------- ----------
See accompanying notes
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GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Expressed in U.S. dollars)
1. BASIS OF PRESENTATION
The unaudited Consolidated Statements of Loss and Deficit for the three
months and nine months ended December 31, 2000 and 1999, the unaudited
Consolidated Balance Sheet as of December 31, 2000, and the unaudited
Consolidated Statements of Cash Flows for the nine months ended December 31,
2000 and 1999 have been prepared by the Company in accordance with accounting
principles generally accepted in Canada for interim financial statements. In the
opinion of management, all adjustments (which include reclassifications and
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at December 31, 2000 and for all
periods presented, have been made.
Significant variations to U.S. GAAP are summarized in Note 10 to the
interim consolidated financial statements.
The accounting policies and methods of application adopted in these
unaudited interim consolidated financial statements are the same as those of the
annual consolidated financial statements for the year ended March 31, 2000, with
the exception of the change in accounting policy related to income taxes [see
note 4].
Certain information and note disclosures normally included in the annual
financial statements prepared in accordance with accounting principles generally
accepted in Canada have been omitted. These unaudited interim consolidated
financial statements and notes thereto should be read in conjunction with the
annual audited consolidated financial statements for the year ended March 31,
2000 included in the Genetronics Biomedical Ltd. Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The results of operations for
the three months and nine months ended December 31, 2000 are not necessarily
indicative of the results for the full year or for any other future period.
The Company has financed its cash requirements primarily from share
issuances, payments from collaborators and government grants. The Company's
ability to realize the carrying value of its assets is dependent on successfully
bringing its technologies to the market and achieving future profitable
operations, the outcome of which cannot be predicted at this time. It will be
necessary for the Company to raise additional funds for the continuing
development of its technologies.
2. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Genetronics
Biomedical Ltd. and its wholly-owned subsidiary, Genetronics, Inc., a private
company incorporated in the state of California, USA. Effective May 2000, the
Company closed the operations of its wholly owned subsidiary Genetronics SA, a
company incorporated in France, and subsequently sold its investment in
Genetronics SA for nominal consideration to Geser SA, a company owned by the
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former General Manager of Genetronics SA. Significant intercompany accounts and
transactions have been eliminated on consolidation.
3. ACCOUNTING POLICIES
Future Income Taxes
Future income taxes are recognized for the future income tax consequences
attributable to differences between the carrying values of assets and
liabilities and their respective income tax bases. Future income tax assets and
liabilities are measured using substantively enacted income tax rates expected
to apply to taxable income in the years in which temporary differences are
expected to be recovered or settled. The effect on future income tax assets and
liabilities of a change in rates is included in earnings in the period that
includes the enactment date. Future income tax assets are recorded in the
financial statements if realization is considered more likely than not.
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective April 1, 2000, the Company adopted the new recommendations of The
Canadian Institute of Chartered Accountants with respect to accounting for
income taxes. The change has been applied retroactively, and as permitted, the
comparative financial statements have not been restated. The change in
accounting policy did not result in any adjustment in the current period or to
the opening deficit. Before the adoption of the new recommendations, income tax
expense was determined using the deferral method of tax allocation.
5. INVENTORIES
Inventories consist of the following:
December 31, 2000 March 31, 2000
----------------- --------------
Raw Materials 499,702 490,926
Work in process 212,321 79,683
Finished Goods 305,796 129,470
Less: allowance for obsolescence (56,197) (88,437)
------- -------
961,622 611,642
======= =======
6. RESTRUCTURING CHARGES
During the three months ended September 30, 1999 the Company undertook a
review of its operating structure to identify opportunities to improve operating
effectiveness. As a result of this review certain staffing changes occurred and
program review continued into the next period. The Company also announced that
its employment of two senior executives ended in September 1999. In December
1999 the Company entered into an Agreement for Termination of Employment with
each of the two senior executives. In accordance with the staffing changes and
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the terms of the Termination of Employment Agreements, the Company has included
restructuring charges of $18,926 at December 31, 2000 [March 31, 2000 -
$288,042] in accounts payable.
7. SHARE CAPITAL
Authorized and Issued Share Capital as at December 31, 2000:
Authorized: 100,000,000 common shares without par value
100,000,000 Class A preferred shares without par value
Issued: 27,289,218 common shares for a total of $42,287,237
No Class A preferred shares have been issued to date
Authorized and Issued Share Capital as at March 31, 2000:
Authorized: 100,000,000 common shares without par value
100,000,000 Class A preferred shares without par value
Issued: 22,832,324 common shares for a total of $30,491,793
No Class A preferred shares have been issued to date
The 2000 Stock Option Plan, effective July 31, 2000 (the "2000 Plan"), was
approved by the shareholders on August 7, 2000, pursuant to which 7,400,000
common shares are reserved for issuance. The 2000 Plan supercedes all
previous stock option plans. As of December 31, 2000, 1,479,675 common
shares were available for grant under the 2000 Plan. At March 31, 2000,
there were 381,133 stock options available for grant under the 1997 plan.
No options had been granted under the 2000 Plan at March 31, 2000.
Stock Options Outstanding as at December 31, 2000:
During the nine months ended December 31, 2000, the Company granted
1,211,500 stock options with a weighted average exercise price of $1.57.
At December 31, 2000 5,177,825 stock options remain outstanding under the
2000 Plan at exercise prices ranging from $0.94 to $5.50 with a weighted
average remaining life of 6.54 years, of which 3,759,393 are vested as at
December 31, 2000.
Issuance of Common Stock:
During the nine months ended December 31, 2000, the Company issued 111,894
common shares from the exercise of stock options, for gross proceeds of
$249,332. The Company also issued 180,500 from the exercise of warrants,
for gross proceeds of $597,455.
Pursuant to an Agency Agreement dated June 16, 1999, the Company issued
4,187,500 Special Warrants at $3.00 each for total consideration of
$12,562,500 before deducting the agent's commission of $1,005,000 and other
issue costs. Each Special Warrant entitled the holder to receive, at no
additional cost, one common share of the Company
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any time up until the earliest of: (i) the day which was the fifth business
day after the date of issuance of a receipt for a final prospectus relating
to the distribution of the common shares on the exercise of the Special
Warrants by the last of the British Columbia and Ontario Securities
Commissions; and (ii) June 16, 2000, (the "Expiry date"). Any Special
Warrants not exercised prior to the Expiry date would be deemed to have
been exercised. In March 2000, the Company issued 23,000 common shares
pursuant to the exercise and conversion of 23,000 Special Warrants. On June
16, 2000 the remaining 4,164,500 Special Warrants were converted into
common shares.
Shares to be issued:
In September 2000, the Company entered into an exclusive license agreement
with the University of South Florida Research Foundation, Inc. ("USF"),
whereby USF granted the Company an exclusive, worldwide license to USF's
rights in patents and patent applications generally related to needle
electrodes ("License Agreement"). These electrodes were jointly developed
by the Company and USF. Pursuant to the License Agreement , the Company
granted USF and its designees warrants to acquire 600,000 common shares for
$2.25 per share until September 14, 2010. Of the total warrants granted,
300,000 vest at the date of grant and the remainder will vest upon the
achievement of certain milestones. The vested warrants which were valued at
$553,950 using the Black-Sholes pricing model were recorded as other
assets and a credit to additional paid in capital
In addition, pursuant to the above License Agreement the Company agreed to
issue a total of 150,000 common shares with a fair market value of $346,500
to USF and its designees for no additional consideration. In December 2000,
the Company received regulatory approval to issue the shares. The shares
have not been issued as of December 31, 2000. The terms of the exclusive
License Agreement include a royalty to be paid to USF based on net sales of
products under the license.
8. LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflect the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted to common stock. Since the effect of the assumed exercise of common
stock options and other convertible securities was anti-dilutive, basic and
diluted loss per share are the same.
9. SEGMENT INFORMATION
The Company's reportable business segments include the Company's U.S.
subsidiary's BTX Instrument Division and the Drug and Gene Delivery Division.
The Company evaluates performance based on many factors including net results
from operations before certain unallocated costs. The Company does not allocate
interest income and expenses and general and administrative costs to its
reportable segments. In addition, total assets are not allocated to each
segment.
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BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
---------- ------------- ----------- ----------
THREE MONTHS ENDED DECEMBER 31, 2000
Reportable segment net sales 1,049,238 -- -- 1,049,238
Other reportable segment revenue -- 170,626 -- 170,626
Interest income -- -- 83,384 83,384
--------- ---------- -------- ----------
Total revenue 1,049,238 170,626 83,384 1,303,248
--------- ---------- -------- ----------
Reportable segment cost of sales (462,421) -- -- (462,421)
Other reportable segment expenses (403,488) (1,657,992) -- (2,061,480)
General and administrative -- -- (934,574) (934,574)
Interest expense -- -- (5,026) (5,026)
--------- ---------- -------- ----------
Net income (loss) 183,329 (1,487,366) (856,216) (2,160,253)
--------- ---------- -------- ----------
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
---------- ------------- ------------ ----------
THREE MONTHS ENDED DECEMBER 31, 1999
Reportable segment net sales 1,015,211 10,611 -- 1,025,822
Other reportable segment revenue -- 187,823 -- 187,823
Interest income -- -- 164,898 164,898
--------- ---------- ---------- ----------
Total revenue 1,015,211 198,434 164,898 1,378,543
--------- ---------- ---------- ----------
Reportable segment cost of sales (515,016) (8,852) -- (523,868)
Other reportable segment expenses (327,232) (1,501,381) -- (1,828,613)
General and administrative -- -- (1,006,263) (1,006,263)
Interest expense -- -- (6,001) (6,001)
--------- ---------- ---------- ----------
Net income (loss) 172,963 (1,311,799) (847,366) (1,986,202)
--------- ---------- ---------- ----------
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
---------- ------------- ------------ ----------
NINE MONTHS ENDED DECEMBER 31, 2000
Reportable segment net sales 3,386,977 -- -- 3,386,977
Other reportable segment revenue -- 494,835 -- 494,835
Interest income -- -- 340,048 340,048
----------- ---------- ---------- ----------
Total revenue 3,386,977 494,835 340,048 4,221,860
----------- ---------- ---------- ----------
Reportable segment cost of sales (1,508,606) -- -- (1,508,606)
Other reportable segment expenses (1,304,886) (4,183,039) -- (5,487,925)
General and administrative -- -- (3,180,980) (3,180,980)
Interest expense -- -- (14,768) (14,768)
----------- ---------- ---------- ----------
Net income (loss) 573,485 (3,688,204) (2,855,700) (5,970,419)
----------- ---------- ---------- ----------
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
---------- ------------- ------------ ----------
NINE MONTHS ENDED DECEMBER 31, 1999
Reportable segment net sales 2,791,720 14,480 -- 2,806,200
Other reportable segment revenue -- 778,062 -- 778,062
Interest income -- -- 409,591 409,591
---------- ---------- ---------- ----------
Total revenue 2,791,720 792,542 409,591 3,993,853
---------- ---------- ---------- ----------
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Reportable segment cost of sales (1,277,272) (12,189) -- (1,289,461)
Other reportable segment expenses (1,303,853) (5,236,536) -- (6,540,389)
General and administrative -- -- (3,319,092) (3,319,092)
Interest expense -- -- (19,260) (19,260)
---------- ---------- ---------- ----------
Net income (loss) 210,595 (4,456,183) (2,928,761) (7,174,349)
---------- ---------- ---------- ----------
Substantially all of the Company's assets and operations are located in the
United States and the majority of all revenues are generated in the United
States.
Approximately 38% (1999: 29%) and 44% (1999: 29%) of the Company's net
sales were made to one customer for the three months and nine months ended
December 31, 2000, respectively. The Company exported approximately 34% (1999:
34%) and 31% (1999: 32%) of its net sales for the three months and nine months
ended December 31, 2000, respectively.
Net sales of the Company by destination were as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
United States 690,413 675,996 2,323,200 1,910,649
Europe 151,901 140,872 531,498 392,889
East Asia 194,303 164,111 465,511 418,493
Other 12,621 44,843 66,768 84,169
--------- --------- --------- ---------
Total 1,049,238 1,025,822 3,386,977 2,806,200
--------- --------- --------- ---------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) for
interim financial statements, which, in the case of the Company, conform in all
material respects with those in the United States (U.S. GAAP) and with the
requirements of the Securities and Exchange Commission (SEC), except as
described in the Company's consolidated financial statements for the year ended
March 31, 2000.
The impact of significant variations to U.S. GAAP on the consolidated
statements of loss and deficit are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
$ $ $ $
----------- ----------- ------------ ------------
Net loss for the period, Canadian
GAAP (2,160,253) (1,986,202) (5,970,419) (7,174,349)
Adjustment for stock based
compensation - non-employees (65,151) (14,364) (369,476) (204,252)
---------- ---------- ---------- ----------
Net loss for the period, U.S. GAAP (2,225,404) (2,000,566) (6,339,895) (7,378,601)
---------- ---------- ---------- ----------
Unrealized gains from short term
investments 1,098 9,671 2,020 3,892
Unrealized gains (losses) on
foreign currency translation (1,327) (45) (140) 319
---------- ---------- ---------- ----------
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Comprehensive loss for the
period, U.S. GAAP (2,225,633) (1,990,940) (6,338,015) (7,374,390)
---------- ---------- ---------- ----------
Net loss per common share, U.S.
GAAP - basic and diluted (0.08) (0.09) (0.24) (0.33)
---------- ---------- ---------- ----------
Weighted average number of
common shares, U.S. GAAP 27,289,218 22,212,606 26,072,635 22,583,825
---------- ---------- ---------- ----------
The impact of significant variations to U.S. GAAP on the consolidated
balance sheet items is as follows:
DECEMBER 31, 2000 MARCH 31, 2000
$ $
----------------- --------------
Short Term Investments 690,030 --
Additional paid in capital 3,496,326 2,572,900
Deficit (38,475,470) (32,135,575)
----------- -----------
11. NEW ACCOUNTING PRONOUNCEMENTS
On June 26, 2000, the SEC deferred the effective date of Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". As a
result of this deferral, SAB No. 101 will be effective for the Company's fiscal
quarter beginning January 1, 2001, requiring retroactive application to the
beginning of the Company's 2001 fiscal year with restatement, if necessary. SAB
No. 101 expresses the views of the SEC staff in applying GAAP to certain revenue
recognition issues. The Company has not yet determined the impact, if any, of
this pronouncement on its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS133). SFAS133 will be effective for the Company's
year ending March 31, 2002. The Company has not determined the impact, if any,
of this pronouncement on its consolidated financial statements.
The Canadian Institute of Chartered Accountants has revised and replaced
Section 3500 of the CICA Handbook, "Earnings Per Share," which will be effective
for the Company's first interim period ended June 30, 2001. The Company has not
determined the impact, if any, of this pronouncement on its consolidated
financial statements.
12. SUPPLEMENTAL CASH FLOW INFORMATION AND OTHER
During the nine months ended December 31, 2000, the Company granted
warrants and agreed to issue common shares pursuant to a license agreement [note
7] aggregating $900,450.
13. SUBSEQUENT EVENTS
On January 17, 2001 the Company completed a public offering of 6,267,500
common shares at a price of Canadian $1.35 per share for gross proceeds of
Canadian $8,461,125 (US $5,688,954) less estimated expenses of Canadian
$1,059,584 (US $709,921). The Company has also granted the Agent compensation
warrants exercisable until January 16, 2002 to purchase 500,000 Common Shares,
at Canadian $1.35 per Common Share. The
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Company has also issued to the Agent 50,000 Common Shares as compensation for
corporate finance services.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. This Quarterly Report on
Form 10-Q includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 that involve risk and uncertainty, including those related to development
plans, intentions to seek licensing partners and additional sources of capital,
intended inventory levels, expectations concerning the adequacy of existing cash
resources, and other financial, clinical, business environment and trend
projections. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals will be
achieved. The important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, without
limitation, potential changes in strategy and focus of potential collaborative
partners, competitive conditions and demand for its products, the current stage
of development of both the Company and its products, the timing and uncertainty
of results of both research and regulatory processes, the extensive government
regulation applicable to its business, the unproven safety and efficacy of its
device products, its significant additional financing requirements, the
volatility of its stock price, the uncertainty of future capital funding, its
potential exposure to product liability or recall, uncertainties relating to
patents and other intellectual property, including whether the Company will
obtain sufficient protection or competitive advantage therefrom, its dependence
upon a limited number of key personnel and consultants and its significant
reliance upon its collaborative partners for achieving its goals, and other
factors detailed in its Annual Report on Form 10-K for the year ended March 31,
2000.
GENERAL
Through its Drug and Gene Delivery Division, the Company engaged in
developing drug and gene delivery systems based on electroporation to be used in
the site-specific treatment of disease. Through its BTX Instrument Division, the
Company develops, manufactures, and sells electroporation equipment to the
research laboratory market.
In the past the Company's revenues primarily reflected product sales to the
research market through the BTX Instrument Division and research grants through
the Drug and Gene Delivery Division. From October 1998 to August 2000 the
Company received up-front licensing fees and milestone payments from Ethicon,
Inc. and Ethicon Endo-Surgery, Inc.
The Company plans to seek a new licensing partner for the Electroporation
Drug Delivery System. The Company will not receive any milestone or licensing
payments for development or sale of the products until a new agreement is in
place with a new partner and the Company achieves the milestones specified in
the new agreement or product sales commence under the new agreement. The Company
believes it has sufficient current resources to initiate activities directed
toward product launch and marketing in Europe, and for initiation of a Phase III
clinical study in the United States.
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Until it achieves the commercialization of clinical products, the Company
expects revenues to continue to be attributable to product sales to the research
market, grants, collaborative research arrangements, and interest income.
Due to the expenses incurred in the development of the drug and gene
delivery systems, the Company has been unprofitable in the last five years. As
of December 31, 2000 the Company has incurred a cumulative deficit of
$35,568,862. The Company expects to continue to incur substantial operating
losses in the future due to continued spending on research and development
programs, the funding of preclinical studies, clinical trials and regulatory
activities and the costs of manufacturing and administrative activities.
RESULTS OF OPERATIONS
Revenues
The Company reported net sales of $1,049,238 for the three months ended
December 31, 2000 which was an increase in the amount of $23,416, or 3%,
compared to net sales of $1,025,822 for the three months ended December 31,
1999. For the three months ended December 31, 2000 as well as for the three
months ended December 31, 1999 the BTX Instrument Division realized 34% of its
net sales from non-U.S. sales. As a result of a new distributorship agreement
with Merck Eurolab in April 2000, sales to the Merck Group, which also includes
VWR Scientific, increased from $294,353 for the three months ended December 31,
1999 to $403,856 for the three months ended December 31, 2000. In December 2000
the Company signed a non-exclusive distributorship agreement with Fisher
Scientific Company LLC to further promote sales to the United States.
Net sales for the nine month period ended December 31, 2000 in the amount
of $3,386,977 increased by $580,777, or 21%, compared to net sales in the
amount of $2,806,200 for the period ended December 31, 1999, primarily as a
result of the stronger first quarter of 2000 compared to the first quarter of
1999. The stronger first quarter of 2000 was also attributable to a significant
increase of net sales to VWR Scientific. Non-U.S. sales as a percentage of total
sales remained relatively constant with 31% for the nine months ended December
31, 2000 compared to 32% for the nine months ended December 31, 1999.
Revenues from grant funding decreased from $71,156 and $313,061 for the
three months and nine months ended December 31, 1999, respectively, to $28,958
and $97,054 for the three months and nine months ended December 31, 2000,
respectively. The reason for the decrease in grant revenues was that activities
for grants awarded in previous years were winding down in the periods ended
December 31, 2000 and all active grants expired by December 31, 2000. No new
grants have been awarded as of the time of this filing.
During the three months and nine months ended December 31, 2000 the Drug
and Gene Delivery Division recorded revenues under collaborative research and
development arrangements in the amount of $141,668 and $314,448, respectively,
as a result of collaborative research agreements to develop electroporation
technology for use in particular gene therapy applications. This represents a
significant increase over the same period of the previous year since the Company
did not enter into these research agreements until the end of calendar 1999.
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In July 2000, the Company received notice from Ethicon Endo-Surgery, Inc.
that it had elected to exercise its discretionary right to terminate the License
and Development Agreement it had entered into with the Company in October 1998,
and therefore no milestone payments have been recorded for the three months
ended December 31, 2000. The Company does not expect to record license fee and
milestone payments until a new agreement is reached with another licensing
partner.
As a result of the decreasing cash, cash equivalents, and short term
investments due to the continuing operating losses, interest income for the
three months and nine months ended December 31, 2000 in the amount of $83,384
and $340,048, respectively, decreased compared to $164,898 and $409,591 for
the three months and nine months ended December 31, 1999.
Cost Of Sales
Cost of sales decreased by $61,447, or 12%, from $523,868 for the three
months ended December 31, 1999 to $462,421 for the three months ended December
31, 2000. The decrease was partially a result of a different product mix in the
three months ended December 31, 2000 compared to the three months ended December
31, 1999. Instrument sales, which yield a higher profit margin than cuvettes and
accessories increased from 62% to 74% of total sales from the three months ended
December 31, 1999 to the three months, ended December 31, 2000. Primarily as a
result of the 21% increase in net sales, the cost of sales for the nine months
ended December 31, 2000 in the amount of $1,508,606 increased by $219,145, or
17%, compared to $1,289,461 for the nine months ended December 31, 1999.
Gross Profit and Gross Margin
The Company's gross profit for the three months ended December 31, 2000 in
the amount of $586,817 represented an increase of $84,863, or 17%, compared
with $501,954 for the three months ended December 31, 1999. The gross profit
margin of 49% for the three months ended December 31, 1999 increased to 56% for
the three months ended December 31, 2000. The primary reason for the higher
profit margin was the previously mentioned change in product mix. As a result of
the higher sales, the Company's gross profit for the nine months ended December
31, 2000 in the amount of $1,878,371 increased by $361,632, or 24%, compared
to $1,516,739 for the same period of the previous year. The gross profit margin
of 55% for the nine months ended December 31, 2000 increased slightly from 54%
for the nine months ended December 31, 2000.
Research and Development
Research and Development, which includes clinical trial costs increased by
$463,295, or 34%, from $1,360,739 for the three months ended December 31, 1999
to $1,824,034 for the three months ended December 31, 2000. A primary reason for
the increase were the costs incurred in the three months ended December 31, 2000
by a third party to manage the data collection, processing, analysis, and
reporting of Phase II clinical trial studies in France and North America. Also,
engineering expenses increased as a result of consulting services incurred for
the design of medical equipment in anticipation of the planned commercialization
in Europe in 2001. For the nine months ended December 31, 2000 the research and
development and clinical trial costs in the amount of $4,650,069 decreased by
$353,290, or 7%, compared to the research
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and development and clinical trial expenses in the amount of $5,003,359 for the
nine months ended December 31, 1999. The higher expenses in the three months
ended December 31, 2000 were more than offset by a decrease of expenses in the
previous six months, primarily in the clinical and regulatory areas and the Drug
Delivery Division engineering department as a result of the delay of
pre-commercialization activities for the MedPulser system in Europe and the
delay of initiation of pivotal and other clinical trials in the U.S. These lower
expenses more than offset higher engineering expenses in the BTX Instrument
Division for the three months and nine months ended December 31, 2000 compared
with the same period of the previous year. The higher BTX Instrument engineering
expenses were primarily related to an increase in the effective headcount and
skill level of personnel assigned to a project to improve manufacturability and
engineering design of the overall BTX product line.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, which include advertising,
promotion and selling expenses in the amount of $1,172,020 for the three months
ended December 31, 2000 decreased by $70,636, or 6%, compared with $1,242,656
for the three months ended December 31, 1999. The lower expenses were mainly
attributable to a decrease in administrative expenses due to the disposal of
Genetronics SA.
For the same reason as above, selling, general and administrative expenses
in the amount of $4,018,836 for the nine months ended December 31, 2000
decreased by $238,226, or 6%, from $4,257,062 for the nine months ended
December 31, 1999.
Net Income/Loss (Net income/loss of reportable segments does not include
unallocated items such as interest income and expense and general and
administrative costs)
The BTX Instrument Division reported a net income in the amount of $183,329
for the three months ended December 31, 2000, compared to a net income in the
amount of $172,963 for the three months ended December 31, 1999, which meant an
increase in the amount of $10,366, or 6%. The increase was a result of the
higher gross profit for the three months ended December 31, 2000 which more than
offset higher engineering expenses. For the nine months ended December 31, 2000
the BTX Instrument Division reported a net income in the amount of $573,485,
which meant an increase in the amount of $362,890 over the same period of the
previous year, primarily as result of the 21% increase in net sales.
The Drug and Gene Delivery Division reported a net loss in the amount of
$1,487,366 for the three months ended December 31, 2000 compared to a net loss
of $1,311,799 for the three months ended December 31, 1999, an increase of
$175,567, or 13%. The before mentioned increase in research and development
expenses was the primary reason for the higher loss. For the nine months ended
December 31, 2000 the net loss in the amount of $3,688,204 decreased by
$767,979, or 17%, compared with a net loss of $4,456,183 for the nine months
ended December 31, 1999. The main factor for the lower loss in the nine months
ended December 31, 2000 were the $599,060 restructuring charges incurred in the
same period of the previous year.
For the three months ended December 31, 2000, the Company recorded a net
loss of $2,160,253, or $0.08 per common share, compared with a net loss of
$1,986,202, or $0.09 per common share, for the three months ended December 31,
1999, which meant an increase of
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$174,051, or 9%. The higher net loss is primarily a result of the increased
research and development expenses. Primarily as a result of the restructuring
charges incurred in the nine months ended December 31, 1999 and lower research
and development expenses in the nine months ended December 31, 2000, the net
loss in the amount of $5,970,419 for the nine months ended December 31, 2000
was $1,203,930, or 17%, lower than the net loss in the amount of $7,174,349
for the same period of the previous year.
LIQUIDITY AND CAPITAL RESOURCES
During the last five fiscal years, the Company's primary uses of cash have
been to finance research and development activities and clinical trial
activities in the Drug and Gene Delivery Division. Since inception, the Company
has satisfied its cash requirements principally from proceeds from the sale of
equity securities. In June 1999 the Company closed a private placement of
4,187,500 Special Warrants at a price of $3.00 per special warrant for total
consideration of $12,562,500 before deducting the agent's commission of
$1,005,000 and other estimated issue costs. Each warrant entitled the holder to
acquire one common share in the capital of the Company at no additional cost
upon exercise. In March 2000, the Company issued 23,000 common shares pursuant
to the exercise and conversion of 23,000 Special Warrants. On June 16, 2000 the
remaining 4,164,500 Special Warrants were exercised and converted into common
shares.
In connection with the issuance of 4,187,500 Special Warrants pursuant to
an agency agreement dated June 16, 1999, the Company issued to the Agent's
nominee 30,000 common shares and 418,750 Special Warrants exercisable, for no
additional consideration, into 418,750 share purchase warrants, which were
exercisable into 418,750 common shares at a price of $3.31 per share on or
before June 16, 2000. During the year ended March 31, 2000, the Company issued
151,300 common shares pursuant to the exercise of 151,300 of these share
purchase warrants. During the three months ended June 30, 2000 the Company
issued 180,500 common shares pursuant to the exercise of 180,500 of these share
purchase warrants for net proceeds to the Company in the amount of $597,455. The
remaining 86,950 Special Warrants expired unexercised on June 16, 2000.
On January 17, 2001 the Company completed a public offering of 6,267,500
common shares at a price of Canadian $1.35 per share for gross proceeds of
Canadian $8,461,125 (US $5,688,954) less estimated expenses of Canadian
$1,059,584 (US $709,921). The Company has also granted the Agent compensation
warrants exercisable until January 16, 2002 to purchase 500,000 Common Shares,
at Canadian $1.35 per Common Share. The Company has also issued to the Agent
50,000 Common Shares as compensation for corporate finance services. The Company
intends to use the majority of the proceeds of the offering to further develop
clinical applications for its core technology, Electroporation Therapy.
Specifically, it intends to spend the funds on activities related to a Phase III
clinical trial in the United States in head and neck cancer, costs related to
launching oncology products in Europe, other clinical trials, and as working
capital and for general corporate purposes.
As of December 31, 2000 the Company had working capital of $4,283,538,
compared to $9,508,012, as of March 31, 2000. The decrease was a result of the
operating loss in the nine months ended December 31, 2000. The current ratio
decreased from 5.52 as of March 31, 2000 to 3.79 as of December 31, 2000.
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Inventories increased from $611,642 at March 31, 2000 to $961,622 at
December 31, 2000, primarily as the result of a build-up of inventory in the BTX
Instrument Division. The Company built up finished goods inventory levels in
anticipation of substantial orders from Merck Eurolab, a European distributor.
As of December 31, 2000 these anticipated orders still had not been received at
the level expected as it has taken longer than planned to promote the
distribution to the nine divisions of Merck Eurolab situated in various
countries in Europe. In addition, the newly signed agreement with Fisher
Scientific Company LLC requires the Company to meet delivery schedules which
necessitated increased inventory levels. Also, in order to eliminate backorders,
the Company increased safety stock levels which resulted in a higher overall
inventory level.
Accounts receivable decreased by $297,083, or 27%, from $1,120,450 at
March 31, 2000 to $823,367 at December 31, 2000. The decrease was primarily a
result of the payment in the first quarter of 2000 of Ethicon receivables that
had been outstanding as of March 31 2000. Receivables from Ethicon decreased
since no product for clinical trials was shipped in the nine months ended
December 31, 2000.
Current liabilities decreased from $2,105,847 at March 31, 2000 to
$1,537,664 at December 31, 2000. The decrease was primarily a result of payments
of fiscal year-end accruals in the nine months ended December 31, 2000. A part
of the year-end accruals consisted of accrued restructuring charges.
Including the proceeds received from the public offering subsequent to
December 31, 2000, the Company believes that it has sufficient funds to support
its operations at least through the next twelve months.
The Company's long term capital requirements will depend on numerous
factors including
- - The progress and magnitude of the research and development programs,
including preclinical and clinical trials;
- - The time involved in obtaining regulatory approvals;
- - The cost involved in filing and maintaining patent claims;
- - Competitor and market conditions;
- - The Company's ability to establish and maintain collaborative arrangements;
- - The Company's ability to obtain grants to finance research and development
projects; and
- - The cost of manufacturing scale-up and the cost of commercialization
activities and arrangements
The Company's ability to generate substantial funding to continue research
and development activities, preclinical and clinical studies and clinical trials
and manufacturing,
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scale-up, and selling, general, and administrative activities is subject to a
number of risks and uncertainties and will depend on numerous factors including:
- - The Company's ability to raise funds in the future through public or
private financings, collaborative arrangements, grant awards or from other
sources;
- - The potential for the Company to obtain equity investments, collaborative
arrangements, license agreements or development or other funding programs
in exchange for manufacturing, marketing, distribution or other rights to
products developed by the Company; and
- - The Company's ability to maintain its existing collaborative arrangements.
The Company cannot guarantee that additional funding will be available when
needed. If it is not, the Company will be required to scale back its research
and development programs, preclinical studies and clinical trials, and selling,
general, and administrative activities, or otherwise reduce or cease operations
and its business and financial results and condition would be materially
adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
The risks related to foreign currency exchange rates are immaterial and the
Company does not use derivative financial instruments.
The Company has invested its excess cash, cash equivalents, and short term
investments in United States government, municipal, and corporate debt
securities with high quality credit ratings and an average maturity of no more
than three months. These investments are not held for trading or other
speculative purposes. Given the short-term nature of these investments, and that
the Company has no borrowings outstanding, the Company is not subject to
significant interest rate risk.
PART II. OTHER INFORMATION
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 1. LEGAL PROCEEDINGS
In May 2000 the Company received notice that Roger Fuller, a former
employee of the Company, filed a complaint in the Superior Court of San Diego
against the Company and one of its former managers alleging damages suffered in
connection with his termination. On October 27, 2000 the Company and Mr. Fuller
entered into a Confidential Settlement Agreement and General Release of All
Claims. The Company believes that the terms of the Agreement were favorable to
the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Distributorship Agreement dated December 1, 2000 by and between the
Registrant and Fisher Scientific Company L.L.C.(1)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 2000.
- --------------------
(1) Confidential treatment has been requested with request to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
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GENETRONICS BIOMEDICAL LTD.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Genetronics Biomedical Ltd.
Date: 02/09/01 By: /s/ Mervyn J. McCulloch
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Mervyn J. McCulloch, Chief Financial Officer
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