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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM
TO
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COMMISSION FILE NO. 0-29608
GENETRONICS BIOMEDICAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BRITISH COLUMBIA, CANADA 33-002-4450
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(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)
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Company's telephone number, including area code: (858) 597-6006
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Company's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The number of shares outstanding of the Company's Common Stock, no par
value, was 21,666,266 as of May 28, 1999. The aggregate market value of the
voting stock (which consists solely of shares of Common Stock) held by
non-affiliates of the Company as of May 28, 1999 was approximately $47,620,793,
based on $3.313, the closing price on that date of Common Stock on the American
Stock Exchange. *
DOCUMENTS INCORPORATED BY REFERENCE
None.
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* Excludes 7,292,347 shares of Common Stock held by directors and officers, and
shareholders whose beneficial ownership exceeds 10% of the shares outstanding
on May 28, 1999. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Company, or that such person is controlled by or under common control with
the Company.
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This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual future results could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those found in this Annual
Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors
Related to the Company's Business," in Part II, Item 7 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and additional factors discussed elsewhere in this Annual Report.
Please note that unless otherwise indicated, all reference to money is
stated in Unites States dollars.
PART I
ITEM 1. BUSINESS
OVERVIEW
Genetronics Biomedical Ltd. was incorporated in British Columbia, Canada on
August 8, 1979 under the name of Concord Energy Corp. Concord Energy Corp.
changed its name to United Safety Technology Inc. on February 17, 1988, to
Consolidated United States Technology Inc. on January 3, 1990, and then to
Genetronics Biomedical Ltd., on September 29, 1994. Genetronics Biomedical Ltd.
carries on its business through its operating subsidiary Genetronics, Inc., a
California corporation. Genetronics, Inc. was incorporated in California on June
29, 1983. Genetronics, Inc. has a subsidiary called Genetronics S.A. which was
incorporated in France on January 30, 1998. Genetronics S.A. was formed
primarily to manage clinical trials that are currently being conducted in
France. All other business activities are conducted through Genetronics, Inc.
Genetronics Biomedical Ltd., Genetronics, Inc. and Genetronics, S.A. are
hereinafter collectively referred to as "the Company" or "Genetronics".
Founded in 1983, Genetronics is a San Diego-based drug delivery company
specializing in developing technology and hardware focused on electroporation.
Electroporation is the application of brief, controlled pulses of electric
fields to cells, which causes tiny pores to open in the cell membrane.
Immediately after electroporation, the cell membrane is more permeable to drugs
and other agents. In the lab, researchers use electroporation to introduce
genes, drugs, and other compounds into cells and experimental animals. This is a
common and well known procedure and more than 4,000 scientific papers have been
published describing results achieved using electroporation. Genetronics sells
electroporation equipment to the research market through its BTX Division.
While widely used in the research arena, electroporation is a relatively
new technology in the therapeutic arena. One of the major difficulties in many
forms of drug therapy is that the pharmaceutical agent is often not able to
penetrate the relatively impermeable walls of cells. The pores produced by
electroporation permit entry of such agents into cells to a much greater extent
than if administered without electroporation. When electroporation is used in
conjunction with drugs, genes, or other therapeutic agents, it is called
Electroporation Therapy, or EPT. Through its Drug Delivery Division, Genetronics
is developing human-use equipment that is designed to allow physicians more
efficient and cost-effective means to deliver life-saving drugs or beneficial
genes to patients with illnesses, including cancer and heart disease. The
Company's proprietary electroporation drug and gene delivery system, the
Genetronics MedPulser(R) system, is currently undergoing clinical trials for use
with certain tumors.
Electroporation therapy is a broad-based technology, with many ways to
achieve commercial success. Genetronics is developing applications for EPT in
the primary areas of oncology, cardiology, gene therapy, transdermal drug
delivery and dermatology.
The Company operates through its two divisions: (i) the Drug Delivery
Division, through which the Company is developing drug delivery systems based on
electroporation to be used in the site-specific treatment of disease and, (ii)
the BTX Division, which develops, manufactures, and sells electroporation
equipment to the research laboratory market.
DRUG DELIVERY DIVISION
Overview
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Through its Drug Delivery Division, the Company is developing drug and gene
delivery systems based on the technology of electroporation to be used in
combination with drugs or genes in the site-specific treatment of disease. There
are many diseases where improved drug delivery is important. The Drug Delivery
Division has identified five areas of application for its electroporation
technology - oncology, gene therapy, dermatology, cardiology and transdermal
drug delivery.
The Drug Delivery Division's most advanced product candidates treat solid
malignant tumors such as squamous cell carcinoma, melanoma, and adenocarcinoma
in the areas of application of oncology and dermatology. The Company is
currently planning Phase III human clinical studies in North America for
treating head and neck cancer with bleomycin and the Genetronics MedPulser(R)
system. Studies designed to evaluate the MedPulser(R) system in a variety of
tumor types have been conducted in Europe. Additional Phase I and II oncology
studies are being planned, as well. Genetronics Biomedical Ltd. announced that
on October 6, 1998, it entered into a comprehensive License and Development
Agreement and a Supply Agreement with Ethicon, Inc., a Johnson & Johnson
company, involving Genetronics' proprietary drug delivery system for
Electroporation Therapy treatment of cancer.
The Genetronics drug delivery system, including the MedPulser(R) instrument
and the disposable applicators, are subject to various regulatory requirements
depending on the country of sale. The Drug Delivery Division has been awarded
ISO 9001, EN46001 and ISO 13485 registration.
Market
The Drug Delivery Division will enter the commercial market with equipment
to be used in the treatment of cancer (oncology). Cancer is a life threatening
disease affecting millions of people worldwide. The World Health Organization
reports that cancer will remain one of the leading causes of death worldwide for
a years to come. In the United States, approximately 12 million new cases have
been diagnosed since 1990. In 1999, the American Cancer Society estimates that
about 1.2 million new cancer cases will be diagnosed, excluding in situ
(non-invasive) cancers and non-melanoma skin cancers. Over 1 million new cases
of basal cell and squamous cell skin cancers are expected to be diagnosed in
1999, according to the American Cancer Society. To further illustrate the market
potential for EPT, solid tumor cancers comprise the first target for EPT and
they number 89% of all cancers. The remaining 11% are blood borne cancers.
The majority of cancer victims are over age 65 and are supported by
government funded programs. In the United States the costs of cancer, including
mortality, morbidity and direct medical costs, are approximately $107 billion
per year; $37 billion for direct medical costs (total of all health
expenditures), $11 billion for indirect morbidity costs (cost of lost
productivity due to illness), and $59 billion for indirect mortality costs.
There is still very much that scientists do not know about this disease,
consequently, there are significant unmet needs in the treatment of cancer. The
oncology business unit within the Drug Delivery Division has initially targeted
those indications for which current treatment modalities result in a low quality
of life and morbidity, or those which have very high mortality rates.
Specialized applicators are being designed which will allow EPT to treat other
solid tumor cancers with a minimally invasive procedure.
In the United States, the cumulative dollar value of treatments and
technologies commonly used in the curative and palliative management of cancer
is expected to exceed $5 billion in 1999 and is expected to continue growing at
a rate of approximately 9.5% annually. The Company's analyses project that
electroporation therapy could be applicable to an estimated 500,000 or more
cancer patients, creating an estimated market opportunity of $1.5 billion per
year.
Treatment of Tumors
Equipment made by the BTX Division has been used by investigators at the
Company and in other laboratories to screen drugs for their effectiveness in
killing tumor cells in vitro and to study the drugs' mode of action. The
Company's scientists, and outside researchers, also have studied the combination
of electroporation and various agents to destroy tumors in vivo. The Company is
currently conducting clinical trials to evaluate the ability
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of the MedPulser(R) electroporation drug and gene delivery system, when used in
conjunction with specific cancer drugs, to destroy tumors in human patients.
In most of the clinical protocols, the site of the tumor is anesthetized
and the chemotherapeutic agent of choice (bleomycin) is injected directly into
the tumor. The therapeutic agent is allowed to diffuse throughout the tumor,
which can take up to several minutes depending on the size, type and location of
the tumor. Once the drug is distributed in the tumor, the electrical field is
applied by the MedPulser(R) system.
The entire procedure can be completed in 20 minutes or less and typically
needs to be done only once. The dosage of drug used in the published results is
based on tumor volume, and is typically a small fraction (1/3 to as little as
1/50) of the dosage which would be used systemically. As a result of the lower
dosage administered locally, systemic side effects have been minimal. Tumor
necrosis with sloughing, ulceration and/or eschar were common reactions
following EPT that were usually routinely managed conservatively with no
additional treatment. No episodes of injury to normal (non tumor) tissue
adjacent to the tumors have been observed but there can be no assurances that
other side effects will not occur after more testing is performed and the side
effect profile of EPT is further defined.
MedPulser(R) system
The MedPulser(R) is an electroporation system designed for the clinical
application of Electroporation Therapy (EPT). The technology is intended to
treat various malignant and non-malignant tumors by locally applying a
controlled electric field to targeted tumor tissues previously injected with a
chemotherapeutic agent. The controlled short duration electric field pulses
temporarily increase the cellular membrane permeability of the tumor cell
membrane allowing the therapeutic agent to more easily enter the tumor cells and
have the desired cytotoxic effect.
The system is composed of two components: (1) a medical instrument, which
creates the electric field (the MedPulser(R) instrument); and (2) a single use,
sterile, disposable electrode applicator. The electrodes may be needles, plates,
or other configurations, depending on the geometry of the tumor and its
location.
The instrument was designed for easy use, such that minimal user input is
needed to apply the therapy. Based on the size and anatomical location of the
tumor to be treated, a physician selects the most appropriate electrode
applicator. The chosen applicator is then connected to the MedPulser(R)
instrument, and it is the connection of applicator to instrument that
automatically configures the therapy parameters for that particular applicator
size and shape. Currently, 12 different electrode applicator configurations are
available. The applicators vary in needle length, needle gauge, electrode needle
spacing, tip angle and handle configuration.
New models of electrode applicators will be considered in the future to
address customer needs. The system is designed such that the installed base of
MedPulser(R) generator instruments allows for a wide variety of new electrode
applicator configurations. Also, the system incorporates other features to
minimize the possibility of applicator reuse as well as prevent the use of
competitive applicators with the MedPulser(R) instrument.
The commercial version MedPulser(R) system has been certified by an
independent test laboratory as meeting strict international product standards.
To date over 25 instruments have been used in human studies and 2000 therapy
sequences have been performed successfully with the MedPulser(R) system in
clinical settings worldwide.
The Genetronics drug delivery device, including the MedPulser(R) system and
the disposable electrode applicators, are subject to various regulatory
requirements, depending on the country of sale.
In the US, EPT utilizing the MedPulser(R) system and bleomycin drug is
regulated as a combination drug-device system. The Company will be required to
obtain both drug labeling and device approvals from the United States FDA.
Clinical trials (Phase I, II and III) to support drug indication labeling
require filing an IND Application, or an Investigational New Drug Application,
followed by submission of a United States NDA, or New Drug Application, and
submission of a device PMA, or Pre-Market Approval or 510(k), for marketing
approval.
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In most of the rest of the world, the Company anticipates that the
MedPulser(R) system will be regulated as a device. In Europe, the device comes
under the Medical Device Directive 93/42/EEC and marketing requires CE mark
certification of conformity to the quality system, production and clinical
investigation essential requirements of the directive. The Company has obtained
CE mark certification, which allows it to sell and use the MedPulser(R)
electroporation system for the treatment of solid tumors with bleomycin in
Europe. Genetronics' licensee in oncology, Ethicon, Inc., plans to sell and
distribute the MedPulser(R) system throughout Europe commencing in 2000.
Medical Device Manufacturing
The Drug Delivery Division must comply with a variety of regulations to
manufacture its products for sale around the world. In Europe, it must comply
with the Medical Device Directive (MDD) which mandates the presence of a quality
system and mandates product testing. The Drug Delivery Division has demonstrated
the quality system is in place by securing ISO 9001 approval. It demonstrated
compliance with international medical device standards with EN 46001 and ISO
13485 recognition. These all occurred in January 1999. In March 1999, the
sufficiency of its product testing was demonstrated by award of the CE Mark. To
sell in the United States, the Company will need to comply with FDA current Good
Manufacturing Practices (cGMP). This process is underway.
The Company employs modern manufacturing practices which include
outsourcing of significant custom assemblies used in the manufacture of the
instrument. The instrument final assembly, testing and quality control functions
are performed in a separate location where the appropriate controls are
employed. The Company outsources the manufacture of the disposable electrode
applicators to a GMP/ISO9002 compliant contract manufacturer.
Through these methods the company attempts to optimize efficiencies of
scale and minimize manufacturing costs.
Clinical Trials
United States Trials
In late 1997 the FDA gave the Company clearance to initiate multi-center
Phase II clinical trials in the United States utilizing the MedPulser(R)
electroporation system in combination with intralesional bleomycin to treat
squamous cell carcinoma in patients who failed conventional therapies. The
Company obtained IND clearance from the Canadian Health Protection Branch to
initiate similar clinical trials. Two protocols with target enrollments of 25
patients each were initiated. One cross-over-controlled study evaluated the
effectiveness of the bleomycin-EPT treatment in patients who failed an initial
bleomycin-alone treatment; one open label study evaluated the effect of
bleomycin-EPT directly administered to the study tumors.
Twenty-three patients were enrolled in the crossover study and 18 patients
were enrolled into the open label bleomycin-EPT trial. The primary study
endpoint of tumor response (50% or greater reduction in tumor size in at least
6/25 patients treated) has been achieved in both studies and the interim results
were presented to the FDA at an "end-of-Phase II" meeting to discuss the pivotal
clinical trial for NDA submission. A summary of the data is provided in the
table below:
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RESPONSE(1)
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RESPONDER NON-RESPONDER
CLINICAL TRIAL PATIENTS TUMORS TUMORS TUMORS
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North America Phase I/II 8 8 6 (75%) 2 (25%)
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North America Phase II 23 33 0 (0%) 32 (97%)
01 Study
Control Group(2)
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North America Phase II 15 18 11 (61%) 6 (33%)
01 Study
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North America Phase II 18 24 16 (67%) 6 (25%)
02 Study
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European Study 12 19 12 (63%) 7 (36%)
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(1) Four tumors could not be evaluated
(2) Control Group patients received only drug, no electric field
The two Phase II protocols involved a total of 42 tumors treated with
bleomycin and EPT. Tumors treated in the trial include squamous cell carcinoma
of the face, oral cavity, pharynx, larynx and sinus. The volume of tumors
treated ranged from less than one cubic centimeter to more than 132 cubic
centimeters. In the crossover controlled Phase II study, patients initially
received only the drug (the control group). Patients who did not respond to drug
alone were then treated with the complete system of drug and electric field, EPT
(treatment group). Of the 33 lesions on 23 patients treated only with drug, none
demonstrated a clinical response. Fifteen of these patients, having 18 lesions,
were subsequently treated with bleomycin and EPT and 61% achieved a clinical
response. In the open-label Phase II study, all patients received full EPT as
their initial treatment. Among the 18 patients (24 lesions) so treated, 67%
achieved a clinical response.
Clearance to initiate pivotal Phase III clinical trials for palliative
treatment of head and neck cancer, and Phase I trials to investigate the
potential to treat primary (new) oral cavity disease was obtained and these
protocols are in development for FDA and institutional approval before study
initiation. The Company believes that a limited well-controlled Phase III trial
for palliative treatment of head and neck cancer failing conventional therapy
will be sufficient to support NDA submission for this indication. Treatment of
primary (new) disease will involve expanded Phase II and Phase III trials
pending successful outcome of the initial Phase I/II studies.
International Trials
In late 1997 and early 1998, the Company received ethics committee approval
from multiple Consulting Committees for the Protection of Humans in Biomedical
Research (CCPPRB) to initiate clinical trials in France in patients with
pancreatic cancer, metastatic cancer to the liver, head and neck cancer,
melanoma and Kaposi's sarcoma. These trials were initiated to demonstrate the
MedPulser(R) system device safety and performance in treating a variety of solid
tumors in support of CE mark certification in accordance with the essential
requirements of EC Medical Device Directive 93/42/EEC. Results from these trials
will be released in due course. The Company achieved CE mark certification in
March 1999 from notified body TUV Product Service GMBH.
The Company, in collaboration with Ethicon, Inc., the Company's corporate
partner in oncology, is planning expanded head and neck cancer and liver
metastases clinical trials in France and selected EC countries to support
European marketing efforts and expanded use claims. Genetronics will collaborate
with Ethicon, Inc. on these trials.
Research and Development Summary
The Drug Delivery Division has focused its research primarily in the areas
of oncology, gene therapy, vascular therapy, transdermal delivery and
dermatology.
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The following table summarizes the programs of the Drug Delivery Division,
the primary indications for each product and the current status of development.
"Developmental" means the program is at the planning stage, protocols are being
developed, and little if any animal work has commenced. "Preclinical data" means
the program is at the stage where results from animal studies have been
obtained. "Clinical Trials" means that human data are available.
SUMMARY TABLE
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Stage of Approval
Programs Development Status ---------------------------------------
US & Canada Europe
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DERMATOLOGY
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Basal Cell Cancer Clinical Trials Two pilot studies N/A
completed.
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Genital Warts Developmental N/A N/A
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ONCOLOGY
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Head and Neck Cancer Clinical Trials Phase II Clinical CE Mark and ISO 9001
Trials in process. Received
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Melanoma Clinical Trials N/A CE Mark and ISO 9001
Received
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Metastatic Liver Cancer Clinical Trials N/A CE Mark and ISO 9001
Received
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Peripheral Sarcoma Preclinical data N/A CE Mark and ISO 9001
Received
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Breast Cancer Preclinical data N/A CE Mark and ISO 9001
Received
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Prostate Cancer Preclinical data N/A CE Mark and ISO 9001
Received
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Glioma Preclinical data N/A CE Mark and ISO 9001
Received
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GENE THERAPY
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In vivo Gene Transfer Preclinical data N/A N/A
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VASCULAR THERAPY
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Coronary Artery Preclinical data N/A N/A
Disease, Marker
genes & drugs
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Vascular Disease, Preclinical data N/A N/A
Heparin delivery
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TRANSDERMAL DELIVERY
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PGE-1 delivery for Tolerance study One Device Tolerance N/A
Erectile dysfunction study completed.
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Calcitonin Preclinical data N/A N/A
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Vitamin C Preclinical data N/A N/A
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Gene Therapy
Gene therapy, in classical terms, involves the introduction of new genetic
information into cells (transfection) for therapeutic purposes. Somatic cells of
the body are transfected with a specific functioning gene to compensate for a
genetic defect that results in a deficiency of a specific protein factor. In
this context, one goal of gene therapy is to convert target cells or tissues
into "protein factories" for the production and secretion of a normal
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protein into the circulation. Many vexing genetic illnesses, including those
currently treated by regular injection of a missing protein, can potentially be
"cured" by supplying the functional gene to a sufficient number of cells under
conditions which allow these cells to produce a therapeutically effective dose
of the gene product.
Currently, single-gene recessive genetic disorders are the most accessible
targets for correction by gene therapy, but ultimately polygenic and acquired
diseases can and will be treated by using genes as pharmaceutical agents. In
principle, any aspect of metabolism can be manipulated by modifying gene
function, and it is this application of gene therapy that has enormous
potential, extending far beyond the treatment of rare genetic diseases. For
example, the ability to influence cellular metabolism by introducing specific
genes has lead to extensive investigation into the use of gene therapy for
cancer treatment. By adding a tumor suppressor gene to certain types of cancers,
the uncontrolled growth of those cells potentially could be brought under normal
regulation. Likewise, transfecting tumor cells with genes capable of inducing
apoptosis can result in tumor ablation.
The methods of introducing genes have two specific approaches. Gene therapy
can be performed either ex vivo or in vivo. Ex vivo gene therapy is the
transfection of cells outside the body. Typically, a small amount of tissue is
removed from the patient and the cells within that tissue are put into culture.
The genetically modified cells, typically blood, bone marrow or others, are then
returned back to the patient, usually by blood transfusion or direct
engraftment. In vivo gene therapy is the introduction of genetic information
directly into cells of the patient's body. Theoretically, any tissue or cell
type in the body can be used, and the choice is dependent on the specific goals
of treatment and indications being treated. For internal tissue targets, a gene
may be transfused through the blood stream to the organ or site of action, or it
may be injected at the desired site, which is then electroporated to allow the
gene to pass through the cell membrane.
Genes can also be applied topically to skin and then transferred into the
cells of the epidermis by electroporation. Epidermal gene delivery by
electroporation for gene therapy is currently being investigated at Genetronics
as a safe, effective and cost-competitive approach. The skin is also a target
for DNA vaccination. "Vaccinating" skin with DNA that encodes a specific antigen
present in infectious agents or in tumor cells can produce beneficial
immunological responses. Genes can also be used to fight cancer. The thymidine
kinase gene in conjunction with the prodrug ganciclovir produces a potent
antitumor effect based on apoptotic cell killing via a bystander effect. Animal
trials treating glioblastomas using this strategy have shown dramatic success.
To make gene therapy a reality, many obstacles have to be overcome,
including the safe, efficient delivery of the intact DNA construct into the host
cells. The instrumentation being used by the Company for high efficiency in vivo
gene transfer is derived from the instrumentation developed for intratumoral and
transdermal drug delivery. The Company believes that electroporation will become
the method of choice for DNA delivery to cells in many applications of gene
therapy.
Because of the broad applicability of this technology, Genetronics has
adopted the strategy of co-developing or licensing its technology exclusively or
non-exclusively for specific genes or specific medical indications. In most
cases, Genetronics contributes proprietary technology, expertise and
instrumentation to optimize the delivery technology for particular applications.
A partner company provides their proprietary DNA constructs, conducts the
pre-clinical research and clinical trials, and may introduce the new treatment
and products to the marketplace. Both partners would share in the commercial
success of the project. Genetronics has actively sought partners to develop this
exciting technology to its full potential.
Vascular Therapy
Genetronics has developed several types of electroporation catheters that
can be used for delivering therapeutic drugs or genes into the arterial wall.
One device is a double-balloon electroporation catheter which consists of two
inflatable balloons at the end of the catheter. The space between the two
balloons can be filled with a solution containing the drug or gene, infused
through the catheter. The electrical field for electroporation is generated
between a spiral electrode, wound around the catheter in the area between the
two balloons, and the non-insulated tip of the guide wire, which is in contact
with the blood in the artery
The Genetronics catheters have been used to evaluate the benefits of
electroporation as applied to arterial walls. The results of animal experiments
indicate that uptake and retention of the drug or gene being used can be
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significantly enhanced by intraluminal electroporation. For instance,
electroporated arteries contained up to 8-fold the amount of heparin than
non-elecroporated arteries, which were exposed to an equal concentration of
heparin for an equal amount of time. Most of the heparin was retained in the
arterial wall 12 hours after electroporation treatment, whereas most heparin was
washed-out of the non-electroporated arterial wall after two hours. These and
other experiments indicate that electroporation catheters are safe to use with
no significant short or medium-term side effects.
Electroporation may offer advantages in the prevention and/or minimization
of restenosis and blood clot formation after interventional vascular therapy.
Restenosis is the narrowing or occlusion of blood vessels that can occur after
balloon angioplasty or stent insertion. It is primarily a result of the
proliferation of cells which make up the vessel wall, in particular the
proliferation of smooth muscle cells. Thrombosis is also a major source of
complication after interventional vascular therapy. Blood clots can form at the
site of injury of the blood vessel and may result in blockage of blood flow at
the primary site of clot formation, or embolism at a distant site.
Electroporation may be a useful means for preventing restenosis and thrombosis
by effectively delivering drugs or genes into the arterial tissue, where they
can interfere with the mechanisms of cell proliferation and blood clotting,
respectively.
The Company is considering licensing opportunities in the area of
electroporation therapy for vascular indications.
Transdermal Drug Delivery
Genetronics has two core technologies that are applicable to transdermal
drug delivery: electroporation and electroincorporation. Electroporation applies
to drugs in solution and works by creating new pathways for a drug to enter
through the stratum corneum, the outermost layer of the skin.
Electroincorporation (EI) is a phenomenon that occurs when small particles (up
to 40 (Greek mu)m in diameter) on the surface of the skin are subjected to
electrical pulses identical or similar to those used in electroporation. The
result of electroincorporation is that these particles are driven through the
stratum corneum and into the deeper layers of the skin. These particles can be
loaded or coated with drugs or genes or can simply act as "bullets" that
generate pores in the skin through which drugs or genes can enter.
The medical community has long sought improved methods of drug delivery, in
particular a replacement for injections and infusions involving needles.
Transdermal drug delivery can be used for both topical and systemic
applications, and offers advantages over conventional methods, including
minimization of pain and fear, lower infection risk, lower doses, fewer drug
side effects and more even drug delivery over a longer period of time. One of
the major obstacles to overcome in transdermal delivery is the penetration of
the outermost layer of the skin, the stratum corneum. Many different methods,
both chemical and physical, have been devised to overcome this barrier.
Electroporation and EI are unique among these methods because they actually
generate new temporary channels (pores) across the stratum corneum through which
drug molecules can diffuse quickly. The enhancement effect of these electric
pulse methods varies from drug to drug and the electrical conditions applied. Up
to 1000-fold increases in drug uptake compared to passive diffusion have been
reported.
In addition to classical drug delivery, electroporation and EI can also be
used to deliver DNA (genes) into the skin, both for gene therapy and DNA
vaccination. The latter two applications hold promise to revolutionize medical
practice.
For transdermal drug delivery, the Company has developed hand-held, battery
powered electroporation devices of similar size and shape to an electric razor.
The Company is continuing to develop new, disposable, high-efficiency electrodes
that will make electroporation and EI even more attractive transdermal drug
delivery methods.
BTX DIVISION
Overview
10.
<PAGE> 11
The Company, through its BTX Instrument Division, began developing and
manufacturing electroporation equipment for the research laboratory market in
1983 and sold its first product in 1985. BTX was founded to develop and
manufacture high quality scientific instrumentation that can be used to perform
various types of electroporation experiments for research scientists.
Electroporation in research is commonly used for transformation and transfection
of all cell types, as well as for general molecular delivery at the cellular
level. BTX currently produces an extensive line of electroporation instruments
and accessories, including eight electroporation and electrofusion instruments,
one monitoring device, 32 electrodes and 25 accessories, all of which enable
laboratory researchers to achieve reliable and reproducible results.
The BTX Division is presently a leader in the field of electroporation
instruments and equipment, with more than 2,000 customers in universities,
companies, and research institutions worldwide. The BTX Division sells its
electroporation/electro cell fusion instrumentation and accessories in all 50
states of the United States and in over 45 foreign countries.
The Company expects the BTX Division to grow in future years as the market
for electroporation instruments expands. The Company attempts to diversify any
political and economic risks by selling its products in over 45 countries.
Products
BTX developed the square wave generator and graphic pulse analyzer for in
vivo gene delivery and nuclear transfer research, fields of rapidly increasing
scientific and medical interest. BTX also has developed a versatile cell fusion
system on the market, the only commercial large volume flow-through
electroporation system, and offers an extensive collection of in situ
electroporation applicators.
BTX focused its efforts in 1998 on product development and promotion of its
line for new and sophisticated applications. BTX released the new ECM(TM) 830, a
sophisticated square wave electroporation system with a menu driven digital user
interface. During the year, publications outlined the utilization of BTX
equipment in newly developing animal in vivo gene delivery research. In the
support of this research, BTX has expanded its in vivo electrode offering and
continues to emphasize the development of novel applicators.
The BTX Division's products include four different exponential Decay Wave
Generators, three Square Wave Generators, one Electro Cell Fusion instrument and
a Graphic Wave Display Monitor (the Enhancer(TM) 400), to monitor the progress
of experiments. In addition, the BTX Division markets a wide range of
sophisticated accessories and electrodes, as well as the standard disposable
electroporation cuvettes.
Exponential decay generators have been traditionally used for the
electroporation of all cell types. Square wave generators have shown the
greatest utility in the electroporation of mammalian and plant cells, as well as
for animal in vivo applications. The Electro Cell Fusion System is used by
researchers for embryo manipulation techniques, hybridoma and quadroma
formation, as well as for all cell fusion applications.
While the Company, through its BTX Division, sells devices purportedly used
by others for non-human embryo cloning, the Company itself does not conduct
embryo cloning. All of the Company's BTX Division instruments sold to the
research market carry the label "not for human use." Management is not aware of
any regulations or industry guidelines limiting the use of the Company's
instrumentation in the animal research market, The Company complies with all
National Institute of Health guidelines on cloning and gene therapy. The company
also complies with all Federal and State regulations regarding the restrictions
on research imposed on federally funded grants.
The BTX Division supplies several cuvette models, as do its competitors,
plus some 20 additional specialized chambers and electrodes for electroporation.
The availability of these products (e.g., 96 Well Coaxial Electrode, Petri Dish
Electrode) provides the BTX Division with an entry into the large volume and
multi-sample processing arenas used by the major pharmaceutical and biotech
companies conducting drug research.
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The BTX Division meets regulatory requirements necessary to provide
instrumentation to the research market for in vivo and in vitro animal
experimentation. The BTX Division does not market equipment for use in humans,
and, therefore, is not required to receive marketing approval from the FDA.
Distribution
The main distributor of the BTX Division's products in North America is VWR
Scientific Products Corporation, one of the largest laboratory products supplier
in the United States. This distributor has approximately 200 representatives
dedicated to the biological sciences in the United States and Canada. In
addition, the BTX Division distributes through Intermountain Scientific
Corporation, which has 25 field sales specialists in the same territory. The BTX
Division has over 40 international distributors in the major countries of the
world, and its products are presently sold in 45 countries. The BTX Division
supports its distributors with advertising, exhibit exposure and lead
generation. The BTX Division also holds an annual sales meeting for its
distributors.
Advertising
The Company's BTX Division advertises in major national and international
scientific journals such as Science, Nature, Genetic Engineering News, and
BioTechniques. The BTX Division also attends and displays its products at about
one scientific conference per month such as American Association for Cancer
Research, National Institute of Health and Neuroscience. On a quarterly basis
the BTX Division utilizes direct mail to an identified mailing list for specific
product promotion.
Competition
The main competitors of the Company's BTX Division in the research
marketplace are BioRad Laboratories, Eppendorf Scientific, Inc. and Invitrogen
Corporation. There are several other companies entering and departing this
market on a regular basis. All of these companies have other molecular biology
product lines besides electroporation, while electroporation is the only
business of the BTX Division. Most competing domestic manufacturers concentrate
on the exponential decay wave system and do not compete in the square wave or
electro cell fusion markets at this time.
STRATEGIC PARTNERS
License and Development Agreement
On October 6, 1998, Genetronics Biomedical Ltd. entered into a
comprehensive License and Development Agreement and a Supply Agreement with
Ethicon, Inc., a Johnson & Johnson company, involving Genetronics' proprietary
drug delivery system for Electroporation Therapy treatment of cancer. In
addition, Johnson & Johnson Development Corporation purchased $6 million in
shares of Genetronics' common stock pursuant to the October 6, 1998 Stock
Purchase Agreement.
The License and Development agreement addresses future development and
clinical and regulatory activities funded worldwide (excluding Canada) by
Ethicon, Inc. Upon regulatory approval, Ethicon, Inc. will distribute and market
the products (excluding Canada) supplied by Genetronics. Genetronics retains the
right to distribute and market in Canada. Genetronics has received a $4 million
up-front license fee and will be receiving future milestone payments. Under the
agreements, Genetronics receives a percentage of net sales as license fees and a
fee for the manufacture of products.
Bleomycin Agreements
The Company has entered into a supply agreement with Abbott Laboratories to
purchase the approved anti-cancer drug sterile bleomycin sulfate for use in the
United States with the Genetronics MedPulser(R) drug delivery system in the
treatment of patients with solid tumor cancers. Under a separate agreement, the
Company has entered into a supply agreement with Faulding, Inc. to purchase
bleomycin sulfate for use in Canada. Bleomycin is a
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cytotoxic drug that has been used as a chemotherapeutic agent in North America
for the treatment of cancer for more than 25 years. It is presently marketed in
more than 40 countries.
SALES AND REVENUE
The following table provides the amount of net product sales, interest
income, and revenue from grant funding and research and development agreements
generated by the Company for the past three fiscal periods. All amounts are
shown in United States dollars.
<TABLE>
<CAPTION>
=============================== ======================== ========================= ====================
Period Ended: 03/31/99 03/31/98 02/28/97
12 Months 13 months 12 months
=============================== ======================== ========================= ====================
PRODUCT SALES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $2,136,180 $ 1,945,389 $ 1,550,774
- ------------------------------- ------------------------ ------------------------- --------------------
Rest of World 1,297,925 1,151,809 1,489,960
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
- -------------------------------------------------------------------------------------------------------
United States 248,417 250,197 49,858
- ------------------------------- ------------------------ ------------------------- --------------------
Canada 52,494 177,301 21,348
- -------------------------------------------------------------------------------------------------------
GRANT FUNDING
- -------------------------------------------------------------------------------------------------------
United States 354,135 128,069 38,856
- -------------------------------------------------------------------------------------------------------
REVENUES UNDER COLLABORATIVE RESEARCH
AND DEVELOPMENT ARRANGEMENTS
- -------------------------------------------------------------------------------------------------------
United States 33,048 6,025 8,583
- -------------------------------------------------------------------------------------------------------
LICENSE AND DEVELOPMENT AGREEMENTS
- -------------------------------------------------------------------------------------------------------
Ethicon, Inc. 4,500,000 0 0
- ------------------------------- ------------------------ ------------------------ ---------------------
</TABLE>
The Company, like many biomedical companies, devotes a substantial portion
of its annual budget to research and development. For the year ended February
28, 1997, research and development expenses totaled $2,200,464; for the thirteen
months ended March 31, 1998 they totaled $5,637,955, and for the year ended
March 31, 1999 they totaled $ 8,086,959. These amounts far exceed revenues from
research arrangements and contribute substantially to the Company's losses. The
Management of the Company anticipates a reduction in losses when it markets
products developed by its Drug Delivery Division. The first such products are
expected to be launched in Europe in 2000, and subsequently in the United States
and Canada.
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INTELLECTUAL PROPERTY
As of June 15, 1999, the Company had 141 issued, licensed, allowed, or
pending patents. Of these, the Company has 44 pending United States patent
applications, 4 allowed United States patent applications, 19 issued United
States patents, and 1 licensed United States patent for a total of 68. The
Company also has 75 foreign submissions, 55 of which are pending and 20 of which
have been issued or allowed.
The Company has registered on the Principal Register of the United States
Patent and Trademark Office its marks for "BTX", "Electronic Genetics",
"Manipulator", "Optimizor" and "MedPulser". The Company has applied to register
"Cosmetronics", "Enhancer", "Genetronics", and has also applied to register its
"Human in Square" design element. The Company has also registered its "BTX" mark
in Canada and South Korea, its "Genetronics" mark in the European Community and
United Kingdom and its "MedPulser" mark in Canada. The Company is not aware of
any claims of infringement or other challenges to the Company's rights to use
its marks in the United States.
EMPLOYEES
As of June 15, 1999, the Company employed 84 people on a full-time basis.
Of the total, 34 were in product research and development, 13 in sales,
marketing and support, 14 in manufacturing, and 23 in finance and
administration. Genetronics' success is dependent on its ability to attract and
retain qualified employees. Competition for employees is intense in the
biomedical industry. To date, the Company believes it has been successful in its
efforts to recruit qualified employees. None of the Company's employees is
subject to collective bargaining agreements. The Company believes relations with
its employees are good.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE PRODUCTS FROM OUR DRUG DELIVERY
DIVISION, THEN OUR BUSINESS WILL SUFFER.
The success of our company depends on the success of the technology being
developed by the Drug Delivery Division. Although we have received various
regulatory approvals which apply to Europe for our equipment for use in treating
solid tumors, the products related to such regulatory approval have not yet been
commercialized. In addition, we have not yet received any regulatory approvals
in the U.S. and clinical trials are still underway in North America for treating
solid tumors. We cannot assure you that the Company will successfully develop
any products and if the Company fails to develop or successfully commercialize
any products, it will have a material adverse effect on the Company. This
Division is at an early stage of development and there are many uncertainties
ahead.
UNPREDICTABILITY OF CONDUCTING PRE-CLINICAL AND CLINICAL TRIALS OF OUR
HUMAN-USE EQUIPMENT.
Before any of Genetronics' human-use equipment can be sold, the FDA, and/or
foreign regulatory offices, must determine that the equipment meets certain
criteria for use in the indications for which approval is requested. The FDA
will make this determination based on the results from our pre-clinical testing
and clinical trials. We are currently in the process of conducting human
clinical trials directed to the use of electroporation to deliver bleomycin to
certain types of tumors.
Clinical trials are unpredictable. Results achieved in early stage clinical
trials may not be repeated in later stage trials, or in trials with more
patients. When early, positive results are not repeated in later stage trials,
pharmaceutical and biotechnology companies have suffered significant setbacks.
Not only are commercialization timelines pushed back, but some companies,
particularly smaller biotechnology companies like us with limited cash reserves,
have gone out of business after releasing news of unsuccessful or neutral
clinical trial results.
If any of the following events arise during our clinical trials, then we
would expect it to have a serious negative effect on our company and your
investment:
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<PAGE> 15
o The electroporation-mediated delivery of drugs or other agents
may be found to be ineffective or to cause harmful side effects, including
death;
o Our clinical trials may take longer than anticipated, for any of
a number of reasons including a scarcity of subjects that meet the
physiological or pathological criteria for entry into the study or that are
willing to participate through the end of the trial;
o The reported clinical data may change over time as a result of
the continuing evaluation of patients;
o Data from various sites participating in the clinical trials may
be incomplete or unreliable, which could result in the need to repeat the
trial or abandon the project; and
o The FDA and other regulatory authorities may interpret our data
different than we do, which may delay or deny approval.
Clinical trials are generally quite expensive. A delay in the trial, for
whatever reason, will probably require us to spend even more money to keep the
product moving through the regulatory process. If we do not have the needed
funds, then our human-use products could be shelved. In the event the clinical
trials are not successful, we will have to determine whether to put more money
into the program to address its deficiencies or whether to abandon use of the
products in the tested indications. Loss of the human-use product line would be
a significant setback for our company.
Because there are so many variables inherent in clinical trials, we cannot
predict whether any of our future regulatory applications to conduct clinical
trials will be approved by the FDA or other regulatory authorities, whether our
clinical trials will commence or proceed as planned, and whether the trials will
ultimately be deemed to be successful.
OUR BUSINESS IS HIGHLY DEPENDENT ON RECEIVING APPROVALS FROM VARIOUS US AND
INTERNATIONAL GOVERNMENT AGENCIES AND CAN BE DRAMATICALLY AFFECTED IF APPROVAL
TO MANUFACTURE AND SELL OUR HUMAN-USE EQUIPMENT IS NOT GRANTED.
The production and marketing of our human-use equipment and the ongoing
research, development, preclinical testing, and clinical trial activities are
subject to extensive regulation. Numerous governmental agencies in the US and
internationally, including the FDA, must review our applications and decide
whether to grant approval. All of our human-use equipment must go through an
approval process for each indication in which we want to label it for use, e.g.,
use for dermatology, use for transfer of a certain gene to a certain tissue in
the United States, use for administering a certain drug to a certain tumor type
in a patient for certain characteristics. These regulatory processes are
extensive and involve substantial costs and time (years).
We have limited experience in, and limited resources available for
regulatory activities. Failure to comply with applicable regulations can, among
other things, result in non-approval, suspensions of regulatory approvals,
fines, product seizures and recalls, operating restrictions, injunctions and
criminal prosecution.
We want to remind you that any of the following events can occur and, if it
did occur, would have a material adverse effect on the company:
o There can be delays, sometimes long, in obtaining approval for
our human-use devices.
o The rules and regulations governing human-use equipment such as
ours can change during the review process, which can result in the need to
spend time and money for further testing or review.
o If approval for commercialization is granted, it is possible the
authorized use will be more limited than we believe is necessary for
commercial success, or that approval may be conditioned on completion of
further clinical trials or other activities.
15.
<PAGE> 16
o Once granted, approval can be withdrawn, or limited, if
previously unknown problems arise with our human-use product.
WE RELY HEAVILY ON COLLABORATIVE AND LICENSING RELATIONSHIPS, AND WILL BE
NEGATIVELY AFFECTED IF WE CANNOT MAINTAIN OR EXPAND EXISTING RELATIONSHIPS, AND
INITIATE NEW ONES.
We rely and will continue to rely on partners and collaborators to fund
some of our research and development expenses and to assist us in the research
and development of our human-use equipment. Our largest partner is Ethicon,
Inc., a Johnson & Johnson company. Ethicon, Inc. has made certain payments to
us, is continuing to make milestone-based payments, is obligated to compensate
us for human-use products, and is obligated to pay royalties on sales in the
future, in exchange for the right to help develop and sell our human-use
equipment to hospitals and others for cancer treatments, among other rights. We
depend on Ethicon, Inc. for research and development funding, for Ethicon,
Inc.'s clinical, sales and marketing efforts under the agreement, and for the
positive association we receive by having Ethicon, Inc. as our partner. Loss of
the Ethicon, Inc. relationship would result in a material adverse effect on our
company.
Our clinical trials to date have used our equipment with the anti-cancer
drug bleomycin. It is not the current intent to package the bleomycin together
with the equipment for sale, but if it should be necessary or desirable to do
this, we would need a reliable source of the drug. In 1998, we signed a supply
agreement with Abbott laboratories under which they would sell us bleomycin for
inclusion in our package. If it becomes necessary or desirable to include
bleomycin in our package, and this relationship with Abbott should be
terminated, then we would have to form a relationship with another provider of
this generic drug, which could delay product launch.
Genetronics also relies on scientific collaborators at universities and
companies to further our research and test our equipment. In most cases, we lend
our equipment to a collaborator, teach him or her how to use it, and together
design experiments to test the equipment in one of the collaborator's fields of
expertise. We aim to secure agreements that restrict collaborators' rights to
use the equipment outside of the agreed upon research, and outline the rights
each of us will have in any results or inventions arising from the work.
Nevertheless, there is always risk that:
o Our equipment will be used in ways we did not authorize, which
can lead to liability and unwanted competition;
o We may determine that our technology has been improperly assigned
to us or a collaborator may claim rights to certain of our technology which
may require us to pay license fees or milestone payments and if commercial
sales of the underlying product is achieved, royalties.
o We will lose rights to inventions made by our collaborators in
the field of our business, which can lead to expensive legal fights and
unwanted competition;
o Our collaborators will not keep our confidential information to
themselves, which can lead to loss of our right to seek patent protection
and loss of trade secrets, and expensive legal fights; and
o Collaborative associations can damage a company's reputation if
they go awry and, thus, by association or otherwise, the scientific
community holds a negative view of the company.
We cannot guarantee that any of the results from these collaborations will
be fruitful. We also cannot tell you that we will be able to continue to
collaborate with individuals and institutions that will further our work, or
that we will be able to do so under terms that are not too restrictive. If we
are not able to maintain or develop new collaborative relationships, then it is
likely the research pace will slow down and it will take longer to identify and
commercialize new products, or new indications for our existing products.
OUR COMPANY COULD BE SUBSTANTIALLY DAMAGED IF PHYSICIANS AND HOSPITALS
PERFORMING OUR CLINICAL TRIALS DO NOT ADHERE TO PROTOCOLS OR PROMISES MADE IN
CLINICAL TRIAL AGREEMENTS.
16.
<PAGE> 17
Our company also works with a number of hospitals to perform clinical
trials, currently in oncology. We depend on these hospitals to recruit patients
for the trials, to perform the trials according to our protocols, and to report
the results in a thorough, accurate and consistent fashion. Although we have
agreements with these hospitals, which govern what each party is to do with
respect to the protocol, patient safety, and avoidance of conflict of interest,
there are risks that the terms of the contracts will not be followed. For
instance:
o Risk of Deviations from Protocol. The hospitals or the physicians
working at the hospitals may not perform the trial correctly. Deviations
from protocol may make the clinical data not useful and the trial could be
essentially worthless.
o Risk of Improper Conflict of Interest. Physicians working on
protocols may have an economic interest in our company, or other conflict
of interest, despite the fact that this is disallowed in the contract. When
a physician has a personal stake in the success of the trial, such as can
be inferred if the physician owns stock of the trial sponsor, it creates
suspicion that the trial results were improperly influenced by the
physician's interest in economic gain. Not only does this put the clinical
trial results at risk, but it can also do serious damage to a company's
reputation.
o Risks Involving Patient Safety and Consent. Physicians and
hospitals may fail to secure formal written consent as instructed or report
adverse effects that arise during the trial in the proper manner, which
could put patients at unnecessary risk. This increases our liability,
affects the data, and can damage our reputation.
If any of these events were to occur, then it could have a material adverse
effect on our ability to receive regulatory authorization to sell our human-use
equipment, not to mention our reputation. Negative events that arise in the
performance of clinical trials sponsored by biotechnology companies of our size
and with our limited cash reserves have resulted in companies going out of
business.
WE RELY HEAVILY ON OUR PATENTS AND PROPRIETARY RIGHTS TO ATTRACT
PARTNERSHIPS AND MAINTAIN MARKET POSITION.
Another factor that will influence our success is the strength of our
patent portfolio. Patents give the patent holder the right to keep others out of
its patented territory. If someone practices within the patented territory of a
patent holder, then the patent holder has the right to charge him with
infringement and begin legal proceedings, which can be lengthy and costly. The
patenting process, enforcement of issued patents, and defense against claims of
infringement is inherently risky. Because our Drug Delivery Division relies
heavily on patent protection, for us, the risks are significant and include the
following:
o Risk of Inadequate Patent Protection for Product. We cannot say
with any certainty that the United States or foreign patent offices will
grant patents of meaningful scope based on the applications we have already
filed and those we intend to file. If we do not have patents that
adequately protect our human-use equipment and indications for its use,
then we will not be competitive.
o Risk Important Patents Will Be Judged Invalid. We cannot
guarantee you that every issued patent we now own or license is valid. If
we have to defend the validity of any of our patents, then it will require
a lot of time and money to do so, and there is no guarantee of a successful
outcome. In the event an important patent related to our drug delivery
technology is found to be invalid, we would lose competitive position and
may not be able to receive royalties for products covered in part or whole
by that patent under license agreements.
o Risk of Being Charged With Infringement. Although we try to avoid
infringement by monitoring patents granted to competitors, there is the
risk that we will use a patented technology owned by another and be charged
with infringement. Defending against a charge of infringement can involve
lengthy and costly legal actions, with no guarantee of a successful
outcome. Biotechnology companies of about our size and limited cash have
gone out of business after fighting and losing an infringement battle. If
we were prevented from using or selling our human-use equipment, then our
business would be seriously affected.
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<PAGE> 18
o Freedom to Operate Risks. We are aware that patents related to
electrically assisted drug delivery have been granted to, and filed by, our
potential competitors. We have taken licenses to some of these patents, and
will consider taking additional licenses in the future. Nevertheless, the
competitive nature of our field of business and the fact that others have
sought patent protection for technologies similar to ours, makes these
risks more real than not.
In addition to patents, we also rely on trade secrets and proprietary
know-how. We try to protect this information with appropriate confidentiality
and inventions agreements with our employees, scientific advisors, consultants,
and collaborators. We cannot assure you that these agreements will not be
breached, or that we will be able to do much to protect ourselves if they are
breached, or that our trade secrets will not otherwise become known or be
independently discovered by competitors. If any of these events occurs, then we
run the risk of losing control over valuable company information, which could
negatively affect our competitive position.
WE RUN THE RISK THAT OUR TECHNOLOGY WILL BECOME OBSOLETE OR LOSE ITS
COMPETITIVE ADVANTAGE.
The drug delivery business is very competitive, fast moving, intense, and
expected to be increasingly so in the future. Other companies and research
institutions are developing drug delivery systems that, if not similar in type
to our systems, are designed to address the same patient or subject population.
Therefore, we cannot promise you that our products will be the best, the safest,
the first to market, or the most economical to make. If competitors' products
are better than ours, for whatever reason, then we will make less money from
sales and our products risk becoming obsolete.
There are many reasons why competitors might be more successful than
Genetronics, including:
o More Money. Some competitors have a lot more money than we do.
They can afford more technical and timeline setbacks than we can.
o Better Experience. Some competitors have been in the drug
delivery business longer than we have. They have greater experience than we
in critical areas like clinical testing, obtaining regulatory approval, and
sales and marketing. This experience or their name recognition may give
them a competitive advantage over us.
o Superior Patent Position. Some competitors may have a better
patent position protecting their technology than we have or will have to
protect our technology. If we cannot use our patents to prevent others from
copying our technology, or if we cannot obtain a critical license to
another's patent that we need to make and use our equipment, then we would
expect our competitive position to lessen.
o Faster to Market. Some companies with competitive technologies
may move through stages of development, approval, and marketing faster than
Genetronics. If a competitor receives FDA approval before us, then it will
be authorized to sell product before us. Because the first company "to
market" often has a significant advantage over late-comers, a second place
position could result in less than anticipated sales.
o Reimbursement Allowed. In the United States, third party payers,
such as Medicare, may reimburse physicians and hospitals for competitors'
products but not for our human-use products. This would significantly
affect our ability to sell our human-use products in the United States and
would have a serious effect on revenues and our business as a whole.
Outside of the United States, reimbursement and funding policies vary
widely.
OUR ABILITY TO ACHIEVE SIGNIFICANT REVENUE FROM SALES OF HUMAN-USE
EQUIPMENT WILL DEPEND ON ESTABLISHING EFFECTIVE SALES, MARKETING AND
DISTRIBUTION CAPABILITIES OR RELATIONSHIPS AND WE LACK SUBSTANTIAL EXPERIENCE IN
THESE AREAS.
Our company has no experience in sales, marketing and distribution of
clinical and human-use products. If we want to be direct distributors of the
human-use products, then we must develop a substantial marketing and sales
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force. This would involve a lot of money, training, and time. Alternatively, we
may decide, as we did with the human-use oncology market, to rely on a company
with a large distribution system and a large direct sales force to undertake
these activities on our behalf. This route could result in less profit for us,
but may permit us to reach market faster. In any event, we cannot assure you
that we will be able to undertake the effort on our own, or contract with
another to do this for areas other than oncology, at a reasonable cost. We also
cannot assure you that, regardless of the route we take, we will successfully
commercialize any product.
OUR COMPANY HAS OPERATED AT A LOSS AND WE EXPECT TO CONTINUE TO ACCUMULATE
A DEFICIT.
As of March 31, 1999, the Company had a deficit of $19,998,501. The Company
has operated at a loss since 1994, and we expect this to continue for some time.
The amount of the accumulated deficit will continue to grow, as it will be
expensive to continue our clinical trials and research and development efforts.
If these activities are successful, and if we receive approval from the FDA to
sell human-use equipment, then even more money will be required to market and
sell the equipment.
Most of the cash we received last year was from our corporate partner,
Ethicon, Inc., which funded further development of the cancer drug delivery
technology through the payment of license and milestone fees, and from its
parent company, Johnson & Johnson, which bought common stock. Other funds came
in from sales of BTX research-use equipment, interest income on our investments,
and SBIR grants. It is possible that we will loose our SBIR grant or that it
will be determined that we are not or have not been in compliance with such
program requirements, and the government may require us to pay back the original
funding grants or even pay certain penalties. We do not expect to receive enough
money from these sources to completely pay for future activities.
WE WILL HAVE A NEED FOR SIGNIFICANT AMOUNTS OF MONEY IN THE FUTURE AND
THERE IS NO GUARANTEE THAT WE WILL BE ABLE TO OBTAIN THE AMOUNTS WE NEED.
As discussed, we have operated at a loss, and expect that to continue for
some time in the future. Our plans for continuing clinical trials, conducting
research, furthering development and, eventually, selling our human-use
equipment will cost a lot of money. The extent of these costs will depend on
many factors, including some of the following:
o The progress and breadth of preclinical testing and the size of
our drug delivery programs, all of which directly influence cost;
o The costs involved in complying with the regulatory process to
get the Company's human-use products approved, including the number, size,
and timing of necessary clinical trials;
o The costs involved in patenting our technologies and defending
them;
o Changes in our existing research and development relationships
and our ability to enter into new agreements;
o The cost of manufacturing our human-use and research-use
equipment; and
o Competition for our products and our ability, and that of our
partners, to commercialize our products.
We plan to fund operations by several means. Ethicon, Inc. will continue to
fund a portion of the oncology program, and we will attempt to enter into
contracts with partners that will fund either general operating expenses or
specific programs or projects. Some funding also may be received through
government grants. We cannot promise that we will enter into any such contracts
or, if we do, that our partners will provide enough money to meet our needs.
In the past, we have raised funds by public and private sale of our stock,
and we may do this in the future to raise needed funds. Sale of our stock to
private or public investors usually results in existing shareholders becoming
"diluted". The greater the number of shares sold, the greater the dilution. A
high degree of dilution can
19.
<PAGE> 20
make it difficult for the price of the Company's stock to rise rapidly, among
other things. Dilution will lessening a shareholder's voting power.
We cannot assure you that we will be able to raise money needed to fund
operations, or that we will be able to raise money under terms that are
favorable to the company.
IF WE DO NOT HAVE ENOUGH MONEY TO FUND OPERATIONS, THEN WE WILL HAVE TO CUT
COSTS.
If the Company is not able to raise needed money under acceptable terms,
then we will have to take measures to cut costs, such as:
o Delay, scale back or discontinue one or more of our drug delivery
programs or other aspects of operations, including laying off some
personnel or stopping clinical trials;
o Sell or license some of our technologies that we would not
otherwise give up if we were in a better financial position;
o Sell or license some of our technologies under terms that are a
lot less favorable than they otherwise might have been if we were in a
better financial position; and
o Consider merging with another company or positioning ourselves to
be acquired by another company.
If it became necessary to take one or more of the above-listed actions,
then the Company may have a lower valuation, which probably would be reflected
in our stock price.
THE MARKET FOR GENETRONICS STOCK IS VOLATILE, WHICH COULD AFFECT YOUR
INVESTMENT.
Genetronics' share price and volume are highly volatile. This is not
unusual for biomedical companies of our size, age, and with a discrete market
niche. It also is common for the volume and price of biotechnology stocks to be
unrelated to a company's operations, i.e., to go down on positive news and to go
up on no news. Genetronics' stock has exhibited this type of disconnect in the
past, and may well exhibit it in the future. The historically low trading volume
of Genetronics stock makes it more likely that a severe fluctuation in volume,
either up or down, will affect the stock price.
Some factors that we would expect to depress the price of our stock
include:
o Adverse or neutral clinical trial results;
o Announcement that the FDA denied our request to approve our
human-use product for commercialization in the United States, or similar
denial by other regulatory bodies which make independent decisions outside
the United States. To date, we have only worked on oncology in Europe;
o Announcement of legal actions brought by or filed against
Genetronics for patent or other matters, especially if we do not win such
actions;
o Cancellation of important corporate partnerships or agreements,
such as the Ethicon, Inc. agreement;
o Public concern as to the safety of our human-use products;
o Shareholders' decisions, for whatever reasons, to sell large
amounts of the company's stock;
20.
<PAGE> 21
o A decreasing cash-on-hand balance to fund operations, or other
signs of apparent financial uncertainty; and
o Significant advances made by competitors that are perceived to be
expected to limit our market position.
OUR DEPENDENCE UPON NON-MARKETED PRODUCTS, LACK OF EXPERIENCE IN
MANUFACTURING AND MARKETING HUMAN-USE PRODUCTS, AND OUR CONTINUING DEFICIT MAY
RESULT IN EVEN FURTHER FLUCTUATIONS IN OUR TRADING VOLUME AND SHARE PRICE.
Successful approval, marketing, and sales of our human-use equipment is
critical to the financial future of our company. Our products are not yet
approved for sale and there can be no assurance that they will be or that such
sales will be as large or timely as we expect. These uncertainties may cause our
operating results to fluctuate dramatically in the next several years. We
believe that quarter-to-quarter or annual comparisons of our operating results
are not a good indication of our future performance. Nevertheless, these
fluctuations may cause us to perform below the expectations of the public market
analysts and investors. If this happens, the price of our common stock would
likely fall.
THE BTX DIVISION MARKETS ONLY TO THE ELECTROPORATION PRODUCT NICHE MARKETS
AND RELIES ON DISTRIBUTION RELATIONSHIPS FOR SALES.
The BTX Division currently markets only electroporation equipment to the
research market. If our research-use equipment loses its competitive position,
then the BTX Division does not have any other product line on which to rely, and
sales would be expected to decline. Therefore, if we do not develop and
introduce new products directed to research-use electroporation, at a reasonable
price, then we will lose pace with our competitors. We cannot guarantee you that
we will have the necessary funds to stay competitive or that we will succeed.
The research-use equipment is sold through United States and international
distributors. Approximately 24% of BTX sales last year were in the United States
through our distribution agreement with VWR Scientific. This accounted for about
10% of the company's total revenue. We rely heavily on our relationship with VWR
to sell our product in the US. There is no guarantee that we will be able to
maintain or replace our current distribution relationship with VWR or other
distributors, or establish sales, marketing and distribution capabilities of our
own. If distribution relationships are not in place for the major markets, e.g.,
the United States, Europe and Japan, then the BTX Division may suffer declining
sales, which would have an effect on the company's bottom line.
THERE IS A RISK OF PRODUCT LIABILITY WITH HUMAN-USE EQUIPMENT AND
RESEARCH-USE EQUIPMENT.
The testing, marketing and sale of human-use products expose us to
significant and unpredictable risks of equipment product liability claims. These
claims may arise from patients, clinical trial volunteers, consumers,
physicians, hospitals, companies, institutions, or others using, selling, or
buying our equipment. Product liability risks are inherent in our business and
will exist even after the products are approved for sale. If and when our
human-use equipment is commercialized, and with respect to the research-use
equipment that is currently marketed by our BTX Division, we run the risk that
use (or misuse) of the equipment will result in personal injury. We have not
experienced any claims of this kind to date, but we cannot be certain that they
will not occur. The chance of occurrence will increase after both product types
are on the market.
Genetronics purchased liability insurance in connection with the ongoing
oncology clinical trials, and we would expect to purchase additional policies
for any additional clinical trial. We cannot assure you that the insurance we
purchase will provide adequate coverage in the event a claim is made, and that
no payments against claims will be funded by the Company directly. If we did
have to make payment against a claim, then it would impact our financial ability
to perform the research, development, and sales activities we have planned.
With respect to our research-use equipment, there is always the risk of
product defects. Product defects can lead to loss of future sales, decrease in
market acceptance, damage to our brand or reputation, and product returns and
warranty costs. These events can occur whether the defect resides in a component
we purchased from a third
21.
<PAGE> 22
party or whether it was due to our design and/or manufacture. Our sales
agreements typically contain provisions designed to limit our exposure to
product liability claims. However, we do not know whether these limitations are
enforceable in the countries in which the sale is made. Any product liability or
other claim brought against us, if successful and of sufficient magnitude, could
negatively impact our financial performance, even if we have insurance.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE OUR HUMAN-USE AND
RESEARCH-USE EQUIPMENT IN SUFFICIENT VOLUMES AT COMMERCIALLY REASONABLE RATES.
Our products must be manufactured in sufficient commercial quantities, in
compliance with regulatory requirements, and at an acceptable cost to be
attractive to purchasers. We rely on third parties to manufacture and assemble
most aspects of our equipment. We have two approved sources for every component
of the manufacturing process and have three approved sources for some components
in the process.
Disruption of the manufacture of our products, for whatever reason, could
delay or interrupt our ability to manufacture or deliver our products to
customers on a timely basis. This would be expected to affect revenues and may
affect our long-term reputation, as well. In the event we provide product of
inferior quality, we run the risk of product liability claims and warranty
obligations, which will negatively affect our bottom line.
Our manufacturing facilities for human-use products will be subject to
Quality Systems regulations, international quality standards and other
regulatory requirements, including pre-approval inspection for the human-use
equipment and periodic post-approval inspections for all human-use products.
While we have undergone and passed a Quality Systems review from an
international body, we have never undergone a Quality Systems inspection by the
FDA. We cannot guarantee that we will pass an FDA inspection when it occurs. If
our facilities are not up to the FDA standards in sufficient time, prior to
United States launch of product, then it will result in a delay or termination
of our ability to produce the human-use equipment in our facility. Any delay in
production will have a negative effect on our business.
THE BTX DIVISION MUST MANAGE THE RISKS OF INTERNATIONAL OPERATIONS.
The BTX Division of Genetronics sells a lot of its research-use equipment
in foreign countries, particularly in the Pacific Rim. Last year, about 38% of
BTX's revenues was from BTX sales in foreign countries. Like any company having
foreign sales, BTX's sales are influenced by many factors outside of our
control.
For instance, the following factors can negatively influence BTX's sales or
profitability in foreign markets:
o We are subject to foreign regulatory requirements, foreign
tariffs and other trade barriers that may change without sufficient notice;
o Our expenses related to international sales and marketing may
increase to a significant extent due to political and/or economic factors
out of our control, including money spent to control and manage
distributors;
o We are subject to various export restrictions and may not be able
to obtain export licenses when needed;
o Some of the foreign countries in which we do business suffer from
political and economic instability, and Asian markets, which are important
to the BTX Division, have recently suffered considerable turmoil;
o Some of the foreign currencies in which we do business fluctuate
significantly; and
o We may have difficulty collecting accounts receivables or
enforcing other legal rights.
22.
<PAGE> 23
o We are subject to the Foreign Corrupt Practices Act, which may
place us at a competitive disadvantage to foreign companies that do not
have to adhere to this Act
WE DEPEND ON THE CONTINUED EMPLOYMENT OF QUALIFIED PERSONNEL.
Our success is highly dependent on the people who work for us. If we cannot
attract and retain top talent to work in our company, then our business will
suffer. We cannot assure you that the staff we now have will decide to stay with
our company, or that we will be able to replace departing employees or build
departments with qualified individuals.
To address the intense competition that exists for such qualified
individuals, we have employment agreements in place for three of our senior
executives. The employment agreements are for Gunter A. Hofmann, our Chief
Scientific Officer, Chairman, and founder of Genetronics, Lois J. Crandell, our
Chief Executive Officer and President, and Martin Nash, our Senior Vice
President and Chief Financial Officer. If any of these individuals chooses to
leave the company, then it might pose significant risks to our continued
development and progress.
THERE IS THE RISK THAT WE WILL NOT MEET ENVIRONMENTAL GUIDELINES.
Like all companies in our line of work, we are subject to a variety of
governmental regulations relating to the use, storage, discharge and disposal of
hazardous substances. Our safety procedures for handling, storage and disposal
of such materials are designed to comply with applicable laws and regulations.
Nevertheless, if we are found to not comply with environmental regulations, or
if we are involved with contamination or injury from these materials, then we
may be subject to civil and criminal penalties. This would have a negative
impact on our reputation, our finances, and could result in a slowdown, or even
complete cessation of our business.
WE MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 COMPUTER PROBLEM.
The Year 2000 Problem stems from the fact that many computer systems,
software programs, equipment and instruments with embedded microprocessors were
designed to only recognize the last two digits of a calendar year. With the
arrival of the Year 2000, these systems and microprocessors may encounter
operating problems due to their inability to distinguish years after 1999 from
years preceding 1999. The Company is aware of the issues associated with the
Year 2000 Problem in many existing hardware and software applications. In 1998
the Company established a Year 2000 compliance plan which was approved by the
Company's senior management and Board of Directors. To execute the plan, the
Company formed a Year 2000 committee that is composed of both management and
non-management personnel. In addition, the Company has contracted with an
outside Year 2000 service provider to assist with the implementation of the Year
2000 compliance plan. The plan is a multi-phased approach to the Year 2000
Problem, and includes assessment, inventory, testing and remediation phases.
The Company cannot guarantee the compliance status of third parties, and
the failure of key suppliers, distributors, business partners, or customers to
become Year 2000 compliant on a timely basis, or at all, could have a material
adverse effect on the Company. In addition, there is no assurance that the
Company will timely identify and remediate all year 2000 problems, that remedial
efforts will not involve significant time and expense, or that such problems
will not have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Issues" for detailed
information on our state of readiness, potential risks and contingency plans
regarding the Year 2000 issue.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR
FORWARD-LOOKING STATEMENTS.
This document contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found in
the material set forth under the sections entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as in this document generally. We used words such as "believes", "intends",
"expects", "anticipates", "plans", "probably" and similar expressions to
identify forward-looking statements. This document also contains third party
estimates
23.
<PAGE> 24
regarding the size and growth of various markets. You should not place undue
reliance on these statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for the reasons described
above and elsewhere in this document.
ITEM 2. PROPERTIES
The Company owns no real property and has no plans to acquire any real
property in the future. The Company currently leases a facility of 24,931 square
feet at its headquarters in San Diego. This facility provides adequate space for
the Company's current research, manufacturing, sales and administrative
operations. The lease for 17,303 square feet runs through December 31, 1999 with
provisions for two, two-year extensions at the Company's option. Two subleases
for a total of 7,628 square feet expire on November 16, 1999 with no options to
extend. The Company is currently identifying facilities in proximity to its
current location which can accommodate the Company's expectation for future
growth.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings with respect
to itself, its subsidiaries, or any of its material properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
24.
<PAGE> 25
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The principal trading markets for the Common Shares of Genetronics
Biomedical Ltd. are the American Stock Exchange (AMEX) and the Toronto Stock
Exchange (TSE). Trading began on the AMEX on December 8, 1998. The Company's
common shares have also traded on the Vancouver Stock Exchange (VSE), however
the Company voluntarily de-listed from that exchange on March 6, 1998. The table
below sets forth the quarterly high and low sales prices of the Company's common
shares in the two most recent fiscal years and interim periods.
<TABLE>
<CAPTION>
==========================================================================
Period Toronto Stock Exchange American Stock Exchange
CDN$ US$
==========================================================================
HIGH LOW HIGH LOW
- ------------------------------------- --------------------------- --------
<S> <C> <C> <C> <C>
Mar - May 1997 5.25 3.05 -- --
- ------------------------------------- --------------------------- --------
June - Aug 1997 5.25 3.25 -- --
- ------------------------------------- --------------------------- --------
Sept - Nov 1997 4.45 2.55 -- --
- ------------------------------------- --------------------------- --------
Dec - March 1997-8* 4.10 2.40 -- --
- ------------------------------------- --------------------------- --------
Apr - June 1998 4.91 3.35 -- --
- ------------------------------------- --------------------------- --------
July - Sept 1998 4.75 3.10 -- --
- ------------------------------------- --------------------------- --------
Oct - Dec 1998 6.20 4.00 3.6875 3.25
- ------------------------------------- --------------------------- --------
Jan - March 1999 6.10 4.80 4.0625 3.25
- --------------------------------------------------------------------------
</TABLE>
- ----------
* The Company changed its fiscal year end from February 28, 1998 to March 31,
1998, which accounts for the four month period of the noted "quarter".
On June 15, 1999, the closing price of the Company's common shares was CDN$
4.45 on the TSE and US$ 3.00 on the AMEX. As of June 15, 1999, there were
approximately 326 registered shareholders of record. In addition, approximately
8,499,124 of the Company's common shares or 39.2% of the total 21,666,266 issued
and outstanding common shares on June 15, 1999 were held among 295 registered
U.S. record holders.
Dividends
The Company has never paid any cash dividends on its common stock.
CANADIAN LAWS AND CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The discussion under this heading summarizes the principal Canadian federal
income tax consequences of acquiring, holding and disposing of common shares of
the Registrant for a shareholder of the Registrant who is not resident in Canada
and who is resident in the United States. It is based on the current provisions
of the Income Tax Act (Canada) (the "Tax Act") and the regulations thereunder.
The provisions of the Tax Act are subject to income tax treaties to which Canada
is a party, including the Canada-United States Income Tax Convention (1980) (the
Convention). This discussion is general only and is not a substitute for
independent advice from a shareholder's own tax advisor.
Dividends on Common Shares - Canada: Under the Tax Act, a non-resident of
Canada is generally subject to Canadian withholding tax at the rate of 25% on
dividends paid or deemed to have been paid to him by a corporation resident in
Canada. The Convention limits the rate to 15% if the shareholder is resident in
the United States and the dividends are beneficially owned by and paid to him,
and to 5% if the shareholder is also a corporation that beneficially owns at
least 10% of the voting stock of the payer corporation. However, if the
25.
<PAGE> 26
shareholder carries on business in Canada through a "permanent establishment"
situated in Canada or performs independent personal services in Canada from a
"fixed base" in Canada, and the share holding in respect of which the dividends
are paid is effectively connected with that permanent establishment or fixed
base, those limitations do not apply. The Convention generally exempts from
Canadian income tax dividends paid to a religious, scientific, literary,
educational or charitable organization or to an organization exclusively
administering a pension, retirement or employee benefit fund or plan, if the
organization is resident in the United States and is exempt from income tax
under the laws of the United States.
Dividends on Common Shares - U.S. Shareholders: U.S. citizens are subject
to tax on their worldwide income, regardless of source. Dividends of the
Registrant received by a U.S. resident shareholder would be subject to income
tax at the U.S. ordinary income tax rates. Any Canadian withholding tax withheld
on dividends of the Registrant would be creditable against U.S. income tax,
subject to limitations. It should be noted that the Company has never paid
dividends in the past and management does not anticipate that any dividends will
be paid in the foreseeable future.
Dispositions of Common Shares: The following comments apply only to a
shareholder whose common shares of the Registrant constitute capital property to
him for the purposes of the Tax Act. Shares will generally constitute capital
property unless the holder is a trader or dealer in securities. A taxpayer's
capital gain or capital loss from a disposition of a common share of the
Registrant is the amount, if any, by which his proceeds of disposition exceed
(or are exceeded by, respectively) the aggregate of his adjusted cost base of
the share and reasonable expenses of disposition. Under the Tax Act, a
non-resident of Canada is subject to Canadian tax on taxable capital gains, and
may deduct allowable capital losses realized on a disposition of "taxable
Canadian property." However, the Convention relieves United States residents
from liability for Canadian tax on capital gains derived on a disposition of
shares unless, a) their value is derived principally from real property in
Canada, b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding the disposition and has an interest of greater
than 25%, and the shares were owned by him when he ceased to be resident in
Canada, or c) they formed part of the business property of a "permanent
establishment" that the holder has or had in Canada within the 12 months
preceding the disposition.
Dispositions of Common Shares: The following comments apply only to a U.S.
shareholder whose common shares of the Registrant constitute capital property.
The shares will generally constitute capital property unless the holder is a
trader or dealer in securities. A U.S. resident shareholder would be subject to
income tax on dispositions of the Registrants stock resulting in capital gain. A
taxpayer's capital gain or capital loss from a disposition of a common share of
the Registrant is the amount, if any, by which his proceeds of disposition
exceed (or are exceeded by, respectively) the aggregate of his adjusted cost
basis of the share and reasonable expenses of disposition. Subject to
limitations, any Canadian income tax withheld on the disposition of the
Registrants common shares would be creditable against the U.S. income tax.
Determination of PFIC Status: Under U.S. tax law, a foreign corporation is
considered a passive foreign holding company ("PFIC") if the corporation meets
certain asset and income tests. Under the income test, a foreign corporation is
a PFIC if 75% or more of its gross income is passive income. Under the asset
test, a foreign corporation is a PFIC if 50% or more of the average value of its
assets (on a gross basis) consists of assets that would produce passive income;
a foreign corporation may elect to have the asset test applied using the
adjusted bases of its assets rather than their fair market values. The
registrant believes that it is classified as a PFIC for the fiscal year ended
March 31, 1998.
The Internal Revenue Code (IRC) provides for certain look-through rules so
that a corporation can avoid PFIC status. A look through rule applies where a
foreign corporation owns, directly or indirectly, 25% or more (by value) of the
stock of another corporation. Under this look-through rule, certain income, such
as interest and dividends, received from the subsidiary, and the value of its
stock, is ignored. Instead, a pro rata portion of the second-tier corporation's
income and assets are treated as if directly received or held by the first-tier
corporation. The look through rules apply for purposes of either the asset or
income test.
U.S. Foreign Tax Credit: U.S. citizens and individual residents are taxed
on their worldwide income. In order to prevent the double taxation that could
result on income derived from foreign sources, the United States allows a credit
for foreign taxes paid or accrued. The amount of foreign tax available to offset
U.S. tax on foreign
26.
<PAGE> 27
source income is subject to limitation. In general, the limitation is equal to
the U.S. tax (pre-credit), multiplied by the foreign source taxable income,
divided by the worldwide taxable income.
RECENT SALES OF UNREGISTERED SECURITIES
In the fiscal year ended March 31, 1999, the Company issued a total of
61,525 shares of its common stock to certain of its employees and consultants
for total consideration of CDN $135,980.
In October, 1998, the Company sold an aggregate of 2,242,611 common shares
to Ethicon, Inc. for $6,000,000 or CDN $9,310,200 in connection with entering
into a licensing and supply agreement with Ethicon. In April 1998 and November
1998, the Company issued 92,000 and 200,000 common shares, respectively,
pursuant to warrants to acquire common shares at a price of CDN $3.30 and CDN
$4.73, respectively, for total consideration of CDN $303,600 and CDN $946,000,
respectively. The sale and issuance of these securities were exempt from
registration under the Securities Act by virtue of Section 4(2) and/or
Regulation D and Regulation S promulgated thereunder. Each of the investors that
participated in the Regulation D offering represented to the Company that they
were "accredited investors" within the meaning of Rule 501(c) of the Securities
Act.
In June, 1999, the Company sold an aggregate of 4,187,500 special warrants
pursuant to a private placement at a purchase price of US $3.00 per special
warrant for total consideration of $12,562,500 cash. The sale and issuance of
these securities were exempt from registration under the Securities Act by
virtue of Section 4(2) and/or Regulation D and Regulation S promulgated
thereunder. Each of the investors that participated in the Regulation D offering
represented to the Company that they were "accredited investors" within the
meaning of Rule 501(c) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the periods indicated, derived from audited consolidated financial
statements prepared in accordance with accounting principals generally accepted
in Canada which conform to accounting principals generally accepted in the
United States, except as described in Note 15 to the consolidated financial
statements. The data set forth below should be read in conjunction with the
Company's consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
included elsewhere herein. Effective January 23, 1998, the Board of Directors of
the Company approved the change of its fiscal year from a February 28 year-end
to a March 31 year-end.
On June 15, 1999 the Interbank rate of exchange for converting Canadian
dollars into United States dollars equaled 1.4620 Canadian dollars for 1 United
States dollar. The following table presents a history of the exchange rates of
Canadian dollars into United States dollars for the five most recent fiscal
years of the Company.
<TABLE>
<CAPTION>
======================= ================ ================ ============== ============== ==============
Fiscal Periods Ending March 31, 1999 March 31, 1998 Feb 28, 1997 Feb 29, 1996 Feb 28, 1995
======================= ================ ================ ============== ============== ==============
<S> <C> <C> <C> <C> <C>
Period End 1.5114 1.4223 1.3556 1.3752 1.4005
- ----------------------- ---------------- ---------------- -------------- -------------- --------------
Average 1.5031 1.3994 1.3566 1.3767 1.3778
- ----------------------- ---------------- ---------------- -------------- -------------- --------------
Period's High 1.5845 1.4686 1.3752 1.4077 1.4132
- ----------------------- ---------------- ---------------- -------------- -------------- --------------
Period's Low 1.4144 1.3594 1.3381 1.3458 1.3424
- ----------------------- ---------------- ---------------- -------------- -------------- --------------
</TABLE>
The following summarizes certain selected consolidated financial
information with respect to the Company and is qualified in its entirety by
reference to the Financial Statements of the Company and the Notes thereto.
Years prior to 1995 (the year in which Genetronics, Inc. went public through a
reverse takeover) present information on Genetronics, Inc., which was then, a
private United States company. All amounts are shown in United States dollars.
27.
<PAGE> 28
<TABLE>
<CAPTION>
==============================================================================================================
12 Months 13 Months 12 Months 12 Months 12 Months
Fiscal Periods Ended 3/31/99 3/31/98 2/28/97 2/29/96 2/28/95
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Sales 3,434,105 3,097,198 3,040,734 2,512,131 2,237,404
- --------------------------------------------------------------------------------------------------------------
License Fee and milestone payments 4,500,000 0 0 0 0
- --------------------------------------------------------------------------------------------------------------
Interest Income 300,911 427,498 71,206 64,160 0
- --------------------------------------------------------------------------------------------------------------
Research Revenue 387,183 134,094 47,439 105,292 248,827
- --------------------------------------------------------------------------------------------------------------
Net Loss for Period
- --------------------------------------------------------------------------------------------------------------
Canadian GAAP(1) (6,603,837) (7,596,666) (2,994,610) (1,876,426) (651,423)
- --------------------------------------------------------------------------------------------------------------
United States GAAP (7,150,537) (7,904,166) (3,330,110) (2,033,326) (738,067)
- ---------------------------------------------------------------------------------------------------------------
Net Loss per Common Share
- --------------------------------------------------------------------------------------------------------------
Canadian GAAP (0.33) (0.43) (0.24) (0.17) (0.13)
- --------------------------------------------------------------------------------------------------------------
United States GAAP (0.35) (0.44) (0.26) (0.18) (0.14)
- --------------------------------------------------------------------------------------------------------------
Total Assets
- --------------------------------------------------------------------------------------------------------------
Canadian GAAP 9,807,644 9,242,887 4,161,129 4,318,264 2,936,666
- --------------------------------------------------------------------------------------------------------------
United States GAAP 9,807,644 9,242,887 4,161,129 4,318,264 2,936,666
- --------------------------------------------------------------------------------------------------------------
Long-term Obligations 9,564 23,904 25,105 7,893 13,813
- --------------------------------------------------------------------------------------------------------------
Dividends per Share 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GAAP means Generally Accepted Accounting Principles
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Through its Drug Delivery Division Genetronics is engaged in developing
drug delivery systems based on electroporation to be used in the site specific
treatment of disease. Through its BTX Division the Company develops,
manufactures, and sells electroporation equipment to the research laboratory
market.
In the past the Company's revenues primarily reflect research grants and,
through the BTX Division, product sales to the research market. In October 1998
the Company entered into comprehensive Licensing Development and Supply
Agreements with Ethicon, Inc., a Johnson & Johnson company, involving
Genetronics' proprietary drug delivery system for the Electroporation Therapy
Treatment of cancer. As part of the Licensing Agreement the Company received an
up-front licensing fee and will be receiving future milestone payments if and
when milestones are met.
Until the commercialization of the clinical products the Company expects
revenues to continue to be attributable to product sales to the research market,
milestone payments, grants, and collaborative research arrangements.
Due to the expenses incurred in the development of the drug delivery
systems the Company has been unprofitable in the last five years. As of March
31, 1999 the Company has incurred a cumulative net loss of $ 19,998,501. 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.
Asian Economic Crises
The Asian economic crisis affected the results of operations to the extent
that the sales revenues from export sales for the fiscal year ended March 31,
1999 were about $500,000 lower than expected. The main countries where the
Company achieved lower than expected sales were Japan, South Korea, Taiwan and
India. The lower export sales revenues resulted in lower than expected cash
proceeds from the BTX Division. Since the lower than
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<PAGE> 29
expected export sales were partially offset by higher domestic sales, the
lower-than-expected cash proceeds from the BTX Division had no material effect
on the Company's liquidity.
The Company is also increasing efforts to expand sales to European and
South American markets which will make up for any possible shortfall in the
event the Asian crisis does not resolve itself within the coming year.
Accordingly, the Company believes that the Asian economic crisis will have no
material effect on the Company's liquidity. See "Risk Factors - Risks of
International Operations".
Inflation
The Company does not believe that inflation has had a material adverse
effect on net sales or results of operations. The Company has generally been
able to pass on increased costs related to inflation through increases in
selling prices.
RESULTS OF OPERATIONS
The following discussion and analysis explains trends in the Company's
financial condition and results of operation for the periods ended March 31,
1999, March 31, 1998, and February 28, 1997. This discussion and analysis of the
results of operations and financial condition of the Company should be read in
conjunction with the consolidated financial statements and the related notes
included elsewhere in this Form 10-K. The consolidated financial statements have
been prepared by management in accordance with accounting principles generally
accepted in Canada, which conform to accounting principles generally accepted in
the United States, except as described in Note 15 to the consolidated financial
statements.
TWELVE MONTHS ENDED MARCH 31, 1999 COMPARED TO THIRTEEN MONTHS ENDED MARCH 31,
1998
In January 1998, Genetronics Biomedical Ltd. changed its fiscal year end
from February 28/29 to March 31. All figures for the fiscal year ended March 31,
1998, reflect thirteen months of operations compared to twelve months due to the
change in year-end. The impact of the reporting period extension to March 31,
1998 is that direct comparisons with the years ended March 31, 1999 and February
28, 1997 may be difficult without taking into consideration the difference in
reporting periods. Consequently, "adjusted" estimates for a twelve month period
ended March 31, 1998, calculated as twelve month pro-rata amounts unless not
representative and otherwise indicated, have been used for discussion purposes
below.
Revenues
The BTX Division produced net sales of $3,434,105, for the twelve months
ended March 31, 1999, compared with net sales of $3,097,198, for the thirteen
months ended March 31, 1998. On an "adjusted" basis, net sales increased by 20%
for the fiscal year ended March 31, 1999. One of the factors contributing to
this increase was the result of the Company's efforts to expand United States
sales by building up a sales force through distributors. For the twelve months
ended March 31, 1999, United States sales through distributors increased by 31%
compared with the thirteen months ended March 31, 1998. 38% of the total net
sales for the twelve-month period ended March 31, 1999 were exported; the same
percentage sold internationally for the thirteen-month period ended March 31,
1998.
Even though the economic crisis in East Asia continued to impact export
sales, international sales increased 13% in the 12 month period ended March 31,
1999 compared to the 13 month period ended March 31, 1998. This increase was
primarily a result of the Company's efforts to expand sales into Europe and
South America.
In late 1998 the BTX Division introduced the ECM 830, a Square Wave
Electroporation system which utilizes the new BTX Power Platform technology and
all-new digital user interface. The CE compliant ECM 830 is expected to assist
the Company's efforts to increase sales in Europe.
In October 1998 Genetronics entered into comprehensive Licensing
Development and Supply Agreements with Ethicon, Inc., a Johnson & Johnson
company, involving its proprietary drug delivery system for
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Electroporation Therapy treatment of cancer. As part of the Licensing Agreement
the Company received a $4,000,000 up-front licensing fee. Future milestone
payments, a percentage of net sales as license fees and revenues for the
manufacture and sale of the Company's drug delivery system for Electroporation
Therapy treatment of cancers are also part of the agreement. The first milestone
payment of $500,000 was received in March 1999 when the Company was given
approval to affix the CE Mark to its proprietary MedPulser(R) drug delivery
system.
Revenues under collaborative research and development arrangements
increased from $6,025, for the thirteen months ended March 31, 1998 to $33,048,
for the twelve months ended March 31, 1999. $25,000 of these revenues for the
twelve months ended March 31, 1999 were a result of collaboration with a major
biotechnology company in gene therapy. Further milestone payments of $50,000 are
due upon achievement of predetermined research results.
Revenues from grant funding increased from $128,069, for the thirteen
months ended March 31, 1998 to $354,135, for the twelve months ended March 31,
1999. The increase was a result of two Phase I grants awarded in vascular
therapy and transdermal drug delivery in September 1997 and April 1998,
respectively, and one Phase II grant in oncology in September 1997. A Phase I
grant for which no revenues have been earned as of March 31, 1999 was awarded in
March 1999 for $99,995 for gene therapy research.
Interest income decreased from $427,498, for the thirteen months ended
March 31, 1998 to $300,911, for the twelve months ended March 31, 1999. The
decrease resulted from the diminishing availability of investment funds due to
operating losses.
Cost Of Sales
Cost of sales increased by 211,350, or 15%, from $1,427,285, for the
thirteen months ended March 31, 1998 to $1,638,635, for the twelve months ended
March 31, 1999. The increase was primarily a result of higher sales in the
twelve-month period ended March 31, 1999.
Gross Profit and Gross Margin
Primarily due to the higher sales, the gross profit for the twelve months
ended March 31, 1999 in the amount of $1,795,470, increased by $125,557, or 8%,
compared with $1,669,913, for the thirteen months ended March 31, 1998.
The gross profit margin for BTX products decreased slightly from 54% for
the thirteen months ended March 31, 1998 to 52% for the twelve months ended
March 31, 1999. In an effort to improve its manufacturing capability, the BTX
Division has upgraded several positions, including hiring a new Manager of
Production. Contributing to the lower profit margin was the increase of sales to
distributors as a percentage of total sales, since distributors receive a
discount, and the impact of new employees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses which include advertising,
promotion and selling expenses, increased by $1,308,805, or 31%, from
$4,172,246, for the thirteen months ended March 31, 1998 to $5,481,051, for the
twelve months ended March 31, 1999. The Company added administrative and
management personnel to support increased research and development activities in
the Drug Delivery Division and the ongoing clinical trials. Sales and marketing
expenses in the BTX Division increased as a result of efforts to build up a
distributor sales force to expand domestic sales.
Research and Development/Clinical Trials
Research and development costs increased by $2,449,004, or 43%, from
$5,637,955, for the thirteen months ended March 31, 1998 to $8,086,959, for the
twelve months ended March 31, 1999. Cost of monitoring clinical trials in the
United States, Canada and Europe increased. Other increased costs were for
personnel in the Drug Delivery Engineering Department to meet regulatory
requirements for products used in the clinical trials.
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During the twelve months ended March 31, 1999 the Drug Delivery Engineering
Department was working on development of commercial versions of the Electrode
Applicators and the MedPulser(R). In March 1999 the Company received Quality
System Registration to three internationally recognized standards, ISO 9001,
EN46001 and ISO 13485. Also in March 1999 the Company received CE Mark approval
of its MedPulser(R) System.
Increased research efforts in the transdermal, gene therapy and cardiology
programs also resulted in higher personnel expenses and contract research. A
portion of these increased expenses was a result of federal grants received for
certain research projects. The revenues received from these grants offset these
expenses and are discussed in the revenue section.
Net results of reportable segments (Net results of reportable segments do
not include unallocated costs such as interest income and expense and general
and administrative costs)
The BTX Division reported net results in the amount of $366,386 for the
twelve months ended March 31, 1999 compared to $478,499 for the thirteen months
ended March 31, 1998 which on an "adjusted basis" meant a decrease of 17%. The
decrease was the result of a lower profit margin and increased sales and
marketing expenses. Also, increased engineering expenses to upgrade BTX
instruments for CE mark compliance contributed to the lower net results.
The Drug Delivery Division reported net expenditures in the amount of
$2,858,343 for the twelve months ended March 31, 1999 compared to $5,282,338
for the thirteen months ended March 31, 1998, which meant a decrease of
$2,423,995, or 46%. The lower net expenditures were primarily a result of the
up-front licensing fee from Ethicon Inc. which more than offset the increased
research and development expenses.
Net Loss
For the twelve months ended March 31, 1999 the Company recorded a net loss
of $6,603,837, compared with a net loss of $7,596,666, for the thirteen months
ended March 31, 1999, a decrease of 6% on an adjusted basis. The lower loss is
primarily a result of the up-front license fee and milestone payment from
Ethicon Inc. which more than offset the increased research and development
expenses and selling, general and administrative expenses.
THIRTEEN MONTHS ENDED MARCH 31, 1998 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1997
The Company has changed its fiscal year end to March 31. All figures for
the fiscal year ended March 31, 1998 reflect thirteen months of operations
compared to twelve months due to the change in year-end. The impact of the
reporting period extension to March 31, 1998 is that direct comparisons with the
year ended February 28, 1997 may be difficult without taking into consideration
the difference in reporting periods. Consequently, "adjusted" estimates for a
twelve month period ended March 31, 1998, calculated as twelve month pro-rata
amounts unless not representative and otherwise indicated, have been used for
discussion purposes below.
Revenues
The BTX Division produced net sales of $3,097,198 for the thirteen months
ended March 31, 1998, compared with net sales of $3,040,734 for the twelve
months ended February 28, 1997. On an "adjusted" basis, net sales decreased by
6% for the fiscal year ended March 31, 1998, which can be attributed to the
Asian economic crisis, which affected the results of operations in Japan, South
Korea, Taiwan and India. There was a more than 20% increase in net sales in the
United States compared to the twelve-month period ended February 28, 1997.
Revenues from grant funding increased from $38,856 for the twelve months
ended February 28, 1997 to $128,069 for the thirteen months ended March 31,
1998. One grant, awarded in September 1996 in the amount of $95,468 for a
project to research in vivo arterial gene therapy by electroporation, was
completed in September 1997. During the thirteen months ended March 31, 1998,
the Company was awarded two more United States government grants: Phase I grant
in the amount of $99,909 awarded in September 1997 from the National Heart,
Lung, and Blood Institute for a project to research sustained delivery of
heparin into arterial walls; Phase II grant in the amount of $581,652 was
awarded in September 1997 by the National Cancer Institute for a project to
research a novel and
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efficient method of anticancer drug delivery. One of these grants is completed.
The research work which the other grant is funding is scheduled to be completed
in September 1999.
Subsequent to March 31, 1998, another Phase I grant in the amount of
$94,301 was awarded by the National Institute of Arthritis and Musculoskeletal
and Skin Diseases for a project to research electrically enhanced transdermal
delivery of calcitonin.
Interest income increased from $71,206 for the twelve months ended February
28, 1997 to $427,498 for the thirteen months ended March 31, 1998. The
"adjusted" increase of 454% resulted principally from the investment of the
proceeds from various 1997 equity financing into money market accounts and term
deposits.
Cost Of Sales
Cost of Sales for the thirteen months ended March 31, 1998 was $1,427,285,
an increase of $150,045, compared with $1,277,240 for the twelve months ended
February 28, 1997. The increase was due to the additional month ended March 31,
1998 and an increase in manufacturing salaries.
Gross Profit and Gross Margin
Gross Profit decreased by $93,581, from $1,763,494, for the twelve months
ended February 28, 1997 to $1,669,913 for the thirteen months ended March 31,
1998. Gross Margin decreased by 4.1% from 58% for the twelve months ended
February 28, 1997 to 53.9% for the thirteen months ended March 31, 1998.
Compared with the twelve months ended February 28, 1997 the sales of chambers
and accessories increased as a percentage of total sales for the thirteen months
ended March 31, 1998. Sales to distributors as a percentage of total sales also
increased during the thirteen months ended March 31, 1998 compared with the
twelve months ended February 28, 1997. Since distributors receive a discount off
the list price, this also contributed to the lower gross margin.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses, which consist of advertising,
promotion and selling expenses, and general administrative expenses, increased
by $1,514,425 from $2,657,821 for the twelve months ended February 28, 1997 to
$4,172,246 for the thirteen months ended March 31, 1998. On an "adjusted" basis,
Selling, General and Administrative expenses increased by 45%. One reason for
the increase was that the Company hired additional administrative and management
personnel to support the increased research and development activities in the
Drug Delivery Division as well as regulatory filings. Also increased
administrative expenses were incurred related to the equity financing and
investor relations efforts.
Research and Development/Clinical Trials
Research and Development costs increased by $3,437,491, from $2,200,464,
for the twelve months ended February 28, 1997 to $5,637,955 for the thirteen
months ended March 31, 1998. On an "adjusted" basis, Research and Development
costs increased by 136%. During the thirteen months ended March 31, 1998 the
Drug Delivery Division incurred expenses for independent third party audits of
clinical studies and an IND filing with the United States Food and Drug
Administration for head and neck cancer trials. Phase I and Phase II clinical
trials at 24 sites in the United States, Canada, and France were initiated in
late 1997 and early 1998. In Paris, France, Genetronics S.A., a wholly owned
subsidiary of Genetronics Inc., was formed in January 1998 to assist in the
management of the clinical trials in France.
In order to process all necessary filings with regulatory bodies and to
monitor clinical trials, the Company formed a Clinical and Regulatory Affairs
department in 1997 at Genetronics, Inc. This resulted in increased personnel
costs in this area for the thirteen months ended March 31, 1998. Increased
personnel costs and contract service expenses in the Drug Delivery Engineering
Department resulted from regulatory requirements for products used in the
clinical trials and anticipation of commercialization in Europe.
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In the BTX Division, increased engineering costs were a result of the need
to develop CE approved instruments in order to continue to ship instruments to
the European market.
Increased preclinical efforts in the oncology, transdermal, gene therapy,
and cardiology programs also resulted in higher personnel expenses and contract
research. An important new product development during the year is a template
device to be used with the MedPulser(R) to potentially treat prostate and breast
cancer. A "smart chip" recognition device was also incorporated, so that
applicators cannot be reused on the commercial versions.
Net results of reportable segments (Net results of reportable segments do
not include unallocated costs such as interest income and expense and
general and administrative costs)
The BTX Division reported net results in the amount of $478,499 for the
thirteen months ended March 31, 1998 compared to $752,917 for the twelve months
ended February 28, 1997 which on an "adjusted basis" meant a decrease of 41%.
The decrease was the result of a lower profit margin and increased sales and
marketing expenses. Also, increased engineering expenses to upgrade BTX
instruments for CE mark compliance contributed to the lower net results.
The Drug Delivery Division reported net expenditures in the amount of
$5,282,338 for the thirteen months ended March 31, 1998 compared to $2,043,877
for the twelve months ended February 28, 1997, which meant an increase of
$3,238,461, or 158%. The increased net expenditures were primarily a result of
increased research and development expenses.
Net Loss
For the thirteen months ended March 31, 1998 the Company recorded a Net
Loss of $7,596,666, or $0.43 per share, compared with a Net Loss of $2,994,610,
or $0.24 per share, for the twelve months ended February 28, 1997. On an
"adjusted" basis the Net Loss increased by 134%. The higher loss is primarily a
result of the increased research and development and clinical trial expenses and
the general and administrative expenses.
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 in the Drug Delivery
Division. The Company has satisfied its cash requirements principally from
proceeds from the sale of equities. In October 1998 the Company received
$6,000,000 from the issuance of Genetronics common stock to Johnson & Johnson
Development Corporation, a Johnson & Johnson company. In November 1998 the
Company issued 200,000 common shares pursuant to the exercise of warrants to
acquire 200,000 common shares at a price of CDN $4.73 per share resulting in
gross proceeds to Genetronics of approximately $610,000 (CDN $946,000). In April
1998, the Company issued 92,000 common shares pursuant to the exercise of
warrants to acquire 92,000 common shares at a price of CDN $3.30 per share
resulting in gross proceeds to Genetronics of approximately CDN $303,600.
As of March 31, 1999 the Company had working capital of $6,204,598,
compared to $6,432,875, as of March 31, 1998. On March 31, 1999 the Company's
cash and cash equivalents amounted to $6,189,284. Cash flows used in operating
activities were $6,318,900, for the twelve months ended March 31, 1999 compared
to $6,788,195, for the thirteen months ended March 31, 1998. The small decrease
in cash used in operating activities compared to the period ended March 31, 1998
was primarily attributable to the up-front license fee and milestone payments
from Ethicon Inc. which more than offset increased operating expenses.
Subsequent to March 31, 1999 the Company sold 4,187,500 special warrants at a
price of $3.00 each, which can be exercised for common shares, for total gross
proceeds in the amount of $12,562,500.
Receivables increased $272,921, or 54%, from $503,727, at March 31, 1998 to
$776,648, at March 31, 1999. The Company recorded higher sales to distributors
during the year.
Inventories increased from $395,090, at March 30, 1998 to $655,906, at
March 31, 1999 primarily due to a build-up of inventory in the Drug Delivery
Division in preparation for a product launch in Europe.
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Current liabilities increased from $992,886 at March 31, 1998 to
$1,423,335, at March 31, 1999. Primarily higher operational expenses contributed
to the $430,449, or 43%, increase in payables.
Cash flows used in investing activities were $791,839 and $879,836, for the
twelve months ended March 31, 1999 and the thirteen months ended March 31, 1998,
respectively. Cash flows used for purchase of capital assets for the twelve
months ended March 31, 1999 related partly to an expansion of the computer
network necessary due to addition of personnel. Also, capital expenditures were
needed to set up a GMP and FDA compliant manufacturing area for the Drug
Delivery Division. The cash used for other assets in the amount of $287,771, for
the twelve months ended March 31, 1999 was primarily a result of expenditures
for patent applications.
The Company believes that its existing cash balances and cash generated
from the above subsequent financing event will be sufficient to fund 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, scale-up, 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 equity investments, collaborative arrangements, license
agreements or development or other funding programs with the Company 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 can not 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
administrative activities and its business and financial results and condition
would be materially adversely affected.
Year 2000 Issues
The Year 2000 Problem stems from the fact that many computer systems,
software programs and equipment and instruments with embedded microprocessors
were designed to only recognize the last two digits of a calendar year. With the
arrival of the Year 2000, these systems and microprocessors may encounter
operating problems due to their inability to distinguish years after 1999 from
years preceding 1999. The Company is aware of the issues associated with the
Year 2000 Problem in many existing hardware and software applications. In 1998
the
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Company established a Year 2000 compliance plan which was approved by the
Company's senior management and Board of Directors. To execute the plan, the
Company formed a Year 2000 committee that is composed of both management and
non-management personnel. In addition, the Company has contracted with an
outside Year 2000 service provider to assist with the implementation of the Year
2000 compliance plan. The plan is a multi-phased approach to the Year 2000
Problem, and includes assessment, inventory, testing and remediation phases.
The Company has completed the assessment and inventory phases of the Year
2000 compliance plan, and is currently in the final stages of testing the
Company's internal management information and other systems to verify their Year
2000 compliance status. Based on the results of the work performed to date, the
Company believes that the mission critical computer systems and applications
used by the Company either are currently Year 2000 compliant, or will be brought
into compliance per the Year 2000 plan, prior to January 1, 2000.
The Company, in collaboration with its outside Year 2000 consultants, has
examined the products manufactured in the BTX Division and has determined that
the BTX products should not experience any Year 2000-related failures. In
addition, the Company, in collaboration with its outside Year 2000 consultants,
has examined the products produced by the Drug Delivery Division, and has
determined that these products should not experience any Year 2000-related
failures.
In addition to examining the Company's internal Year 2000 compliance
issues, the Company has contacted the critical companies in the Company's supply
and distribution chain in order to ensure that they are Year 2000 compliant, and
that there will be no interruption of the Company's business operations due to
Year 2000 failures. The Company is currently evaluating the responses received
from these companies and following up on any Year 2000-related issues. The
Company is also evaluating the Year 2000 compliance status of other critical
business dependencies, including business partners, collaborators, and clinical
test sites. As part of this effort, the Company is establishing a process to
monitor the Year 2000 Compliance status of its key outside business dependencies
up to and through the Year 2000. However, the Company cannot guarantee the
compliance status of third parties, and the failure of key suppliers,
distributors, business partners, or customers to become Year 2000 compliant on a
timely basis, or at all, could have a material adverse effect on the Company.
The Company is continuing to develop a contingency plan which will be used
by the Company in the event that Year 2000 failures occur which affect critical
operations. Contingency planning may include increasing inventory levels,
establishing secondary sources of supply and manufacturing, and maintaining
back-up lines of communications with our customers. However, it is unlikely that
any contingency plan can fully mitigate the impact of significant business
disruptions among key suppliers or customers.
The Company has established a Year 2000 budget to address Year 2000 issues.
The total cost of these year 2000 compliance activities to date have not been
material to the Company's financial condition or its operating results. In
addition to utilizing outside resources for the Company's Year 2000 program, the
Company is devoting internal resources to the Year 2000 compliance program. The
Company is including the internal costs incurred as part of the Company's Year
2000 expenditures in this disclosure. The Company will continue to review and
update data for costs incurred related to the Year 2000 and will revise
forecasted costs each quarter. To date, the costs incurred for Year 2000
compliance activities have been approximately $4,000 internally and $19,000 for
external resources. Based on the Company's Year 2000 review to date, the Company
does not believe that the incremental costs of addressing Year 2000 issues will
have a material adverse effect on the Company's consolidated results of
operations, liquidity and capital resources. The Company believes that it will
complete the implementation of its Year 2000 compliance plan by the end of the
third quarter of calendar year 1999.
However, there can be no assurance that the Company will timely identify
and remediate all year 2000 problems, that remedial efforts will not involve
significant time and expense, or that such problems will not have a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 7A QUALITATIVE AND QUANTITATIVE 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.
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From time to time, the Company maintains a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. 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. However, the Company has recently completed a private financing and may
choose to invest in cash equivalents which mature in up to nine months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company listed in Item 14(a) are included
herein on the financial pages and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS
The executive officers and directors of the Company, the positions held by
them and their ages as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------- --- -----------------------------------------------
<S> <C> <C>
Lois J. Crandell 57 Director, Chief Executive Officer and President
Gunter A. Hofmann(2) 64 Director, Chief Scientific Officer, and
Chairman of the Board
Martin Nash 51 Director and Senior Vice President(1)
James L. Heppell(2)(4) 43 Director
Suzanne L. Wood(3)(4) 42 Director
Gordon Politeski(2)(3)(4) 56 Director
Stan Yakatan(2)(3)(4) 56 Director
Wayne Schnarr(4) 48 Director
</TABLE>
- ----------
(1) On June 10, 1999, Martin Nash was appointed Chief Financial Officer,
retaining his previous title, as well.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of Nomination and Corporate Governance Committee
LOIS J. CRANDELL, has been the President, Chief Executive Officer and a
Director of Genetronics Biomedical since September 1994 and President, Chief
Executive Officer and a Director Genetronics, Inc. since January 1992. Prior to
joining Genetronics, Inc. in 1991, Ms. Crandell co-founded the venture capital
firm, More than Money Ventures in 1988. Ms. Crandell also founded Crandell
Communications and was Vice President and a Director of Medical Wellness
Technologies, Vice President of Peterson-Morris MacLachlan and held product and
marketing management positions at Medtronic, Inc. and Control Data Corporation.
Ms. Crandell holds two patents and is a Board Member of BIO/COM San Diego, an
industry trade organization, and UCSD Cancer Research Foundation.
GUNTER A. HOFMANN, Ph.D., has been the Chairman of the Board and Chief
Scientific Officer of Genetronics Biomedical Ltd. since September 1994 and has
been Chairman of the Board and Chief Scientific Officer of Genetronics, Inc.
since January 1992. Prior to founding Genetronics, Inc., in 1983, Dr. Hofmann
managed the product development and technology transfer activities of Maxwell
Laboratories. Dr. Hofmann holds approximately 50 patents and has several others
pending. Dr. Hofmann received his doctorate in Physics from the
Max-Planck-Institute for Plasma Physics in Germany.
MARTIN NASH has been the Senior Vice President of Genetronics Biomedical
Ltd. since April 1996 and a Director of Genetronics Biomedical Ltd. since July
28, 1997 and Senior Vice President of Genetronics, Inc. since June 1994 and a
director of Genetronics, Inc. since April 1996. On June 10, 1999, Martin Nash
was appointed Chief Financial Officer and retained his previous title, as well.
Prior to joining Genetronics, Inc. in 1994, Mr. Nash was co-founder, Chief
Executive Officer and Chief Financial Officer of Cypros Pharmaceutical
Corporation (NASDAQ), co-founder of Corvas International, Inc. (NASDAQ), and
Vice President of Corporate Development at Synbiotics (NASDAQ). He was also
President of Molecular Biosystems, Inc. (NYSE) and held a variety of marketing
and business development management positions at Ortho Diagnostics Systems,
Inc., a division of Johnson & Johnson, Inc., and at Becton Dickinson & Company.
In 1990 Mr. Nash was President of the Association of Biotechnology Companies.
Mr. Nash received a Bachelor of Arts and Sciences from Boston College.
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JAMES L. HEPPELL has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since September 1994. Mr. Heppell is a partner at Catalyst
Corporate Finance Lawyers and previously of Hanna Heppell Bell & Visosky, both
in British Columbia. Mr. Heppell provides corporate finance legal services to
technology issuers. His expertise lies in representing biotechnology companies,
instructing and carrying out cross-border financings and in dealing with the
requirements of all major Canadian exchanges, as well as NASDAQ. Mr. Heppell is
also a Director, President and Chief Executive Officer of Mecca Medi-Tech, Inc.
and a Director of Sabretooth Holdings, Inc. and the Secretary of Forbes
Medi-Tech, Inc., BCY Ventures, Inc. and Response Biomedical Corp. In addition to
his L.L.B., Mr. Heppell has a Bachelor of Science degree in Microbiology from
the University of British Columbia.
SUZANNE L. WOOD has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since June 1989. Ms. Wood is a principal of Wood & Associates,
a financial and management consulting firm servicing public and private
companies since 1982. Her 15 years experience in financial and corporate
management include positions as Controller and Director of the Mitek Group of
Companies, Vice President and director of Barrington Petroleum Ltd., and
Controller of Ice Stations Resources Ltd. Ms. Wood received her Bachelor of Arts
from the University of British Columbia, where she also attained three years of
post-graduate training. During her employment with Revenue Canada Taxation in
the Business Audit Division, she completed four levels of the Certified General
Accountants Program. She completed the Canadian Securities course and continues
to participate in the Professional Development Program of the Institute of
Chartered Accountants.
STAN YAKATAN has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since July 1997. Mr. Yakatan is currently Chief Executive
Officer and Chairman of Quantum Biotechnologies, Inc., a development stage
company. Mr. Yakatan is Chairman and managing partner of Katan Associates. From
1994 to 1995, Mr. Yakatan was Chief Executive Officer of Cystar. From 1991 to
1993 Mr. Yakatan was Chairman and Chief Executive Officer of Unisyn Technologies
Inc., a development stage biotechnology company. Previously, he was Executive
Vice President of New Brunswick Scientific, Inc. and President and Chief
Executive Officer of Biosearch, a biotech company previously based out of San
Rafael, California, and specializing in the manufacture of DNA and peptide
synthesizers, prior to its sale to Millipore. Mr. Yakatan has a Masters degree
in Business Administration from the University of Pennsylvania.
GORDON POLITESKI has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since May 1997. Mr. Politeski is currently Chief Executive
Officer and Director of SBL Technologies Medical Laser Group. He is former
President and Chief Executive Officer of Harley Street Software, involved in
ambulatory ECG monitoring, and is former President and Chief Executive Officer
of Nortran Pharmaceuticals, Inc. where he took the company's first drug
candidate successfully through a Phase I clinical trial. As founding President
and Chief Executive Officer of Biomira, Inc., a cancer diagnostics and therapy
company, Mr. Politeski took Biomira from the Alberta Stock Exchange to the
Toronto Stock Exchange and subsequently to the NASDAQ. He has also served a
President and General Manager for Allergan Pharmaceuticals in opthamology and
currently is a Director of Sabretooth Holding, Inc. and a Director, the Chief
Financial Officer and Vice President Business Development of BCY Ventures, Inc.,
a publicly traded venture capital pool company. Mr. Politeski is a graduate of
the University of Saskatchewan and the Amos Tuck Executive Program at Dartmouth
University.
WAYNE SCHNARR, Ph.D. has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since September 1997. Dr. Schnarr is currently Vice President
and Director of BioCatalyst Yorkton, Inc. of Toronto, a venture management firm
which is involved in fostering technological advances in the biotechnology and
health care sectors. Previously, Dr. Schnarr has been a Life Sciences Analyst
for Yorkton Securities, Inc. of Toronto. His 15 years of experience in the
pharmaceutical industry include management experience in research, marketing,
and manufacturing with companies such as Canada Packers Chemical Division and
Connaught Laboratories. Dr. Schnarr has also been President of Pharma Patch plc,
a publicly traded transdermal drug delivery company in Toronto, as well as
Research Director for the Canadian Drug Manufacturers Association, which
represents the Canadian generic drug industry. Dr. Schnarr is also a Director,
Chief Financial Officer, and the Vice President of BCY Ventures, Inc., a
publicly traded venture capital pool company. Dr. Schnarr received his B.Sc. in
Chemistry from the University of Victoria (B.C.) in 1973 and his Ph.D. in
Carbohydrate Chemistry form Queens University (Kingston) in 1977. He
subsequently obtained his MBA from York University in Toronto.
38.
<PAGE> 39
BOARD COMMITTEES
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the auditors' comments (out of the presence of
management) as to controls, adequacy of staff and management performance and
procedures in connection with audit and financial controls. The Audit Committee
is composed of three directors: Suzanne L. Wood (Chairwoman), Gordon Politeski
and Stan Yakatan.
The Compensation Committee makes recommendations based upon management's
suggestions regarding the salaries and incentive compensation for officers and
key employees and performs such other functions regarding compensation as the
Board may delegate. The Compensation Committee is composed of Stan Yakatan
(Chair), Gunter A. Hofmann, Gordon J. Politeski and James L. Heppell.
The Nomination and Corporate Governance Committee identifies and recommends
candidates for election to the Board of Directors. It advises the Board of
Directors on all matters relating to directorship practices, including the
criteria for selecting directors, policies relating to tenure and retirement of
directors and compensation and benefit programs for non-employee directors. The
Nomination and Corporate Governance Committee also makes recommendations
relating to the duties and membership of committees of the Board of Directors,
recommends processes to evaluate the performance and contributions of individual
directors and the Board of Directors as a whole and approves procedures designed
to provide that adequate orientation and training are provided to new member of
the Board of Directors and consults with the Chief Executive Officer in her
process of recruiting new directors and assists in locating senior management
personnel and selecting members for the scientific advisory board. The
Nomination and Corporate Governance Committee has developed a policy to govern
the Company's approach to corporate governance issues and provides a forum for
concerns of individual directors about matters not easily or readily discussed
in a full board meeting, e.g., the performance of management. The Nomination and
Corporate Governance Committee is composed of Wayne Schnarr (Chairman), James L.
Heppell, Suzanne L. Wood, Stan Yakatan, Gordon J. Politeski.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of each of the named
executive officers of the Company for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ---------------
SECURITIES
YEAR SALARY BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) ($) ($) OPTIONS/SARS(3) COMPENSATION(4)
- -------------------------------------- ---- ---------- ------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gunter A. Hoffman 1999 179,785 35,200 135,200 14,083
Chairman, and Chief Scientific Officer 1998 179,445 -0- 25,000 13,383
1997 160,539 32,000 105,000 7,090
Lois J. Crandell 1999 179,990 43,125 143,125 14,021
Director, President and CEO 1998 174,997 -0- 65,000 13,217
1997 149,688 37,500 100,000 12,230
Martin Nash 1999 140,573 27,200 127,200 7,520
Director, Senior Vice President(2) 1998 134,118 -0- 25,000(5) 12,181
1997 115,000 23,000 97,000 11,957
</TABLE>
39.
<PAGE> 40
- ----------
(1) For 1998 and 1999, the fiscal year ended March 31. For 1997, the fiscal
year ended February 28.
(2) On June 10, 1999 Martin Nash was appointed Chief Financial Officer of the
Company.
(3) The Company does not have Stock Appreciation Rights. All noted securities
are options.
(4) The noted Other Compensation includes cash contributions made by the
Company to purchase, on the open market, common shares in the Company for
the named executives' 401(k) accounts. Also included are amounts paid for
life insurance premiums and that portion of automobile leases attributed to
business use and, for Lois Crandell, amounts paid for disability insurance
premiums.
(5) An additional grant of 25,000 options, the exercise of which was contingent
upon the occurrence of a future event, was cancelled in the last completed
fiscal year. This grant is not included in the Summary Compensation Table.
OPTION/SAR GRANTS TABLE
The following table sets out stock options and stock appreciation rights
granted to each Named Executive Officer during the fiscal year of the Company
ended March 31, 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL EXERCISE ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS OR BASE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM
OPTIONS/SARS EMPLOYEES IN (CDN$/ EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR SECURITY) DATE 5% ($) 10% ($)
- ------------------------ -------------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gunter A. Hofmann, Ph.D. 35,200 12% $3.74 July 7/03 $69,450 $110,528
100,000 $4.45 Oct. 19/03 133,100 260,000
Lois J. Crandell 43,125 12% $3.74 July 7/03 85,086 135,413
100,000 $4.45 Oct. 19/03 133,100 260,000
Martin Nash 27,200 11% $3.40 July 7/08 105,808 208,866
100,000 $4.05 Oct. 14/08 333,000 728,000
</TABLE>
- ----------
(1) The Company does not have Stock Appreciation Rights. All noted securities
are options.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table sets forth information concerning each exercise of
stock options or tandem SARs and freestanding SARs during the last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options and SARs, provided on an aggregated basis:
40.
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT FISCAL
SECURITIES FISCAL YEAR END YEAR-END (CDN$)
ACQUIRED ON (#) EXERCISABLE/ EXERCISABLE/
NAME OF EXECUTIVE OFFICER EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE(1) UNEXERCISABLE($)(5)
- -------------------------------- ----------- ----------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Gunter A. Hofmann, Ph.D. -0- N/A 435,200(2) $837,292
360,200/75,000 $799,792/37,500
Lois J. Crandell -0- N/A 428,125(3) $628,331
353,125/75,000 $590,831/37,500
Martin Nash -0- N/A 249,200(4) $321,460
174,200/75,000 $253,960/67,500
</TABLE>
- ----------
(1) The Company does not have Stock Appreciation Rights. All noted securities
are options.
(2) 150,000 options with an exercise price of CDN$1.25; 20,000 options with an
exercise price of CDN$2.31; 35,000 options with an exercise price of
CDN$3.42; 25,000 options with an exercise price of CDN$4.24; 45,000 options
with an exercise price of CDN$4.62; 25,000 options with an exercise price
of CDN$2.92; 35,200 options with an exercise price of CDN$3.74; and 100,000
options with an exercise price of CDN$4.45.
(3) 100,000 options with an exercise price of CDN$1.25; 20,000 options with an
exercise price of CDN$2.31; 40,000 options with an exercise price of
CDN$4.24; 60,000 options with an exercise price of CDN$4.62; 40,000 options
with an exercise price of CDN$4.84; 25,000 options with an exercise price
of CDN$2.92; 43,125 options with an exercise price of CDN$3.74; and
$100,000 options with an exercise price of CDN$4.45.
(4) 20,000 options with an exercise price of CDN$2.00; 7,000 options with an
exercise price of CDN$3.30; 25,000 options with an exercise price of
CDN$3.85; 45,000 options with an exercise price of CDN$4.20; 25,000 options
with an exercise price of CDN$2.65; 27,200 options with an exercise price
of CDN$3.40; 100,000 options with an exercise price of CDN$4.05.
(5) The closing price of the company's common shares on the TSE was CDN$4.95 on
March 31, 1999. This price was used in the calculations reported in the
column "Value of Unexercised In-the-Money Options/SARs at Fiscal Year-end
(CDN$) Exercisable/Unexercisable."
COMPENSATION OF DIRECTORS
Outside directors of the Company are paid a fee of $1,000 per day for each
board or committee meeting a director attends in person; a director
participating telephonically is paid $500 per day for each such meeting. In
addition, each of the outside directors generally receives an annual grant of an
option to purchase the Company's common shares. In the last completed fiscal
year, each outside director was granted an option to purchase 25,000 shares of
the Company's common stock at CDN$ 5.70 per share. Inside directors do not
receive separate compensation for their participation in board or committee
meetings. The Company pays all reasonable expenses associated with directors'
attendance at, and participation in, board and committee meetings, and other
Company business to which a director attends.
As described in Note 14 to the Financial Statements, the Company paid legal
fees to the Law Firm of Catalyst corporate Finance Lawyers in Vancouver, British
Columbia, Canada, in the amount of US $93,778 in the year ended March 31, 1999.
James L. Heppell, a partner of that law firm, is a Director of the Company. The
Company also paid accounting and administrative fees to Wood & Associates of
Vancouver, British Columbia,
41.
<PAGE> 42
Canada, in the amount of US $26,735 in the year ended March 31,1999. Suzanne
Wood, the Principal of Wood & Associates, is a Director of the Company. For the
year ended March 31, 1999, the Company paid US $114,900 to a company where one
of the principals is an officer of the Company's French subsidiary.
In the fiscal year ended March 31, 1999, the Company paid $1,500 to Stan
Yakatan, a Director of the Company, for consulting services with respect to its
BTX Division. The Company also sold research-use equipment to Quanum
Biotechnologies, Inc., a company in which Mr. Takatan is the Chief Executive
Officer and Chairman of the Board, at the customary price the Company sells the
same or similar equipment to other similarly situated purchasers.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In January 1995, the Company entered into an employment agreement with Lois
J. Crandell, the Company's President and Chief Executive Officer, such
employment agreement has a one year term with automatic renewal unless 60 days
prior notice is provided. Such agreement was amended January 9,1996, March 1,
1997 and January 15, 1999 and pursuant to an amendment, Ms. Crandell receives an
annual salary of $220,000. Ms. Crandell is also eligible to receive an annual
bonus of up to 25% of her annual salary, payable within 90 days of the end of
the Company's fiscal year and the Company agreed to provide Ms. Crandell with
life insurance in the amount of $500,000.
In January 1995, the Company entered into an employment agreement with
Gunter A. Hofmann, Ph.D., the Company's Chief Scientific Officer and such
employment agreement has a one year term with automatic renewal unless 60 days
prior notice is provided. Such agreement was amended on January 9, 1996, March
1, 1997 and January 15, 1999 and pursuant to an amendment, Dr. Hofmann receives
an annual salary of $200,000. Dr. Hofmann is also eligible to receive an annual
bonus of up to 20% of his annual salary, payable within 90 days of the end of
the Company's fiscal year and the Company agreed to provide Dr. Hofmann with
life insurance in the amount of $500,000.
In January 1995, the Company entered into an employment agreement with
Martin Nash, the Company's Senior Vice President. Mr. Nash was also appointed as
the Company's Chief Financial Officer on June 10, 1999. Mr. Nash's employment
agreement has a one year term with automatic renewal unless 60 days prior notice
is provided.. Such agreement was amended on January 9, 1996, March 1, 1997 and
January 15, 1999 and pursuant to an amendment, Mr. Nash receives an annual
salary of $165,000. Mr. Nash is also eligible to receive an annual bonus of up
to 20% of his annual salary, payable within 90 days of the end of the Company's
fiscal year.
Upon termination of either Dr. Hofmann's employment, Ms. Crandell's
employment, or Mr. Nash's employment for the following reasons; (i) the Company
decides not to renew the employment agreement, (ii) the Company terminates the
employee or (iii) if without written consent of the employee, the Company
changes the employee's duties or responsibilities and the employee terminates
his or her employment with 6 months written notice, then the Company must pay to
the employee 2 months of his or her annual salary for each full year of service,
such payment to be for no shorter time period than for 6 months and the employee
shall be entitled to all other benefits that he or she would have been entitled
to as an employee. In addition, pursuant to the terms of the employment
agreements between the Company and Dr. Hofmann, Ms. Crandell and Mr. Nash, in
recognition of the fact that the employees require the use of a car in the
performance of their duties, the Company pays the portion of the lease payment,
the insurance, maintenance, and repair costs associated with business usage of a
car for the employees' sole use.
REPRICING OF OPTIONS/SARS
The Company did not adjust or amend the exercise price of stock options or
SARs previously awarded to the named executive officers at any time during the
last completed fiscal year. The Company does not have SARs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining the compensation
of the executive officers of the Company. The members of the Compensation
Committee during the last ended fiscal year are Stan Yakatan
42.
<PAGE> 43
(Chair), Gunter A. Hofmann, Gordon J. Politeski, and James L. Heppell. Gunter
Hofmann was the Chief Scientific Officer of the Company during the fiscal year.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation programs of the Company are designed to reward performance
and to be competitive with the compensation agreements of other biomedical
companies. The Compensation Committee of the Board of Directors of the Company
evaluates each executive officer position to establish skill requirements and
levels of responsibility. The Compensation Committee, after referring to
information from other corporations and public data, determines the compensation
for the executive officers.
Objectives
The primary objectives of the Company's executive compensation program are
to enable the Company to attract, motivate and retain qualified individuals and
to align their success with that of the Company's shareholders through the
achievement of strategic corporate objectives and the creation of shareholder
value. The level of compensation paid to each executive is based on the
executive's overall experience, responsibility and performance. Executive
officer compensation is composed of salary, bonuses and the opportunity to
receive options granted under the Plan.
Salary
Salary ranges are determined following a review of the market data for
similar positions in corporations of a comparable size and type of operations to
the Company. The salary for each executive officer is largely determined by the
terms of the officer's employment agreement with the Company.
Bonuses
The Company may provide annual incentive compensation to the executive
officers through bonus arrangements. Awards are contingent upon the achievement
of corporate and individual objectives determined by the Compensation Committee.
Stock Option Plan
The executive officers may be granted incentive stock options or
non-incentive stock options under the Plan.
Compensation of President and Chief Executive Officer
The Committee considers with particular care the compensation of the
Company's Chief Executive Officer, and recommends such compensation for Board
approval. Lois J. Crandell was the Company's President and Chief Executive
Officer for the year ended March 31, 1999. Ms. Crandell's compensation was
increased in January of 1999 from $172,500 to $220,000. Ms. Crandell received a
bonus of $43,125 in the year ended March 31, 1999 compared to no bonus in 1998.
Such increases in salary and bonus were based upon progress in achieving certain
of the Company's milestones, including the Ethicon, Inc. licensing deal in
October 1998.
COMPENSATION COMMITTEE
Stan Yakatan (Chair)
Gunter A. Hofmann
Gordon J. Politeski
James L. Heppell.
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on
the Company's Common Stock as listed on the Toronto Stock Exchange to two
indices: the S&P Super Cap Biotechnology Index and the AMEX Composite Index.
The total return for each of the Company's stock, the AMEX Composite Index and
the S&P Super Cap Biotechnology Index assumes the reinvestment of dividends,
although dividends have never been declared on the Company's Common Stock. The
S&P Super Cap Biotechnology Index tracks the aggregate price performance of 16
biotechnology firms on the S&P Super Cap Index, such index began on July 1,
1996. The AMEX Composite Index tracks the aggregate price performance of equity
securities of 300 of the largest traded companies in Canada, such index began
on December 29, 1995. On December 8, 1998, the Company listed its stock on the
American Stock Exchange. Since the Company's stock has been listed on the
Toronto Stock Exchange for a longer time, the following comparisons were
prepared using the Toronto Stock Exchange since they are more meaningful to
stockholders.
COMPARISON OF CUMULATIVE
TOTAL RETURN ON INVESTMENT
<TABLE>
<CAPTION>
Genetronics AMEX Index
Date Indexed Price Indexed Price
------- ------------- -------------
<S> <C> <C>
Dec-95 $100.00 $100.00
Dec-96 190.91 104.06
Dec-97 140.91 124.47
Dec-98 229.55 125.57
</TABLE>
<TABLE>
<CAPTION>
Genetronics S&P Biotechnology
Date Indexed Price Indexed Price
------- ------------- -------------
<S> <C> <C>
Dec-95 $100.00 $100.00
Dec-96 73.81 95.67
Dec-98 120.24 159.29
</TABLE>
43.
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 28, 1999 with respect
to (i) each stockholder known to the Company to be the beneficial owner of more
than five percent (5%) of the outstanding common stock of the Company, (ii) each
director, (iii) each Named Executive Officer and (iv) all directors and Named
Executive Officers of the Company as a group. Except as set forth below, each of
the named persons and members of the group has sole voting and investment power
with respect to the shares shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------- -------------------------------- -----------------------
Amount and Nature of
Beneficial Ownership of Common Percent of Class of
Beneficial Owner of Common Stock(1) Stock(2) Common Stock(2)
- -------------------------------------------------------------- -------------------------------- -----------------------
<S> <C> <C>
Johnson & Johnson Development Corporation
One Johnson & Johnson
Plaza, New Brunswick, New Jersey 2,242,611 10.4%
- -------------------------------------------------------------- -------------------------------- -----------------------
Gunter A. Hofmann 3,788,175(3) 16.9%
- -------------------------------------------------------------- -------------------------------- -----------------------
Lois J. Crandell 3,788,175(4) 16.9%
- -------------------------------------------------------------- -------------------------------- -----------------------
Martin Nash 554,661(5) 2.6%
- -------------------------------------------------------------- -------------------------------- -----------------------
James L. Heppell 150,500(6) *
- -------------------------------------------------------------- -------------------------------- -----------------------
Suzanne L. Wood 120,000(7) *
- -------------------------------------------------------------- -------------------------------- -----------------------
Stan Yakatan 266,400(8) 1.2%
- -------------------------------------------------------------- -------------------------------- -----------------------
Wayne Schnarr 85,000(9) *
- -------------------------------------------------------------- -------------------------------- -----------------------
Gordon Politeski 85,000(10) *
- -------------------------------------------------------------- -------------------------------- -----------------------
All Executive Officers and Directors as a group (11) persons 5,049,736 23.3%
- -------------------------------------------------------------- -------------------------------- -----------------------
</TABLE>
- ------------------
* less than 1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedule 13Ds filed with the Securities and
Exchange Commission (the "Commission"). Except as shown otherwise in the
table, the address of each stockholder listed is in care of the Company at
1119 Sorrento Valley Rd., San Diego, California 92121.
(2) Except as otherwise indicated in the footnotes of this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or
warrants exercisable within 60 days of May 28, 1999 are deemed outstanding
for computing the percentage of the person or entity holding such options
or warrants but are not deemed outstanding for computing the percentage of
any other person. Percentage of beneficial ownership is based upon
21,666,266 shares of the Company's Common Stock outstanding as of May 28,
1999.
(3) Includes 360,200 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998. Also includes 1,012,276 shares
owned by Lois J. Crandell, Dr. Hofmann's wife. Dr. Hofmann disclaims
beneficial ownership of Ms. Crandell's shares.
(4) Includes 353,125 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998. Also included 2,775,899 shares
owned by Gunter A Hofmann, Ms. Crandell's husband. Ms. Crandell disclaims
beneficial ownership of Dr. Hofmann's shares.
(5) Includes 174,200 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
(6) Includes 120,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998, 10,000 shares owned by Mr.
Heppell's wife, in which he disclaims beneficial ownership, 1,000 shares
owned by Free Spirit Investment Ltd., which is owned 50% by Mr. Heppell and
50% by his wife and 200 shares owned by Full Moon Law Corporation, which is
also owned 50% by Mr. Heppell and 50% by his wife
44.
<PAGE> 45
(7) Includes 100,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
(8) Includes 156,400 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
(9) Includes 85,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
(10) Includes 85,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
(11) Includes 331,994 shares of Common Stock issuable pursuant to options
exercisable within 60 days of May 28, 1998
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Note 14 to the Financial Statements, the Company paid legal
fees to the Law Firm of Catalyst corporate Finance Lawyers in Vancouver, British
Columbia, Canada, in the amount of US $93,778 in the year ended March 31, 1999.
James L. Heppell, a partner of that law firm, is a Director of the Company.
The Company also paid accounting and administrative fees to Wood &
Associates of Vancouver, British Columbia, Canada, in the amount of US $26,735
in the year ended March 31,1999. Suzanne Wood, the Principal of Wood &
Associates, is a Director of the Company. For the year ended March 31, 1999, the
Company paid US $114,900 to a company where one of the principals is an officer
of the Company's French subsidiary.
In the fiscal year ended March 31, 1999, the Company paid $1,500 to Stan
Yakatan, a Director of the Company for consulting services with respect to its
BTX Division. The Company also sold research-use equipment to Quanum
Biotechnologies, Inc., a company in which Mr. Yakatan is the Chief Executive
Officer and Chairman of the Board, at the customary price the Company sells the
same or similar equipment to other similarly situated purchasers.
Three individuals among the Company's officers and directors are related.
Lois Crandell (President, Chief Executive Officer and Director) and Gunter
Hofmann (Chairman and Chief Scientific Officer) are married. In addition, Markus
Hofmann (currently Controller) is the son of Gunter Hofmann and the stepson of
Lois Crandell. Except for these three individuals there are no family
relationships among officers or directors and employees.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................... F-1
Consolidated Balance Sheets as of March 31, 1999 and March 31, 1998............................. F-2
Consolidated Statements of Loss and Deficit for the periods ended March 31, 1999, March 31, 1998
and February 28, 1997...................................................................... F-3
Consolidated Statements of Changes in Financial Position for the periods ended March 31, 1999,
March 31, 1998, and February 28, 1997...................................................... F-4
Notes to Consolidated Financial Statements...................................................... F-5
</TABLE>
(a)(2) Index to Financial Statement Schedules
45.
<PAGE> 46
All schedules are omitted because they are not required, are not
applicable, or the information is included in the Financial Statements or Notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
(a)(3) Index to Exhibits
See Index to Exhibits beginning on page 26.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
The following management compensatory plans and arrangements are required
to be filed as exhibits to this Report on Form 10-K pursuant to Item 14(c):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
10.2 1995 Incentive Stock Option Plan (the "1995 Plan").(1)
10 Form of Nonstatutory Stock Option Agreement of Company pursuant to the 1995
Plan.(1)
10.4 Form of Incentive Stock Option Agreement of Company pursuant to the 1995
Plan.(1)
10.5 Amended 1997 Incentive Stock Option Plan (the "Amended 1997 Plan").(1)
10.6 Form of Nonstatutory Stock Option Agreement of Company pursuant to the
Amended 1997 Plan.(1)
10.4 Form of Incentive Stock Option Agreement of Company pursuant to the Amended
1997 Plan.(1)
10.5 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and Lois
Crandell.(1)
10.6 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and
Gunter A. Hofmann, Ph.D.(1)
10.7 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and
Martin Nash.(1)
10.8 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended, between the Company and Lois Crandell.
10.9 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended between the Company and Gunter A. Hofmann,
Ph.D.
10.10 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended, between the Company and Martin Nash.
10.11 401(k) Defined Contribution Plan of Company.(1)
10.12 Lease (sublease) between the Company (as sub-leasee), Genix Botek, Inc. (as
lessee) and Olen Property Corp (as landlord) dated April 7, 1998.(1)
10.13 Stock Purchase Agreement dated October 6, 1998 by and between the Company
and Johnson & Johnson Development Corporation
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 47
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference from the Form 20-F for the period ended February
28, 1998.
46.
<PAGE> 47
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 29th day of June, 1999.
GENETRONICS BIOMEDICAL LTD.
By: /s/ LOIS J. CRANDELL
------------------------------------
Lois J. Crandell
President,
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lois J. Crandell and Martin Nash, or any
of them, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Annual Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME POSITION DATE
------------------------------- --------------------------------------------- -------------
<S> <C> <C>
/s/ GUNTER A. HOFMANN Chairman of the Board June 29, 1999
- ---------------------------
Gunter A. Hofmann
/s/ LOIS J. CRANDELL President, Chief Executive Officer, and June 29, 1999
- --------------------------- Director (Principal Executive Officer)
Lois J. Crandell
/s/ MARTIN NASH Senior Vice President, Chief Financial June 29, 1999
- --------------------------- Officer, and Director (Principal Financial and
Martin Nash Accounting Officer)
/s/ JAMES L. HEPPELL Director June 29, 1999
- ---------------------------
James L. Heppell
Director June , 1999
- ---------------------------
Gordon Politeski
Director June , 1999
- ---------------------------
Wayne Schnarr
/s/ STAN YAKATAN Director June 29, 1999
- ---------------------------
Stan Yakatan
/s/ SUZANNE L. WOOD Director June 29, 1999
- ---------------------------
Suzanne L. Wood
</TABLE>
47.
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
10.2 1995 Incentive Stock Option Plan (the "1995 Plan").(1)
10.3 Form of Nonstatutory Stock Option Agreement of Company pursuant to the 1995
Plan.(1)
10.4 Form of Incentive Stock Option Agreement of Company pursuant to the 1995
Plan.(1)
10.5 Amended 1997 Incentive Stock Option Plan (the "Amended 1997 Plan").(1)
10.6 Form of Nonstatutory Stock Option Agreement of Company pursuant to the
Amended 1997 Plan.(1)
10.4 Form of Incentive Stock Option Agreement of Company pursuant to the Amended
1997 Plan.(1)
10.5 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and Lois
Crandell.(1)
10.6 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and
Gunter A. Hofmann, Ph.D.(1)
10.7 Employment agreement dated January 9, 1995, Amendment No. 1 dated January 9,
1996 and Amendment No. 2 dated March 1, 1997 between the Company and
Martin Nash. (1)
10.8 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended, between the Company and Lois Crandell.
10.9 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended between the Company and Gunter A. Hofmann,
Ph.D.
10.10 Amendment Number 3 dated January 15, 1999 to Employment Agreement dated
January 9, 1995, as amended, between the Company and Martin Nash.
10.11 401(k) Defined Contribution Plan of Company.(1)
10.12 Lease (sublease) between the Company (as sub-leasee), Genix Botek, Inc. (as
lessee) and Olen Property Corp (as landlord) dated April 7, 1998.(1)
10.13 Stock Purchase Agreement dated October 6, 1998 by and between the Company
and Johnson & Johnson Development Corporation.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 47.
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference from the Form 20-F for the period ended February
28, 1998.
<PAGE> 49
AUDITORS' REPORT
To the Directors of
GENETRONICS BIOMEDICAL LTD.
We have audited the consolidated balance sheets of GENETRONICS BIOMEDICAL LTD.
as at March 31, 1999 and 1998 and the consolidated statements of loss and
deficit and changes in financial position for the twelve month, thirteen month
and twelve month periods ended March 31, 1999 and 1998 and February 28, 1997,
respectively. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 1999
and 1998, and the results of its operations and the changes in its financial
position for the twelve month, thirteen month and twelve month periods ended
March 31, 1999 and 1998 and February 28, 1997, respectively, in accordance with
accounting principles generally accepted in Canada. As required by the Company
Act (British Columbia), we report that, in our opinion, these principles have
been applied on a consistent basis.
Vancouver, Canada,
May 3, 1999 [except for note 16
which is as of June 10, 1999]. Chartered Accountants
F-1
<PAGE> 50
GENETRONICS BIOMEDICAL LTD.
Incorporated under the laws of British Columbia
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at March 31 (In U.S. dollars)
1999 1998
$ $
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 6,189,284 6,521,990
Accounts receivable, net of allowance for
uncollectible accounts of $19,685
[1998 - $36,500] [note 3] 776,648 503,727
Inventories [note 4] 655,906 395,090
Prepaid expenses and other 6,095 4,954
----------- -----------
TOTAL CURRENT ASSETS 7,627,933 7,425,761
----------- -----------
Fixed assets [note 5] 1,177,393 1,035,314
Other assets [note 6] 1,002,318 781,812
----------- -----------
9,807,644 9,242,887
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued expenses [note 7] 1,377,443 972,537
Current portion of obligations under
capital leases [note 9] 45,892 20,349
----------- -----------
TOTAL CURRENT LIABILITIES 1,423,335 992,886
----------- -----------
Obligations under capital leases [note 9] 118,384 78,061
Deferred rent 9,564 23,909
----------- -----------
TOTAL LIABILITIES 1,551,283 1,094,856
----------- -----------
Commitments and contingencies [note 9]
SHAREHOLDERS' EQUITY
Share capital [note 8] 28,357,863 21,562,402
Cumulative translation adjustment (103,001) (19,707)
Deficit (19,998,501) (13,394,664)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,256,361 8,148,031
----------- -----------
9,807,644 9,242,887
=========== ===========
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
F-2.
<PAGE> 51
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
LOSS AND DEFICIT
<TABLE>
<CAPTION>
(In U.S. dollars)
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
----------- ------------- ------------
<S> <C> <C> <C>
REVENUE
Net sales [note 3] 3,434,105 3,097,198 3,040,734
License fee and milestone payments 4,500,000 -- --
Grant funding 354,135 128,069 38,856
Revenues under collaborative research
and development arrangements 33,048 6,025 8,583
Interest income 300,911 427,498 71,206
----------- ----------- ----------
8,622,199 3,658,790 3,159,379
----------- ----------- ----------
EXPENSES
Cost of sales 1,638,635 1,427,285 1,277,240
Research and development [note 10] 8,086,959 5,637,955 2,200,464
Selling, general and administrative 5,481,051 4,172,246 2,657,821
Interest expense 19,391 17,970 18,464
----------- ----------- ----------
15,226,036 11,255,456 6,153,989
----------- ----------- ----------
NET LOSS FOR THE PERIOD (6,603,837) (7,596,666) (2,994,610)
Deficit, beginning of period (13,394,664) (5,797,998) (2,803,388)
----------- ----------- ----------
DEFICIT, END OF PERIOD (19,998,501) (13,394,664) (5,797,998)
=========== =========== ==========
LOSS PER COMMON SHARE (0.33) (0.43) (0.24)
=========== =========== ==========
</TABLE>
See accompanying notes
F-3.
<PAGE> 52
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
(In U.S. dollars)
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
--------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period (6,603,837) (7,596,666) (2,994,610)
Items not involving cash:
Depreciation and amortization 410,268 246,258 165,542
Loss on disposal of capital assets 18,986 -- --
Changes in non-cash working capital items:
Accounts receivable (272,921) 237,390 (223,460)
Inventories (260,816) (2,372) 34,210
Prepaid expenses and other (1,141) (815) 3,926
Accounts payable and accrued expenses 404,906 329,206 72,271
Amount payable, joint venturer -- -- (65,541)
Deferred rent (14,345) (1,196) 17,212
--------- ---------- ------------
CASH USED IN OPERATING ACTIVITIES (6,318,900) (6,788,195) (2,990,450)
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of capital assets (504,068) (575,153) (436,716)
Decrease (increase) in other assets (287,771) (304,683) (225,116)
---------- ---------- ----------
CASH USED IN INVESTING ACTIVITIES (791,839) (879,836) (661,832)
========== ========== ==========
FINANCING ACTIVITIES
Increase in notes payable -- -- 500,000
Repayment of notes payable -- -- (500,000)
Obligations under capital leases 89,882 21,466 98,391
Payments on obligations under capital leases (24,016) (18,549) (17,762)
Issuance of common shares on exercise of
Special Warrants -- (2,346,485) --
Proceeds from issuance of Special Warrants - net -- -- 2,346,485
Proceeds from issuance of common shares - net 6,795,461 14,679,621 383,284
--------- ---------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 6,861,327 12,336,053 2,810,398
========== ========== ==========
Effect of exchange rate changes on cash (83,294) 14,361 3,136
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (332,706) 4,682,383 (838,748)
Cash and cash equivalents, beginning of period 6,521,990 1,839,607 2,678,355
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 6,189,284 6,521,990 1,839,607
========== ========== ==========
</TABLE>
See accompanying notes
F-4.
<PAGE> 53
1. NATURE OF BUSINESS
Genetronics Biomedical Ltd. carries out its business through its wholly-owned
subsidiaries, Genetronics, Inc. and Genetronics S.A. Through its BTX Instrument
Division, the Company develops, manufactures, and markets electroporation
instrumentation and accessories used by scientists and researchers to perform
genetic engineering techniques, such as cell fusion, gene transfer, cell
membrane research and genetic mapping in research laboratories worldwide.
Through its Drug Delivery Division, the Company is developing drug delivery
systems which are designed to use electroporation to enhance drug or gene
delivery in the areas of oncology, dermatology, gene therapy, cardiology and
transdermal drug delivery.
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. ACCOUNTING POLICIES
The Company prepares its accounts in accordance with accounting principles
generally accepted in Canada. A reconciliation of amounts presented in
accordance with United States accounting principles is detailed in note 15.
Because a precise determination of many assets and liabilities depends on future
events, the preparation of financial statements necessarily involves the use of
management's estimates and approximations. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements.
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 and Genetronics S.A., a
wholly owned subsidiary of Genetronics, Inc., a company incorporated in France.
The Company's 50% investment in a joint venture has been accounted for using
proportionate consolidation to October 15, 1996 [see note 10].
F-5.
<PAGE> 54
2. ACCOUNTING POLICIES (CONT'D.)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of 90 days
or less, when purchased, to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
CAPITAL ASSETS
Fixed assets are stated at cost and depreciated over the estimated useful lives
of the assets (five to seven years) using the straight-line method. Leasehold
improvements and equipment under capital leases are being amortized over the
shorter of the estimated useful lives of the assets or the term of the lease.
Patents are recorded at cost and amortized on the straight-line method over the
expected useful lives of the patents or 17 years, whichever is less. Cost is
comprised of the consideration paid for patents and related legal costs. If
management determines that development of products to which patent costs relate
is not reasonably certain or that costs exceed recoverable value, such costs are
charged to operations.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) and
replacement cost for raw materials and net realizable value for finished goods
and work in process.
FINANCIAL INSTRUMENTS
The fair values of the financial instruments approximates their carrying value
except as otherwise disclosed in the financial statements.
F-6.
<PAGE> 55
2. ACCOUNTING POLICIES (CONT'D.)
ADVERTISING COSTS
Advertising costs are expensed as incurred.
REVENUE RECOGNITION
Sales are recognized upon shipment of products. Revenue from licensing
arrangements are recognized when all the criteria in the agreement has been
fulfilled.
Revenues under collaborative research and development arrangements are not
refundable if research efforts are unsuccessful, and, accordingly, are recorded
as revenue as development activities are performed and expensed.
LOSS PER COMMON SHARE
Loss per common share has been calculated using the weighted average number of
common shares outstanding during the period. Fully diluted loss per share has
not been presented as the outstanding options and warrants are anti-dilutive.
INCOME TAXES
The Company uses the deferral method of income tax allocation in accounting for
income taxes.
RESEARCH AND DEVELOPMENT
Research costs are expensed in the period incurred. Development costs are
expensed in the period incurred unless the Company believes a development
project meets generally accepted accounting criteria for deferral and
amortization. No development costs have been deferred to date.
F-7.
<PAGE> 56
2. ACCOUNTING POLICIES (CONT'D.)
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is used as the reporting currency in these consolidated
financial statements. However, the non-consolidated accounts of the Company are
measured using the Canadian dollar as its functional currency. Assets and
liabilities of the Company are translated into U.S. dollars using current
exchange rates in effect at the balance sheet date and revenue and expense
accounts are translated using the weighted average exchange rate during the
period. Gains and losses resulting from this process are recorded in
shareholders' equity as an adjustment to the cumulative translation account.
The accounts of the Company's U.S. subsidiary, a self-sustaining entity, are
measured using the U.S. dollar as its functional currency. Any of its
transactions denominated in foreign currencies are translated into U.S. dollars
at the exchange rate in effect on the transaction date. At the balance sheet
date, monetary items denominated in foreign currencies are adjusted to reflect
the exchange rate in effect at that time. Gains and losses resulting from this
translation process are deferred and included in the cumulative foreign currency
translation adjustment in shareholders' equity. The accounts of the Company's
French subsidiary, an integrated entity, are recorded in French francs and
translated into U.S. dollars using the temporal method. Under this method,
monetary assets and liabilities are translated at the year-end exchange rates.
Non-monetary assets and liabilities are translated using historical rates of
exchange. Revenues and expenses are translated at the rates of exchange
prevailing on the dates such items are recognized in earnings. Exchange gains
and losses are included in income for the year.
GOVERNMENT ASSISTANCE
The Company receives non-refundable assistance under available government
programs. Government assistance towards current expenditures is recorded as
grant funding revenue in the period the related expenditure is incurred.
LEASES
Leases have been classified as either capital or operating leases. Leases which
transfer substantially all of the benefits and risks incidental to the ownership
of assets are accounted for as if there was an acquisition of an asset and
incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are expensed as
incurred.
F-8.
<PAGE> 57
3. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
At March 31, 1999, two customers accounted for approximately $235,000 [1998 --
$196,000] of total accounts receivable. Approximately 24%, 19% and 18% of net
sales were made to one customer for the year ended March 31, 1999, the thirteen
months ended March 31, 1998, and year ended February 28, 1997, respectively.
By an exclusive license and development agreement dated October 2, 1998, the
Company has granted the rights to its drug delivery technology to make, use and
sell oncology products as defined in the agreement. The agreement expires at the
expiration of certain patent rights covering the technology which at March 31,
1999 is in 2016. Pursuant to the agreement, during the year ended March 31,
1999, the Company received license fee and milestone payments from the licensee
in the amount of $4,500,000.
Credit is extended based on an evaluation of a customer's financial condition
and generally collateral is not required. To date, credit losses have not been
significant.
4. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
$ $
------- -------
<S> <C> <C>
Raw materials 401,634 139,157
Work in process 81,863 112,030
Finished goods 172,409 143,903
------- -------
655,906 395,090
======= =======
</TABLE>
F-9.
<PAGE> 58
5. FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------- ------------ ----------
<S> <C> <C> <C>
1999
Machinery, equipment and office furniture 1,284,112 487,230 796,882
Leasehold improvements 424,436 189,041 235,395
Equipment under capital leases 209,740 64,624 145,116
--------- ------- ---------
1,918,288 740,895 1,177,393
========= ======= =========
1998
Machinery, equipment and office furniture 1,103,800 416,553 687,247
Leasehold improvements 338,493 79,835 258,658
Equipment under capital leases 150,401 60,992 89,409
--------- ------- ---------
1,592,694 557,380 1,035,314
========= ======= =========
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
$ $
--------- -------
<S> <C> <C>
Patent costs, net 970,380 760,184
Other 31,938 21,628
--------- -------
1,002,318 781,812
========= =======
</TABLE>
Patent costs are net of accumulated amortization of $184,002 at March 31, 1999
[1998 - $116,737].
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1999 1998
$ $
--------- -------
<S> <C> <C>
Trade accounts payable 641,915 356,968
Accrued compensation 601,433 337,433
Accrued expenses 134,095 278,136
--------- -------
1,377,443 972,537
========= =======
</TABLE>
F-10.
<PAGE> 59
8. SHARE CAPITAL
AUTHORIZED
100,000,000 common shares without par value
100,000,000 Class A preferred shares without par value
ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
NUMBER OF AMOUNT OF
COMMON SHARES ISSUED CAPITAL
# $
------------- --------------
<S> <C> <C>
BALANCE, FEBRUARY 29, 1996 12,583,398 6,499,497
For cash
Pursuant to exercise of stock options 162,500 167,625
Pursuant to exercise of warrants 80,000 165,659
For settlement of debt [note 14] 22,476 50,000
---------- ---------
BALANCE, FEBRUARY 28, 1997 12,848,374 6,882,781
For cash
Pursuant to exercise of stock options 290,756 390,868
Pursuant to exercise of warrants 1,408,000 3,248,172
Issued pursuant to exercise of Special Warrants 1,268,000 2,781,515
For cash
Pursuant to issue and exercise of warrants 1,300,000 3,976,342
Pursuant to private placement 1,955,000 6,050,128
Share issue costs -- (1,767,404)
---------- ---------
BALANCE, MARCH 31, 1998 19,070,130 21,562,402
For cash
Pursuant to private placement 2,242,611 6,000,000
Pursuant to exercise of stock options 61,525 90,423
Pursuant to exercise of warrants 292,000 830,985
Share issue costs -- (125,947)
---------- ---------
BALANCE, MARCH 31, 1999 21,666,266 28,357,863
========== ==========
</TABLE>
F-11.
<PAGE> 60
8. SHARE CAPITAL (CONT'D.)
At March 31, 1999, the stated capital amount of the Company, as determined in
accordance with the provisions of the Company Act (British Columbia), is
$30,400,688 [1998 - $23,605,227].
SPECIAL WARRANTS
<TABLE>
<CAPTION>
NUMBER OF
SPECIAL WARRANTS AMOUNT
# $
---------------- ------
<S> <C> <C>
Balance, February 28, 1997 1,268,000 2,346,485
Converted into common shares upon exercise (1,268,000) (2,346,485)
---------- ----------
Balance, March 31, 1998 and 1999 -- --
========== ==========
</TABLE>
Pursuant to an Agency Agreement dated October 25, 1996, the Company issued
1,268,000 Special Warrants at Cdn. $3.00 each for a total consideration of
$2,781,515 (Cdn. $3,804,000) before deducting the agent's commission of $278,151
(Cdn. $380,400) and other estimated share issue costs. Each Special Warrant is
exchangeable into one common share, which were qualified for distribution by
final receipt for a prospectus dated April 16, 1997.
STOCK OPTIONS
During the period ended March 31, 1998 the shareholders approved the adoption of
a 1997 stock option plan which was amended by the directors during the year
ended March 31, 1999, which is subject to shareholder approval, whereby
6,400,000 common shares were reserved for issuance [1998 - 4,200,000]. The
directors have the discretion to specify the vesting terms at the time of grant.
As at March 31, 1999, 1,231,083 common shares are available for grant under the
option plan.
F-13.
<PAGE> 61
8. SHARE CAPITAL (CONT'D.)
The following table summarizes the stock options outstanding at March 31, 1999:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
# ($CDN.) EXPIRY DATE
--------- -------------- -----------
<S> <C> <C>
390,500 4.00 October 1, 1999 - September 10, 2007
350,000 1.25 January 3, 2000
110,000 1.43 April 24, 2000
150,500 2.25 December 14, 2000 - 2005
40,000 2.31 December 14, 2000
35,000 3.42 September 3, 2001
145,400 3.30 October 14, 2001 - 2006
65,000 4.24 January 13, 2002
105,000 4.62 January 26, 2002
186,500 3.71 April 8, 2002 - August 21, 2007
40,000 4.84 July 24, 2002
50,000 2.92 January 22, 2003
250,000 1.69 February 14, 2006
250,000 2.00 April 24, 2006
145,000 2.50 August 8, 2006 - January 29, 2008
92,500 3.85 January 13, 2007
115,000 4.20 January 26, 2007
35,000 4.50 May 21, 2007
32,500 4.40 July 24, 2007
80,000 3.05 November 24, 2007
95,000 3.20 January 23, 2008
157,500 2.65 December 4, 2008
390,411 3.40 July 7, 2003 - 2008
78,325 3.74 July 7, 2003
64,500 3.80 April 6, 2003 - 2008
422,500 4.05 May 21, 2003 - October 15, 2008
104,000 4.25 September 13, 2008
120,500 4.40 May 13, 2003 - 2008
200,000 4.45 October 19, 2003
19,000 5.35 March 25, 2009
112,500 5.50 December 3, 2003
222,000 5.70 February 4, 2009
----------
4,654,136
=========
</TABLE>
The above table includes stock options as described in note 14[c].
F-14.
<PAGE> 62
8. SHARE CAPITAL (CONT'D.)
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
<TABLE>
<CAPTION>
RANGE OF
NO. OF COMMON EXERCISE PRICE
SHARES ISSUABLE ($ CDN.)
--------------- --------------
<S> <C> <C>
Balance, February 29, 1996 1,535,000 1.25 - 2.31
Options granted 1,357,000 2.00 - 4.62
Options exercised (162,500) 1.25 - 1.40
Options cancelled (135,000) 1.25 - 3.80
---------
Balance, February 28, 1997 2,595,000 1.25 - 4.62
Options granted 1,331,150 2.65 - 4.84
Options exercised (290,756) 1.25 - 3.80
Options cancelled (568,344) 1.25 - 4.40
---------
Balance, March 31, 1998 3,067,050 1.25 - 4.84
Options granted 1,783,736 3.40 - 5.70
Options exercised (61,525) 1.25 - 3.71
Options cancelled (135,125) 1.25 - 5.70
---------
BALANCE, MARCH 31, 1999 4,654,136 1.25 - 5.70
==========
</TABLE>
WARRANTS
During the year ended February 29, 1996 the Company issued through a private
placement 1,380,000 units at Cdn. $2.50, each unit comprising one common share
and one warrant to purchase an additional share at a price of Cdn. $2.80 up to
November 29, 1996 and Cdn. $3.20 thereafter to May 30, 1997. During the year
ended February 28, 1997, warrants to purchase 80,000 common shares at Cdn. $2.80
per share were exercised. During the thirteen months ended March 31, 1998,
warrants to purchase the remaining 1,300,000 common shares at Cdn. $3.20 were
exercised.
In addition, in connection with the issuance of 1,955,000 common shares pursuant
to an agency agreement dated April 15, 1997, the Company granted the agent
warrants to acquire 200,000 common shares for Cdn. $4.30 per share until May 26,
1998. During the year ended March 31, 1999, the Company amended the terms of the
warrants by increasing the exercise price to Cdn. $4.73 and extending the expiry
date to November 30, 1998. These warrants were exercised during the year.
F-15.
<PAGE> 63
8. SHARE CAPITAL (CONT'D.)
SHAREHOLDER RIGHTS PLAN
In 1997, the shareholders approved the adoption of a Shareholder Rights Plan
(the "Rights Plan") to protect the Company's shareholders from unfair, abusive
or coercive take-over strategies. Under the Rights Plan, holders of common
shares are entitled to one share purchase right ("Right") for each common share
held. If any person or group makes a take-over bid, other than a bid permitted
under the plan or acquires 20% or more of the Company's outstanding common
shares without complying with the Rights Plan, each Right entitles the
registered holder thereof to purchase, in effect, $20 equivalent of common
shares of the Company at 50% of the prevailing market price.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
[a] The Company leases its facilities and certain motor vehicles under
operating lease agreements which expire up to 2004. The facilities lease
agreements require the Company to pay maintenance costs. Rent expense under
operating leases was as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
---------- ------------ -----------
<S> <C> <C> <C>
Rentals 277,906 209,066 135,757
======= ======= =======
At March 31, 1999, future minimum lease payments under non-cancellable operating leases are as follows:
$
-------
2000 284,236
2001 68,503
2002 36,868
2003 9,352
2004 6,235
-------
405,194
=======
</TABLE>
F-16.
<PAGE> 64
9. COMMITMENTS AND CONTINGENCIES (CONT'D.)
[b] At March 31, 1999 future minimum lease payments under non-cancellable
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
$
--------
<S> <C>
2000 67,172
2001 67,172
2002 59,573
2003 10,839
2004 4,070
-------
Total minimum lease payments 208,826
Amounts representing interest (approximately 15%) (44,550)
------
Present value of future minimum lease payments 164,276
Less amounts due in one year (45,892)
-------
118,384
=======
</TABLE>
[c] In accordance with the license and development agreement described in note
3, the Company is committed to fund certain research and development
activities based on a percentage of sales pursuant to the license agreement
subject to a minimum of $1,500,000 per annum.
F-17.
<PAGE> 65
9. COMMITMENTS AND CONTINGENCIES (CONT'D.)
CONTINGENCIES
[a] The Company may, from time to time, be subject to claims and legal
proceedings brought against them in the normal course of business. Such
matters are subject to many uncertainties. Management believes that
adequate provisions have been made in the accounts where required and the
ultimate resolution of such contingencies will not have a material adverse
effect on the financial position of the Company.
[b] The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect the
Company's ability to conduct normal business operations. It is not possible
to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties will be fully resolved.
10. JOINT VENTURE
On October 1, 1995, the Company commenced certain research and development
activities in a 50% owned joint venture, PharmaTronics LLC, with Pharma Patch
PLC. The purpose of the joint venture was to jointly pursue the development of
an electrical assist method for the transdermal delivery of drugs, using an
electrode patch.
The joint venture conducted research activities which were funded by capital
contributions of the Company and its joint venture partner. The joint venture
did not have any significant assets, liabilities or revenues. On November 15,
1995 Technical Chemicals and Products Inc. (TCPI) acquired the assets of Pharma
Patch PLC and became the new joint venture partner. On October 15, 1996, the
Company agreed with TCPI to dissolve the joint venture.
The Company's proportionate share of expenses of the joint venture for the
period March 1, 1996 to October 15, 1996 was $99,516, which was included in
research and development expenses.
F-18.
<PAGE> 66
11. INCOME TAXES
At March 31, 1999, the U.S subsidiary has U.S. federal and California income tax
net operating loss carryforwards of approximately $17,620,000 and $4,190,000,
respectively. The difference between the U.S. federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% limitation
of California loss carryforwards. The U.S. federal and California tax loss
carryforwards expire as follows:
<TABLE>
<CAPTION>
U.S. FEDERAL CALIFORNIA
$ $
------------ ----------
<S> <C> <C>
1999 -- 71,000
2000 -- 346,000
2001 -- 769,000
2002 -- 1,356,000
2003 -- 1,648,000
2007 46,000 --
2009 542,000 --
2010 1,816,000 --
2011 2,947,000 --
2012 6,184,000 --
2013 6,085,000 --
---------- ---------
17,620,000 4,190,000
========== =========
</TABLE>
The U.S subsidiary also has U.S. federal and California research tax credit
carryforwards of approximately $419,000 and $212,000, respectively, which will
begin to expire in 1999 unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, annual use of the
subsidiary's net operating loss and credit carryforwards may be limited because
of a cumulative change in ownership of more than 50% which occurred during 1993
and as a result of the reverse takeover which occurred in 1995. However, the
Company does not believe such limitations will have a material impact upon the
utilization of these carryforwards.
The French subsidiary has losses for French income tax purposes of approximately
$1,400,000 which will expire in 2004.
F-19.
<PAGE> 67
11. INCOME TAXES (CONT'D.)
The Company has non-capital losses for Canadian income tax purposes which may be
used to reduce future taxable income, expiring as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
2001 216,000
2002 322,000
2003 393,000
2004 602,000
2005 818,000
---------
2,351,000
=========
</TABLE>
In addition, the Company has unclaimed tax deductions of approximately
$1,060,000 related primarily to share issue costs available to reduce taxable
income of future years.
The income tax benefits of the operating loss and tax credit carryforwards have
not been recorded in the accounts as their realization is not virtually certain.
12. PENSION PLAN
In 1995, the U.S subsidiary adopted a 401 (k) Profit Sharing Plan covering
substantially all of its employees in the United States. The defined
contribution plan allows the employees to contribute a percentage of their
compensation each year. The Company currently matches 50% of the employees
contribution, up to 6% of annual compensation. The proceeds from contributions
are invested in common shares of the Company. The pension expense for the year
ended March 31, 1999 was $66,297 [thirteen months ended March 31, 1998 -
$44,911; year ended February 28, 1997 - $42,200].
F-20.
<PAGE> 68
13. SEGMENTED INFORMATION
The Company's reportable business segments include the BTX division and the Drug
delivery division [note 1]. 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.
The accounting policies of the segments are the same as those described in the
summary of accounting policies.
Substantially all of the Company's assets and operations are located in the
United States and predominantly all revenues are generated in the United States.
<TABLE>
<CAPTION>
BTX DRUG DELIVERY
DIVISION DIVISION TOTAL
$ $ $
-------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED MARCH 31, 1999
Reportable segment revenue 3,434,105 4,887,183 8,321,288
Add reconciling items
Interest income 300,911
--------- ----------- ---------
Total revenue 8,622,199
--------- ----------- ---------
Net results of reportable segment 366,386 (2,858,343) (2,491,957)
--------- ----------- ---------
Add (deduct) reconciling items
Interest income 300,911
General and administrative (4,393,400)
Interest expense (19,391)
---------
Net loss (6,603,837)
----------
</TABLE>
F-21
<PAGE> 69
13. SEGMENTED INFORMATION (CONT'D.)
<TABLE>
<CAPTION>
BTX DRUG DELIVERY
DIVISION DIVISION TOTAL
$ $ $
-------- ------------- ---------
13 MONTHS ENDED MARCH 31, 1998
<S> <C> <C> <C>
Reportable segment revenue 3,097,198 134,094 3,231,292
--------- ---------- ---------
Add reconciling items
Interest income 427,498
---------
Total revenue 3,658,790
---------
Net results of reportable segment 478,499 (5,282,338) (4,803,839)
--------- ---------- ---------
Add (deduct) reconciling items
Interest income 427,498
General and administrative (3,202,355)
Interest expense (17,970)
---------
Net loss (7,596,666)
=========
</TABLE>
<TABLE>
<CAPTION>
BTX DRUG DELIVERY
DIVISION DIVISION TOTAL
$ $ $
--------- ------------- -----------
<S> <C> <C> <C>
YEAR ENDED FEBRUARY 28, 1997
Reportable segment revenue 3,040,734 47,439 3,088,173
--------- ------------- -----------
Add reconciling items
Interest income 71,206
----------
Total revenue 3,159,379
----------
Net results of reportable segment 752,917 (2,043,877) (1,290,960)
--------- ------------- -----------
Add (deduct) reconciling items
Interest income 71,206
General and administrative (1,756,392)
Interest expense (18,464)
----------
Net loss (2,994,610)
==========
</TABLE>
F-22
<PAGE> 70
14. RELATED PARTY TRANSACTIONS
[a] The payments to parties not at arm's length include the following:
- legal fees paid to a law firm where one of the partners is a director
of the Company
- accounting and administration fees paid to a company where the
principal is a director of the Company
- rent and administration fees paid to a company where one of the
principals is an officer of the Company's French subsidiary, as
follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
--------- ------------ -----------
<S> <C> <C> <C>
Legal services 93,778 82,810 76,155
Accounting and administration 26,735 24,020 17,855
Rent and administration 114,900 -- --
========= ============ ===========
</TABLE>
[b] Included in accounts payable and accrued expenses are the following amounts
owed to the parties identified in note 14(a) which are payable under normal
trade terms:
<TABLE>
<CAPTION>
1999 1998
$ $
------------ -----------
<S> <C> <C>
Legal services and accounting and
administration 6,510 3,635
============ ===========
</TABLE>
[c] During the year ended February 28, 1997, the Company issued promissory
notes to an officer, shareholder and three directors (the "noteholders")
amounting to $500,000. The notes were interest bearing at a rate of 9.25%
per annum and repayable in January 1997. Prior to maturity the Company
repaid $450,000 of these loans and issued 22,476 common shares in
settlement of a $50,000 promissory note. The Company paid approximately
$14,500 of interest to the noteholders.
In addition, the Company issued to the noteholders options to acquire
70,000 common shares at various prices to Cdn. $3.42 expiring at various
dates to October 14, 2001.
F-23
<PAGE> 71
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
The Company prepares the consolidated financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). In
addition the Company provides supplementary descriptions of significant
differences between Canadian GAAP and those in the United States ("U.S. GAAP")
as follows:
[a] Under U.S. GAAP, the liability method is used in accounting for income
taxes pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS109). SFAS109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in
effect for the year in which the differences are expected to reverse.
Significant components of the Company's deferred tax assets as of March 31,
1999 and 1998 pursuant to U.S. GAAP are shown below. A valuation allowance
would be recognized to fully offset the deferred tax assets as of March 31,
1999 and 1998 as realization of such assets is uncertain.
<TABLE>
<CAPTION>
1999 1998
$ $
--------- ---------
<S> <C> <C>
Capitalized research expense 393,000 289,000
Net operating loss carryforwards 7,774,000 4,777,000
Research and development credits 557,000 299,000
Other - net 209,000 71,000
--------- ---------
Total deferred tax assets 8,933,000 5,436,000
Valuation allowance for deferred tax assets (8,933,000) (5,436,000)
--------- ---------
Net deferred tax assets -- --
========= =========
</TABLE>
[b] Under U.S. GAAP, non-cash items such as assets acquired under capital lease
are excluded from the statements of cash flows. Under Canadian GAAP, the
gross amount of non-cash items are included in the respective operating,
investing, or financing activities as applicable.
F-24
<PAGE> 72
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
[c] In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS128).
SFAS128 replaced the previously reported primary and fully diluted earnings
per share with basic and dilutive earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects
of options, warrants, and convertible securities. Dilutive earnings per
share are calculated in accordance with the treasury stock method and are
based on the weighted average number of common shares and dilutive common
share equivalents outstanding. For purposes of reconciling to U.S. GAAP,
all earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the SFAS128 requirements.
[d] Under U.S. GAAP, the Company's investment in its joint venture would have
been accounted for on an equity basis. This difference has no significant
impact on the Company's financial position or net loss for the year, from
that reported in these consolidated financial statements under Canadian
GAAP.
[e] The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB25) in accounting for its
employee stock options. Under APB25, because the exercise price of the
Company's options for common shares granted to employees is not less than
the fair market value of the underlying stock on the date of grant, no
compensation expense has been recognized.
[f] Under U.S. GAAP, stock based compensation to non-employees must be recorded
at the fair market value of the options granted. This compensation,
determined using a Black-Scholes pricing model, is expensed over the
vesting periods of each option grant. For purposes of reconciliation to
U.S. GAAP, the Company will record an additional compensation expense of
$431,000 [1998 - $148,000] over future vesting periods.
[g] Under Canadian GAAP, costs incurred in connection with the Company's
reverse takeover in fiscal 1995 have been presented as a charge against
shareholder's equity. For U.S. GAAP purposes, these costs totaling $86,644
must be charged to expense. Accordingly, the Company's deficit and share
capital for the periods presented have been increased by $86,644 for U.S.
GAAP purposes.
F-25
<PAGE> 73
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
The impact of significant variations to U.S. GAAP on the Consolidated Statements
of Loss are as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
----------- ----------- -----------
<S> <C> <C> <C>
Loss for the period, Canadian GAAP (6,603,837) (7,596,666) (2,994,610)
Adjustment for stock based compensation
- non-employees (546,700) (307,500) (335,500)
----------- ----------- -----------
Loss for the period, U.S. GAAP (7,150,537) (7,904,166) (3,330,110)
=========== =========== ===========
Unrealized losses on foreign currency translation (83,294) 14,361 3,135
----------- ----------- -----------
Comprehensive loss for the period, U.S. GAAP (7,233,831) (7,889,805) (3,376,975)
=========== =========== ===========
Loss per share, U.S. GAAP (0.35) (0.44) (0.26)
=========== =========== ===========
Weighted average number of shares,
U.S. GAAP 20,272,801 17,782,723 12,692,374
=========== =========== ===========
</TABLE>
F-26
<PAGE> 74
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation" (SFAS123), which also requires that the information be determined
as if the Company has accounted for its employee stock options granted in fiscal
periods beginning subsequent to December 1994 under the fair value method of
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes pricing model with the following weighted average
assumptions for the year ended March 31, 1999, the thirteen months ended March
31, 1998 and year ended February 28, 1997, respectively: risk free interest
rates of 5.2%, 5.8% and 6.8%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 0.68, 0.70 and 0.67; and
a weighted average expected life of the options of five, seven and one-half and
eight years.
The Black Scholes options valuation model was developed for use in estimating
the fair value of trade options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted-average fair value of options granted during the year ended March
31, 1999 was $Cdn. $4.79 [thirteen months ended March 31, 1998 - Cdn. $2.58;
year ended February 28, 1997 - Cdn. $2.41].
Supplemental disclosure of pro forma loss and loss per share is as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma loss, US GAAP (9,169,837) (9,257,666) (4,341,210)
Pro forma loss per share, US GAAP (0.45) (0.52) (0.34)
=========== =========== ===========
</TABLE>
F-27
<PAGE> 75
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
The impact of significant variations to U.S. GAAP on the Consolidated Balance
Sheet items are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
------------ ------------
<S> <C> <C>
Share capital 29,791,107 22,448,946
Deficit (21,431,745) (14,281,208)
============ ============
</TABLE>
The impact of significant variations to U.S. GAAP on the Consolidated Statement
of Cash Flow's cash flow items are as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
----------- ----------- -----------
<S> <C> <C> <C>
Cash used in operating activities,
Canadian GAAP and U.S. GAAP (6,603,837) (6,788,195) (2,990,450)
=========== =========== ===========
Cash used in investing activities,
Canadian GAAP (791,839) (879,636) (661,832)
Capital assets acquired by
capital loans 89,882 21,466 98,391
----------- ----------- -----------
Cash used in investing activities
U.S. GAAP (701,957) (858,370) (563,441)
=========== =========== ===========
Cash provided by financing activities,
Canadian GAAP 6,861,327 12,336,053 2,810,398
Increase in capital loans (89,882) (21,466) (98,391)
----------- ----------- -----------
Cash provided by financing activities,
U.S. GAAP 6,771,445 12,314,587 2,712,007
=========== =========== ===========
</TABLE>
F-28
<PAGE> 76
15. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
Supplemental disclosures of cash flow information is as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 FEBRUARY 28
1999 1998 1997
$ $ $
---------- ------------ ----------
<S> <C> <C> <C>
Interest paid during
the period 19,391 17,970 18,464
========== ============ ==========
</TABLE>
16. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company initiated a private placement of
Special Warrants and as of June 10, 1999, has received subscription agreements
for 4,187,500 Special Warrants for gross proceeds of $12,562,500 as part of the
total offering. Each Special Warrant entitles the holder to receive one common
share for no additional consideration.
F-29
<PAGE> 1
EXHIBIT 10.8
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT made as of the 15TH DAY OF
JANUARY, 1999, ("Amendment")
BETWEEN:
GENETRONICS, INC., a California Corporation having it's principle
place of business at 11199 Sorrento Valley Road, San Diego, California,
USA, 92121-1334 (the "Company")
AND:
LOIS J. CRANDELL, an individual residing at [__________________]
(the "Employee")
(the Company and the Employee are collectively, the "Parties")
WHEREAS:
A. The Company entered into an Employment Agreement with the Employee
dated January 9, 1995, and Amended January 9, 1996, and March. 1, 1998
(the "Agreement"); and
B. The parties wish to amend certain terms of the Agreement as set out
herein ("the Amendment!'),
THEREFORE in consideration of the recitals, the following
representations and covenants, the Parties agree on the following terms:
1. AMENDMENT TO THE AGREEMENT
Article 2, Section 2.1 is hereby amended in its entirety to read as
follows:
2.1 SALARY. For her services hereunder, the Employee shall
receive a Salary, payable in such regular intervals as shall be
determined by the Employer, which shall be at the rate of U.S. $220,000
per year ("Salary).
2. CONFIRMATION
Except as amended hereby, the Agreement continues in full force and
effect as of the date hereof.
This Amendment may be executed in as many counterparts as may be necessary and
by facsimile, each of such counterparts together will constitute one and the
same instrument and notwithstanding the date of execution will be deemed to bear
the date as of the day and the year first above written.
GENETRONICS, INC. EMPLOYEE
By: /s/ Gunter A. Hofmann By:/s/ Lois J. Crandell
------------------------- -----------------------
Gunter A. Hofmann Lois J. Crandell
Chairman and CSO
<PAGE> 1
EXHIBIT 10.9
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT made as of the 15TH DAY OF
JANUARY, 1999, ("Amendment")
BETWEEN:
GENETRONICS, INC., a California Corporation having it's principle
place of business at 11199 Sorrento Valley Road, San Diego, California,
USA, 92121-1334 (the "Company")
AND:
GUNTER A. HOFMANN, an individual residing at [___________________]
(the "Employee")
(the Company and the Employee are collectively, the "Parties")
WHEREAS:
A. The Company entered into an Employment Agreement with the Employee
dated January 9, 1995, and Amended January 9, 1996 and March 1, 1998,
(the "Agreement"); and
B. The parties wish to amend certain terms of the Agreement as set out
herein ("the Amendment"),
THEREFORE in consideration of the recitals, the following
representations and covenants, the Parties agree on the following terms:
1. AMENDMENT TO THE AGREEMENT
Article 2, Section 2.1 is hereby amended in its entirety to read as
follows:
2.1 SALARY. For his services hereunder, the Employee shall
receive a Salary, payable in such regular intervals as shall be
determined by the Employer, which shall be at the rate of U.S. $200,000
per year ("Salary").
2. CONFIRMATION
Except as amended hereby, the Agreement continues in full force and
effect as of the date hereof.
This Amendment may be executed in as many counterparts as may be necessary and
by facsimile, each of such counterparts together will constitute one and the
same instrument and notwithstanding the date of execution will be deemed to bear
the date as of the day and the year first above written.
GENETRONICS, INC. EMPLOYEE
By: /s/ Lois J. Crandell By: /s/ Gunter A. Hofmann
------------------------ -------------------------
Lois J. Crandell Gunter A. Hofmann
President and CEO
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT made effective as of the 15TH
DAY OF JANUARY. 1999, ("Amendment")
BETWEEN:
GENETRONICS, INC., a California Corporation having it's principle
place of business at 11199 Sorrento Valley Road, San Diego, California,
USA, 92121-1334 (the "Company")
AND:
MARTIN NASH, an individual residing at [___________________________]
(the "Employee")
(the Company and the Employee we collectively, the "Parties")
WHEREAS:
A. The Company entered into an Employment Agreement with the Employee
dated January 9, 1995, and Amended January 9, 1996, and March 1, 1998
(the "Agreement"); and
B. The parties wish to amend certain terms of the Agreement as set out
herein ("the Amendment"),
THEREFORE in consideration of the recitals, the following
representations and covenants, the Parties agree on the following terms:
1, AMENDMENT TO THE AGREEMENT
(a) Article 2, Section 2.1 is hereby amended in its entirety to read
as follows:
"2.1 SALARY. For his services hereunder, the Employee shall
receive a Salary, payable in such regular intervals as shall be
determined by the Employer, which shall be at the rate of U.S.
$165.000 per year ("Salary")."
(b) Article 3, Section 3.5 is hereby amended in its entirety to read
as follows:
"COMPANY CAR. The Employer recognizes that the Employee
requires the use of an automobile in the performance of his duties and
therefore agrees to furnish a leased sedan automobile at leasing costs
below a Lexus to the Employee for his sole use. The lease shall be in
the name of Employer, and the automobile will be replaced every three
(3) years upon request by the Employee. The Employer shall pay for
lease payments in addition to insurance, maintenance, and repair costs
associated with said automobile. Upon termination of the Employee's
employment with the Employer for any reason Employee will assume all
obligations of any/all automobile lease(s) entered into by the Company
for his benefit, and shall have said lease agreement and all
obligations thereunder assigned to him personally."
2. CONFIRMATION
Except as amended hereby, the Agreement continues in full force and
effect as of the date hereof.
This Amendment may be executed in as many counterparts as may be necessary and
by facsimile, each of such counterparts together will constitute one and the
same instrument and notwithstanding the date of execution will be deemed to bear
the date as of the day and the year first above written.
GENETRONICS, INC. EMPLOYEE
By: /s/ Lois J. Crandell By:/s/ Martin Nash,
---------------------- Senior Vice President
Lois J. Crandell, --------------------------
President & CEO Martin Nash,
Senior Vice President
<PAGE> 1
EXHIBIT 10.13
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") is made as of October
6, 1998 (the "Effective Date"), by and between GENETRONICS BIOMEDICAL LTD., a
corporation organized under the laws of British Columbia, Canada (the
"Company"), and JOHNSON & JOHNSON DEVELOPMENT CORPORATION, a New Jersey
corporation ("JJDC").
RECITAL:
WHEREAS, JJDC desires to purchase from the Company, and the Company
desires to sell to JJDC, shares of the Company's common stock, upon the terms
and subject to the conditions set forth herein and in connection with the
execution of (i) a separate Supply Agreement of even date herewith by and among
ETHICON, INC., a New Jersey corporation and affiliate of JJDC ("Ethicon"),
GENETRONICS, INC., a California corporation and a wholly-owned subsidiary of the
Company ("Sub"), and the Company (the "Supply Agreement"), and (ii) a separate
License Agreement of even date herewith by and among Ethicon, Sub and the
Company, attached hereto as Exhibit A (the "License Agreement" and, together
with the Supply Agreement, the "Ancillary Agreements").
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. Purchase and Sale of Share.
(a) Subject to the terms and conditions of this Agreement, at
the Closing (as defined hereinafter), the Company agrees to sell to JJDC and
JJDC agrees to purchase from the Company, that number of shares (the "Shares")
of the Company's common shares, no par value (the "Common Stock"), determined by
dividing six million dollars (U.S. $6,000,000) by the Share Price (as defined
below), for an aggregate purchase price (the "Purchase Price") of six million
dollars (U.S. $6,000,000). For the purposes hereof, "Share Price" shall mean the
arithmetic average of the closing prices of the Common Stock, as reported by The
Toronto Stock Exchange or such other principal securities exchange or market on
which the Common Stock is then traded, for the twenty (20) trading day period
immediately preceding the date hereof; provided, however, that in the event that
the Common Stock is not traded on any trading day during such period, then the
closing price of the Common Stock on such day shall be deemed to be the closing
price of the most recent previous trading day on which the Common Stock was
traded on such exchange or market.
(b) The purchase and sale of the Shares shall take place at
the offices of the Company, at 10:00 am. Eastern time on such date (the "Closing
Date") as the parties shall mutually agree (the "Closing").
(c) At the Closing, the Company will deliver to JJDC a
certificate or certificates, registered in JJDC's name, representing the Shares,
and JJDC shall deliver an amount equal to the Purchase Price to the Company by
certified check payable to the Company
1.
<PAGE> 2
or wire transfer of immediately available funds to an account specified by the
Company.
2. Representations and Warranties of the Company. The Company hereby represents
and warrants to JJDC that:
2.1 Organization and Corporate Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of British
Columbia, Canada, and is qualified to do business as a foreign corporation in
each jurisdiction where failure to qualify would have a Material Adverse Effect
on the Company. For purposes of this Agreement, a "Material Adverse Effect" or
"Material Adverse Change" shall mean, with respect to the Company, any material
adverse effect or change in the condition (financial or other), business,
results of operations, prospects, assets, liabilities or operations of the
Company or on the ability of the Company to consummate any of the transactions
contemplated hereby, or any material event or condition that would, with or
without the passage of time, constitute such a material adverse effect or
change. The Company has full power and authority to own its property, to carry
on its business as presently conducted and to carry out the transactions
contemplated hereby. The copies of the Certificate of Incorporation, Memorandum
and Articles and Bylaws of the Company, as amended to date, which have been
furnished to JJDC by the Company, are correct and complete.
2.2 Authorization. The Company has full power to execute, deliver and
perform this Agreement, the Ancillary Agreements and any other agreement entered
into by the Company in connection with this Agreement. Each such agreement has
been duly executed and delivered by the Company and is the legal, valid and,
assuming due execution by the other parties hereto and thereto, binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally, and to
general equitable principles. The execution, delivery and performance of this
Agreement, including the sale, issuance and delivery of the Shares, and the
Ancillary Agreements, and each other agreement entered into by the Company in
connection with this Agreement, has been duly authorized by all necessary
corporate action of the Company.
2.3 Capitalization. When issued in accordance with the terms of this
Agreement, the Shares will be duly authorized, validly issued and outstanding,
fully paid and nonassessable, free of any liens, encumbrances, preemptive rights
or rights of first refusal and, subject to reliance on the representations and
warranties of JJDC set forth in Section 3, will be issued in compliance with all
applicable Canadian provincial and U.S. federal and state securities laws. The
entire authorized capital of the Company consists of 200,000,000 shares
consisting of (i) 100,000,000 shares of Common Stock and (ii) 100,000,000 shares
of Class A Preferred Stock. The shares of Common Stock outstanding are duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
were issued in compliance with all applicable Canadian provincial and U.S.
federal and state securities laws. No shares of Common Stock or preferred stock
are held in the Company's treasury. There are no outstanding securities,
warrants, rights of first refusal, options or other rights to purchase or
acquire, or exchangeable for or convertible into, any shares of Common Stock or
preferred stock, except for options to purchase shares of Common Stock issued
pursuant to the Company's Stock Option Plan, and warrants to purchase up to
200,000 shares of Common Stock at Cdn. $4.73 per share. The Company has reserved
4,700,000 shares
2.
<PAGE> 3
of Common Stock under its stock option plans. There are no preemptive rights
with respect to the issuance or sale by the Company of any of its securities.
Upon consummation of the transactions contemplated hereby, JJDC will acquire
good and valid title to the Shares, free and clear of any encumbrances, liens,
claims, charges or assessments of any nature whatever.
2.4 Subsidiaries. The Company has no subsidiaries and no investments,
directly or indirectly, in any other corporation or business organization except
for Genetronics, Inc. The Company is not a participant in any joint venture or
partnership.
2.5 Financial Statements. The audited consolidated balance sheets and
statements of operations and cash flow for the Company included in the Public
Reports.(as defined below) (collectively, the "Financial Statements") are
complete and correct in all matters and respects, are in accordance with the
books and records of the Company, have been prepared in accordance with U.S. and
Canadian generally accepted accounting principles (as applicable), consistently
applied, and fairly present the financial position of the Company as of each
such date and the results of operations for each such period then ended.
2.6 Absence of Undisclosed Liabilities. Except as and to the extent
reflected or stated in the Financial Statements, the Company has no debts,
liabilities or obligations of any nature, whether accrued or absolute, assigned
or otherwise, or whether due or to become due, that would have been required to
be reflected in, reserved against or otherwise described in the Financial
Statements or in the notes thereto in accordance with GAAP which were not (a)
fully reflected in, reserved against or otherwise described therein or the notes
thereto or (b) incurred in the ordinary course of business consistent with past
practice since June 30, 1998.
2.7 Absence of Certain Developments. Since the date of the Company's
interim financial statements for the period ended June 30, 1998 (the "Interim
Statements"), (a) there has not been any Material Adverse Change with respect to
the Company, and (b) the Company has not entered into any transaction except in
the ordinary course of business and consistent with past practice, or entered
into any agreement (contingent or otherwise) to do so.
2.8 Title to Properties. Except as disclosed in the Financial
Statements, the Company has good and marketable title to, or has a valid
leasehold interest in, or a valid license for, all of the properties and assets
reflected in the Financial Statements, free and clear of all mortgages, security
interests, liens, restrictions or encumbrances other than (i) the lien of
current taxes not yet due and payable and (ii) possible minor liens and
encumbrances which do not in any case, individually or in the aggregate,
materially detract from the value of the property subject thereto or materially
impair the operations of the Company, would not represent a Material Adverse
Change, and which have not arisen otherwise than in the ordinary course of
business.
2.9 Tax Matters.
(a) All taxes, including, without limitation, income, excise,
property, sales, transfer, use, franchise, payroll, employees' income
withholding and social security taxes imposed or assessed by the United States
or by any foreign country or by any state, municipality, subdivision or
instrumentality of the United States or of any foreign country, or by any other
taxing authority, which are due or payable by the Company, and all interest,
penalties and
3.
<PAGE> 4
additions thereon, whether disputed or not, have been paid in full; all tax
returns or other documents required to be filed in connection therewith have
been accurately prepared and duly and timely filed; and the Company is not the
beneficiary of any extension of time within which to file any such returns. The
Company has not been delinquent in the payment of any foreign or domestic tax,
assessment or governmental charge or deposit and has no tax deficiency or claim
outstanding, assessed or, to the best of its knowledge, proposed against it, and
there is no basis for any such deficiency or claim. No issues have been raised
(or are currently pending) by the U.S. Internal Revenue Service or Revenue
Canada or any other taxing authority in connection with any of the returns and
reports referred to above, and no waivers of statutes of limitations have been
given or requested with respect to the Company in connection therewith. The
provisions for taxes in the Financial Statements are sufficient for the payment
of all accrued and unpaid federal, provincial, state, county and local taxes of
the Company.
(b) The Company is not a party to or bound by any tax
indemnity, tax sharing or tax allocation agreement.
(c) The Company is not presently a member nor has it ever been
a member of an affiliated group of corporations within the meaning of Section
1504 of the Internal Revenue Code of which it is or was not the parent company.
2.10 No Defaults. The Company is not in violation of any term or
provision of (a) its Certificate of Incorporation, Memorandum and Articles or
Bylaws, as amended to date, or in any material respect any note, indenture,
mortgage, lease, agreement, contract, purchase order or other material
instrument, document or agreement to which the Company is a party or by which it
or any of its properties or assets is bound or affected or (b) any order, writ,
injunction or decree of any court or any federal, provincial, state, municipal
or other governmental department, authority, commission, board, bureau, agency
or instrumentality, domestic or foreign. There exists no condition, event or act
which constitutes, or which after notice, lapse of time or both, would
constitute a material default under any of the foregoing.
2.11 Intellectual Property. The Company owns or possesses sufficient
legal rights to all material patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights, licenses, inventions
and processes necessary for the conduct of its business as now conducted, and as
proposed to be conducted, without conflict with or infringement of the rights of
others. There are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity,
which would be material to the Company's business as conducted or, to the best
of the Company's knowledge, as proposed to be conducted. The Company has not
received any communications alleging, nor is the Company aware, to the best of
its knowledge, of any basis for such allegation, that the Company has violated,
or by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, tradenames, copyrights or trade secrets or other
proprietary rights of any other person or entity. No other firm, corporation,
association or person (i) has notified the Company that it is claiming any
ownership of or right to use any of the Company's patents, trademarks, service
marks, tradenames, copyrights or trade secrets or other proprietary rights, or
(ii) to the best of the Company's knowledge, is infringing
4.
<PAGE> 5
upon any such patents, trademarks, service marks, tradenames, copyrights or
trade secrets or other proprietary rights. The Company is not aware, to the best
of its knowledge, that any of its employees is obligated under any contract
(including, licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company or that would conflict with the
Company's business as presently conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business as proposed, will, to
the best of the Company's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees are now obligated. Each
employee of or consultant to the Company with access to confidential or
proprietary information has executed a proprietary information agreement
obligating such employee or consultant to hold all such information in
confidence. The Company does not believe, to the best of its knowledge, that it
is or will be necessary to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their employment by the
Company.
2.12 Effect of Transaction. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby by the Company, and
compliance with the provisions hereof by the Company, do not and will not, with
or without the passage of time or the giving of notice or both, (a) violate any
provision of law, statute, rule or regulation or any ruling, writ, injunction,
order, judgment or decree of any court, administrative agency or other
governmental body applicable to the Company, or (b) conflict with or result in
any breach of any of the terms, conditions or provisions of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company, under the
Certificate of Incorporation, Memorandum or Articles or Bylaws, as amended to
date, of the Company or any material note, indenture, mortgage, lease,
agreement, contract, purchase order or other instrument, document or agreement
to which the Company is a party or by which it or any of its properties or
assets is bound or affected, except in any case where such occurrence would not
have a Material Adverse Effect on the Company.
2.13 No Governmental Consent or Approval Required. Based in part on the
representations made by JJDC in Section 3 of this Agreement, no authorization,
consent, approval or other order of, declaration to, or registration,
qualification, designation or filing with, any federal, provincial, state or
local governmental agency or body is required for or in connection with the
valid and lawful authorization, execution and delivery by the Company of this
Agreement, the Ancillary Agreements or any other agreement entered into by the
Company in connection with this Agreement, and the consummation of the
transactions contemplated hereby or thereby, or for or in connection with the
valid and lawful authorization, issuance, sale and delivery of the Shares, other
than the qualification (or taking of such action as may be necessary to secure
an exemption from qualification if available) of the offer and sale of the
Shares under the applicable state and provincial securities laws, which filings
and qualifications, if required, will be accomplished in a timely manner so as
to comply with such qualification or exemption from qualification requirements.
2.14 Litigation. Except as disclosed in the Interim Statements, there
is no (a) claim,
5.
<PAGE> 6
arbitration, action, suit, proceeding or investigation at law or in equity or by
or before any governmental instrumentality or other agency pending, or to the
best knowledge of the Company, threatened against the Company, or (b) judgment,
decree, injunction or order of any court, governmental department, commission,
agency, instrumentality or arbitrator against the Company, nor, to the best
knowledge of the Company, does there exist any basis therefor.
2.15 Securities Laws. Assuming that JJDC's representations and
warranties contained in Section 3 of this Agreement are true and correct, the
offer, issuance and sale of the Shares are and will be exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the "1933 Act"), and of the Canadian Act (as defined hereinafter),
and have been registered or qualified (or are exempt from registration,
qualification and prospectus filing requirements) under the registration,
permit, qualification or prospectus filing requirements of all applicable
provincial and state securities laws.
2.16 Business. The Company has complied in all material respects with
all federal, provincial, state, local or foreign laws, ordinances, regulations
or orders applicable to the business of the Company as presently or previously
conducted, or as proposed to be conducted. The Company has all material federal,
provincial, state, local and foreign governmental licenses and permits that are
required for the conduct of its business presently or previously conducted by
the Company, which licenses and permits are in full force and effect, and no
violations are outstanding or uncured with respect to any such licenses or
permits and no proceeding is pending or, to the best knowledge of the Company,
threatened to revoke or limit any thereof.
2.17 Brokerage. There are no claims for brokerage commissions or
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement made by or on behalf of
the Company and the Company agrees to indemnify and hold JJDC harmless against
any damages incurred as a result of any such claim.
2.18 Insurance. The Company maintains in full force such types and
amounts of insurance issued by issuers of recognized responsibility insuring the
Company, with respect to its liability, workers' compensation, business and
properties, in such amounts and against such losses and risks as are adequate
against risks usually insured against by Persons (as hereinafter defined)
operating similar businesses and properties.
2.19 Public Reports. The Company has provided to JJDC true and complete
copies of all reports, schedules, forms, statements and other documents (the
"Public Reports") filed by the Company with (i) the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the British Columbia
Securities Commission (the "BCSC") under the Securities Act (British Columbia)
(the "British Columbia Act"), and (iii) the Ontario Securities Commission (the
"OSC" and, together with the BCSC, the "Canadian SC") under the Securities Act
(Ontario) (the "Ontario Act" and, together with the British Columbia Act, the
"Canadian Act"), since December 31, 1994. The Public Reports include all the
reports the Company has been required to file under the Exchange Act or the
Canadian Act since that date. As of their respective dates, (i) the Public
Reports complied in all material respects with the requirements of the Exchange
Act and the Canadian Act, as applicable, and the rules and regulations
promulgated thereunder, and (ii) none of the Public Reports contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the
6.
<PAGE> 7
statements therein not misleading.
2.20 Investment Company. The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and will
not, as a result of the transactions contemplated hereby, become an "investment
company."
2.21 Registration Rights. Except as set forth herein, the Company is
not under any contractual obligation to register any of its currently
outstanding securities or any of its securities that may hereafter be issued.
2.22 Disclosure. The Company has provided JJDC with all the information
that it has requested for deciding whether to purchase the Shares at the
Closing. Neither the Financial Statements, this Agreement, nor any other written
document, certificate, instrument or statement furnished or made available in
connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein not misleading.
2.23 Employees. There are no controversies or labor troubles pending
or, to the best knowledge of the Company, threatened between the Company and its
employees. JJDC will not incur through consummation of any of the transactions
contemplated by the Agreement any liability in respect of employees of the
Company or any of its employee benefit plans.
3. Representations and Warranties and Other Agreements of JJDC.
3.1 Representations and Warranties. JJDC hereby represents and warrants
to the Company that:
a. Authorization. JJDC has full power and authority to
execute, deliver and perform this Agreement and to purchase the Shares. This
Agreement has been duly executed and delivered by JJDC and, assuming due
execution by the Company hereto, this Agreement constitutes the valid and
legally binding obligation of JJDC, enforceable against JJDC in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally, and to
general equitable principles.
b. Purchase Entirely for Own Account. The Shares to be
received by JJDC will be acquired for investment for JJDC's own account, not as
a nominee or agent and not with a view to the distribution of any part thereof.
JJDC has no present intention of selling, granting any participation in, or
otherwise distributing the Shares. JJDC does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer, or grant
participation to such person or to any third person, with respect to any of the
Shares.
c. Restrictions on Disposition. JJDC covenants that in no
event will it dispose of any of the Shares (other than pursuant to Rule 144
promulgated under the 1933 Act ("Rule 144") or outside the United States in
accordance with Regulation S under the 1933 Act or pursuant to a registration
statement filed with the SEC pursuant to the 1933 Act) unless and until (i) JJDC
shall have notified the Company of the proposed disposition and shall have
furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and
7.
<PAGE> 8
(ii) if requested by the Company, JJDC shall have furnished the Company with an
opinion of JJDC's counsel, reasonably satisfactory in form and substance to the
Company and the Company's counsel, to the effect that (a) such disposition will
not require registration under the 1933 Act or (b) appropriate action necessary
for compliance with the 1933 Act and any applicable state, provincial, local or
foreign law has been taken. The restrictions on transfer imposed by this Section
3.1(c) shall cease and terminate as to the Shares when: (i) such Shares shall
have been effectively registered under the 1933 Act and sold by the holder
thereof in accordance with such registration, or (ii) an opinion of the kind
described in the preceding sentence states that all future transfers of such
Shares by the holder thereof would be exempt from registration under the 1933
Act. Each certificate evidencing the Shares shall bear an appropriate
restrictive legend as set forth in Section 3.3 below, except that such
certificate shall not be required to bear such legend after a transfer thereof
if the transfer was made in compliance with Rule 144 or Rule 904 of Regulation S
under the 1933 Act or pursuant to a registration statement or, if the opinion of
counsel referred to above is issued and provides that such legend is not
required in order to establish compliance with any provisions of the 1933 Act.
d. Receipt of Information. JJDC has been furnished access to
the business records of the Company and all such additional information and
documents as JJDC has requested and has been afforded an opportunity to ask
questions of and receive answers from representatives of the Company concerning
the terms and conditions of this Agreement and the purchase of the Shares.
e. Brokerage. There are no claims for brokerage commissions or
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of JJDC, and JJDC agrees to indemnify and hold the Company harmless
against any damages incurred as a result of any such claims.
f. Organization and Corporate Power. JJDC is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New Jersey.
g. Investment Experience. JJDC acknowledges that it can bear
the economic risk of its investment and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Shares. JJDC also represents that it has not been
organized solely for the purpose of acquiring the Shares.
h. Accredited Investor. JJDC is an "Accredited Investor"
within the meaning of 501 of Regulation D promulgated under the 1933 Act or a
"Qualified Institutional Buyer" within the meaning of 144A promulgated under the
1933 Act.
3.2 Further Provisions Regarding Disposition.
a. Transfer to Affiliates. Notwithstanding the provisions of
Section 3.1(c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by JJDC of the Shares to a subsidiary, shareholder or
Affiliate of JJDC, if the transferee agrees in writing to be subject to the
terms hereof to the same extent as if such transferee were JJDC hereunder.
b. New Certificates. Whenever the restrictions imposed by this
Section 3.1(c)
8.
<PAGE> 9
shall terminate as herein provided, the holder of the Shares as to which such
restrictions have terminated shall be entitled to receive from the Company,
without expense, one or more new certificates not bearing restrictive legends
and not containing any reference to the restrictions imposed by this Agreement.
3.3 Legend. It is understood that, subject to Sections 3.1(c) and
3.2(b), the certificates evidencing the Shares shall bear substantially the
following legends:
(a) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT OR OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF
REGULATION S UNDER SUCH ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO A HOLD PERIOD AND MAY NOT BE TRADED IN BRITISH COLUMBIA UNTIL [four
months from closing] EXCEPT AS PERMITTED BY THE SECURITIES ACT (BRITISH
COLUMBIA) AND THE RULES AND REGULATIONS MADE THEREUNDER. DELIVERY OF THIS
CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON
STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE BEARING NO LEGEND MAY BE OBTAINED
FROM THE COMPANY'S TRANSFER AGENT UPON DELIVERY OF A DECLARATION IN THE FORM
ATTACHED HERETO AS SCHEDULE "A".
(b) Any legend required by the laws of any other applicable
jurisdiction.
4. Conditions of JJDC's obligations at Closing. The obligations of JJDC
to purchase Shares at the Closing are subject to the fulfillment on or prior to
the Closing of each of the following conditions, any of which may be waived by
JJDC:
(a) Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true in all material
respects (provided that to the extent any representation or warranty has a
materiality qualification it shall not be further qualified by the use of the
word material in this Section 4.1) on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date.
(b) Performance. The Company shall have performed and complied
with all agreements, obligations, and conditions contained in this Agreement
that are required to be performed or complied with by it on or before the
Closing.
(c) Qualifications. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States,
Canada or of any province or state that are required in connection with the
lawful issuance and sale of the Shares to JJDC pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
9.
<PAGE> 10
(d) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to JJDC and JJDC's counsel, and JJDC shall have received all such
counterpart original and certified or other copies of such documents as JJDC may
reasonably request.
(e) Opinion of Company Counsel. JJDC shall have received from
Catalyst Corporate Finance Lawyers and Cooley Godward LLP, counsel for the
Company, opinions addressed to JJDC covering the matters set forth in Sections
2.1, 2.2, 2.3 (as to the due authorization, valid issuance, full payment and
non-accessibility of the Shares), 2.12, 2.13, 2.15, and 2.20 hereof.
(f) Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to JJDC at the Closing a certificate certifying that (i)
the representations and warranties of the Company contained in Section 2 are
true in all material respects (provided that to the extent any representation or
warranty has a materiality qualification it shall not be further qualified by
the use of the word material in this Section 4.1(f)), (ii) the Company has
performed and complied in all material respects with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing, and (iii) there has
been no Material Adverse Change in the Company since the date of the Interim
Statements.
(g) Required Consents. All waiting periods applicable to the
Closing under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended (including any extension thereof by reason of a request for additional
information) shall have expired or been terminated and no action shall have been
instituted, or shall be threatened or pending, by the United States Justice
Department (the "DOJ") or the Federal Trade Commission (the "FTC") challenging
or seeking to enjoin the consummation of the transactions contemplated at the
Closing, which action shall not have been withdrawn or terminated.
(h) TSE Listing. The Shares shall have been approved for
conditional listing on The Toronto Stock Exchange, subject to the requirements
in the notice of issuance which is attached hereto as Exhibit B.
5. Conditions of the Company's Obligations at Closing. The obligations of the
Company under Section 1 of this Agreement are subject to the fulfillment on or
prior to the Closing of each of the following conditions, any of which may be
waived by the Company:
5.1 Representations and Warranties. The representations and warranties
of JJDC contained in Section 3 shall be true in all material respects (provided
that to the extent any representation or warranty has a materiality
qualification it shall not be further qualified by the use of the word material
in this Section 5.1) on and as of the date of the Closing with the same effect
as though such representations and warranties had been made on and as of the
date of the Closing.
5.2. JJDC shall have performed and complied in all material respects
(provided that to the extent any representation or warranty has a materiality
qualification it shall not be further
10.
<PAGE> 11
qualified by the use of the word material in this Section 5.2) with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
5.3 Qualifications. All material authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States,
Canada or of any province or state that are required in connection with the
lawful issuance and sale of the Shares at the Closing to JJDC pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
date of the Closing.
6. Registration of Shares.
6.1 Definitions. Unless the context otherwise requires, the terms
defined in this Section 6 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined.
"Board" means the Board of Directors of the Company.
"Holder" of any security means the record or beneficial owner
of such security or any permitted assignee thereof.
"Holders of a Majority of the Registrable Securities" means
the Person or Persons who are the Holders of greater than 50% of the shares of
Registrable Securities then outstanding.
"Person" means any natural person, corporation, trust,
association, company, partnership, joint venture or other entity or any
government, governmental agency, instrumentality or political subdivision.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the 1933 Act, and the declaration for ordering of the
effectiveness of such registration statement.
"Registrable Securities" means (i) the shares of Common Stock
of the Company sold pursuant to this Agreement and (ii) any Common Stock issued
or issuable with respect to the Common Stock referred to in clause (i) above by
way of a stock dividend or stock split or in connection with a combination of
shares, reclassification, recapitalization, merger or consolidation or
reorganization; provided, however that such shares of Common Stock shall only be
treated as Registrable Securities if and so long as they have not been (x) sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (y) sold in a transaction exempt from the
registration and prospectus delivery requirements of the 1933 Act pursuant to
Rule 144 or Rule 904 of Regulation S thereunder so that all the transfer
registrations and restrictive legends with respect to such Common Stock are
removed upon the consummation of such sale and the Company receives either (x)
an opinion of counsel for the Company (with a copy to the seller of such Common
Stock), which shall be in form and content, reasonably satisfactory to the
Company, to the effect that such Common Stock in the hands of the purchaser is
freely transferable without restriction or registration under the 1933 Act in
any public or private transaction or, (y) in the event of a sale outside the
United States, upon the delivery of a declaration in the form attached hereto as
Schedule "A".
11.
<PAGE> 12
"Registrable Securities then outstanding" means the number of
shares of Common Stock which are Registrable Securities and (i) are then issued
and outstanding or (ii) are then issuable pursuant to the exercise or conversion
of then outstanding and then exercisable options, warrants or convertible
securities.
6.2 Required Registration.
(a) Pursuant to the terms and subject to the conditions
hereof, if at any time after six (6) months from the date hereof, the Company
shall receive a written request therefor from the Holders of at least 30 percent
of the Registrable Securities then outstanding, the Company agrees to prepare
and file promptly a registration statement under the 1933 Act covering the
shares of Registrable Securities which are the subject of such request and
agrees to use its best efforts to cause such registration statement to become
effective as expeditiously as possible. Upon the receipt of such request, the
Company agrees to give prompt written notice to all Holders of Registrable
Securities that such registration is to be effected. The Company agrees to
include in such registration statement such shares of Registrable Securities for
which it has received written request to register such shares by the Holders
thereof within twenty (20) days after the receipt by the Holders of written
notice from the Company.
(b) The Company shall be obligated to prepare, file and cause
to become effective only two registration statements pursuant to this Section
6.2. A registration required to be effected by the Company pursuant to this
Section 6.2 shall not be deemed to have been effected (i) unless a registration
statement with respect thereto has become effective, (ii) if, after it has
become effective, such registration is interfered with by any stop order,
injunction, or other order or requirement of the SEC or other governmental
agency or court, for any reason not attributable to the Holders initiating the
registration request hereunder (the "Initiating Holders") with respect to such
registration statement, and has not thereafter become effective or (iii) if the
conditions to closing specified in the underwriting agreement, if any, entered
into in connection with such registration are not satisfied or waived, other
than by reason of a failure on the part of the Initiating Holders with respect
to such registration statement.
(c) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they agree to provide the Company with the name of the managing underwriter or
underwriters (the "managing underwriter") that a majority interest of the
Initiating Holders propose to employ, as part of their request made pursuant to
this Section 6.2, and the Company agrees to include such information in its
written notice referred to in Section 6.2(a). In such event, the right of any
Holder to registration pursuant to this Section 6.2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by the Holders of a Majority of the Registrable Securities initiating
such request for registration and such Holder). All Holders proposing to
distribute their securities through such underwriting agree to enter into
(together with the Company) an underwriting agreement with the managing
underwriter or underwriters elected for such underwriting, in the manner set
forth above, provided that such underwriting agreement is in customary form and
is reasonably acceptable to the Holders of a majority of the shares of
Registrable Securities to be included in such registration.
12.
<PAGE> 13
(d) Notwithstanding the foregoing, if the managing underwriter
of an underwritten distribution advises the Company and the Holders of
Registrable Securities participating in such registration in writing that in its
good faith judgment the number of shares of Registrable Securities and the other
securities requested to be included in such registration exceeds the number of
shares of Registrable Securities and the other securities which can be sold in
such offering, then (i) the other securities so requested to be included in such
registration shall initially be reduced and the number of shares of Registrable
Securities so requested to be included in such registration shall subsequently
be reduced, together to that number of shares which in the good faith judgment
of the managing underwriter can be sold in such offering and (ii) the reduced
number of Registrable Securities to be included in the underwriting shall be
allocated pro rata among all Holders of Registrable Securities participating in
such registration. Those Registrable Securities which are excluded from the
underwriting by reason of the managing underwriter's marketing limitation shall
not be included in such registration and shall be withheld from the market by
the Holders thereof for a period, not in excess of 120 days, which the managing
underwriter reasonably determines is necessary to effect the underwritten public
offering.
(e) Without the prior written consent of the Holders holding
at least sixty-six and sixty seven hundredths percent (66.67%) of the
then-outstanding Registrable Securities, the Company will not, after the date
hereof, grant registration rights permitting any holder of Company securities to
include such other holder's securities, by a "piggyback" registration right in
any demand registration effected under this Section 6.2.
6.3 "Piggyback" Registration.
(a) Each time the Company shall determine to file a
registration statement under the 1933 Act (other than pursuant to Section 6.2
hereof and other than on Form S-4, S-8 or a registration statement on Form S-1
covering solely any employee benefit plan) in connection with the proposed offer
and sale for money of any of its securities either for its own account or on
behalf of any other security holder, the Company agrees to give promptly written
notice of its determination to all Holders of Registrable Securities. Upon the
written request of a Holder of any shares of Registrable Securities given within
twenty (20) days after the receipt of such written notice from the Company, the
Company agrees to cause all such Registrable Securities, the Holders of which
have so requested registration hereof, to be included in such registration
statement and to use its best efforts to cause such registration statement to
become effective under the 1933 Act, all to the extent requisite to permit the
sale or other disposition by the prospective seller or sellers of the
Registrable Securities to be so registered. In the event that the proposed
registration by the Company is, in whole or in part, an underwritten public
offering of securities of the Company, any request pursuant to this Section
6.3(a) to register Registrable Securities may specify that such securities are
to be included in the underwriting (i) on the same terms and conditions as the
shares of Common Stock, if any, otherwise being sold through underwriters, under
such registration, or (ii) on terms and conditions comparable to those normally
applicable to offerings of Common Stock in reasonably similar circumstances in
the event that no shares of Common Stock other than Registrable Securities are
being sold through underwriters in such registration.
(b) If the registration of which the Company gives written
notice pursuant to
13.
<PAGE> 14
Section 6.3(a) is for a public offering involving an underwriting, the Company
agrees to so advise the Holders as a part of its written notice. In such event
the right of any Holder to registration pursuant to this Section 6.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting agree to enter into (together with the
Company and the other Holders distributing their securities through such
underwriting) an underwriting agreement with the underwriter or underwriters
selected for such underwriting by the Company.
(c) Notwithstanding any other provision of this Section 6.3,
if the managing underwriter of an underwritten distribution advises the Company
and the Holders of the Registrable Securities requesting participation in such
registration in writing that in its good faith judgment the number of shares of
Registrable Securities and the other securities requested to be registered under
this Section 6.3 exceeds the number of shares of Registrable Securities and
other securities which can be sold in such offering, then (i) the number of
shares of Registrable Securities and other securities so requested to be
included in the offering shall be reduced to that number of shares which in the
good faith judgment of the managing underwriter can be sold in such offering
(except for shares to be issued by the Company in a public offering, which shall
have priority over the Registrable Securities), and (ii) such reduced number of
shares shall be allocated among all participating Holders of Registrable
Securities and holders of other securities in proportion, as nearly as
practicable, to the respective number of shares of Registrable Securities and
other securities held by such Holders at the time of filing the registration
statement. All Registrable Securities and other securities which are excluded
from the underwriting by reason of the managing underwriter's marketing
limitation and all other Registrable Securities not originally requested to be
so included shall not be included in such registration and shall be withheld
from the market by the Holders thereof for a period, not in excess of one
hundred eighty (180) days, which the managing underwriter reasonably determines
is necessary to effect the underwritten public offering.
6.4 Registration Expenses.
(a) The Company shall pay all expenses incurred in effecting
the registration of Registrable Securities pursuant to Section 6 including,
without limitation, all federal, provincial and state registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of one counsel for
the participating Holders together, blue sky fees and expenses, and the expense
of any special audits incident to or required by any such registration, but not
including underwriting discounts, commissions and expenses.
(b) Notwithstanding the foregoing, in the event that a
registration pursuant to Section 6.2 is requested by the Initiating Holders and
such request is withdrawn prior to the filing of a registration statement by the
Company, or such Holders cause the Company to withdraw a registration statement
prior to its effectiveness, then either (i) the Initiating Holders and other
Holders requesting inclusion of their shares in such registration shall bear pro
rata all fees, costs and expenses of the registration and preparation of the
registration statement or (ii) such requested registration shall be deemed to be
one of the registrations the Company is required to effect pursuant to Section
6.2 hereof. Notwithstanding the foregoing, however, if at
14.
<PAGE> 15
the time of the withdrawal, the Initiating Holders and the other Holders have
learned of a Material Adverse Change with respect to the Company from that known
to such Holders at the time of their request, then such Holders shall not be
required to pay any of such registration expenses and shall retain their rights
pursuant to Section 6.2.
6.5 Registration Procedures. If and whenever the Company is required by
the provisions of Section 6 to effect the registration of Registrable Securities
under the 1933 Act, the Company will, as expeditiously as possible:
(a) prepare and file with the SEC a registration statement
which includes the Registrable Securities and use its best efforts to cause such
registration statement to become and remain effective until the distribution
described in the registration statement has been completed;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the 1933 Act with respect to the sale or other
disposition of Registrable Securities covered by such registration statement
whenever a Holder shall desire to sell or otherwise dispose of the same;
(c) furnish to each participating Holder (and to each
underwriter, if any, of Registrable Securities) such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents, as such Holder may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under such
provincial or state securities or blue sky laws of such jurisdiction as each
participating Holder shall reasonably request and do any and all other acts and
things which may be necessary under such securities or blue sky laws to enable
such Holder to consummate the public sale or other disposition of the
Registrable Securities in such jurisdictions, except that the Company shall not
for any purpose be required to consent generally to service of process or
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified;
(e) before filing the registration statement or prospectus or
amendments or supplements thereto, furnish to counsel selected by the
participating Holders copies of such documents proposed to be filed which shall
be subject to the reasonable approval of such counsel;
(f) in the event of any underwritten offering, along with the
Holders, enter into and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter of such offer;
(g) notify the participating Holders at any time when a
prospectus relating to any Registrable Securities covered by such registration
statement is required to be delivered under the 1933 Act, of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements
15.
<PAGE> 16
therein not misleading in light of the circumstances then existing and promptly
file such amendments and supplements as may be necessary so that, as thereafter
delivered to such Holders of such Registrable Securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing and use its best
efforts to cause each such amendment and supplement to become effective;
(h) furnish at the request of the participating Holders on the
date that such Registrable Securities are delivered to the underwriters for sale
in connection with a registration pursuant to Section 6 (i) an opinion, dated
such date, of the counsel representing the Company, for purposes of such
registration, in form and substance as is customarily given by company counsel
to the underwriters in an underwritten public offering addressed to the
underwriters, if any, and to such Holders, and (ii) a letter dated such date,
from the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters
and to such Holders; and
(i) use its best efforts to cause all such Registrable
Securities to be listed on the securities exchange, if any, on which the Common
Stock is then listed.
6.6 Form F-3 or S-3 Registration. In case the Company shall receive
from any Holder or Holders a written request or requests that the Company effect
a registration on Form F-3 or S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliance as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within 15
business days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 6.6: (i) if
Form F-3 or S-3 is not available for such offering by the Holders; (ii) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than Five
Hundred Thousand Dollars ($500,000.00); (iii) if the Company shall furnish to
the Holders a certificate signed by the President or Chief Executive Officer of
the Company stating that in the good faith judgment of the Board, it would be
seriously detrimental to the Company and its stockholders for such Form F-3 or
S-3 Registration to be effected at such time, in which event the Company shall
have the right to defer the filing of the Form F-3 or S-3 Registration Statement
for a period of not more than ninety (90) days after receipt of the request of
the Holder or Holders under this Section 6.6; provided, however, that the
Company shall not utilize this right more than once in any 12-
16.
<PAGE> 17
month period; (iv) if the Company has, within the 12month period preceding the
date of such request, already effected one registration on Form F-3 or S-3 that
includes Registrable Securities of the Holders pursuant to this Section 6.6 and
other similar provisions granting rights to registration on Form F-3 or S-3; or
(v) in any particular jurisdiction in which the Company would be required to
qualify to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 6.6 shall not be counted as demands for registration effected pursuant
to Section 6.2.
6.7 Indemnification. In the event Registrable Securities are registered
pursuant to this Section 6:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder of Registrable Securities which are included in a
registration statement pursuant to the provisions of this Agreement and any
underwriter (within the meaning of the 1933 Act) with respect to the Registrable
Securities, and each officer, director, employee and agent thereof and each
person, if any, who otherwise controls such Holder or underwriter (within the
meaning of the 1933 Act), against any losses or claims, damages, expenses or
liabilities, joint or several, to which they may become subject under the 1933
Act, the Exchange Act or other federal or state law, or otherwise, insofar as
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or allegedly untrue statement
of any material fact contained in the registration statement for the Registrable
Securities, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or any document incident to
the registration or qualification of any Registrable Securities, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or allegedly necessary to make the statements
therein not misleading or arise out of any violation or alleged violation by the
Company of the 1933 Act, the Exchange Act, any state securities law or any rule
or regulation promulgated under the 1933 Act, the Exchange Act or any state
securities law; and will reimburse such Holder, any underwriter, officer,
director, employee, agent or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 6.7(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, expense, liability or action
if such settlement is effected without the written consent of the Company, which
shall not be unreasonably withheld, nor shall the Company be liable under this
Section 6.7(a) to such Holder, underwriter, officer, director, employee, agent
or controlling person for any such loss, claim, damage, expense, liability or
action to the extent that it arises out of, or is based upon, an untrue
statement or allegedly untrue statement or omission or alleged omission made in
connection with such registration statement, preliminary prospectus, final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with information furnished in writing expressly for use in connection
with such registration by such Holder, underwriter, officer, director, employee,
agent or controlling person.
17.
<PAGE> 18
(b) To the extent permitted by law, each Holder of Registrable
Securities which are included in a registration statement pursuant to the
provisions of this Agreement will indemnify and hold harmless the Company, each
of its employees, agents, directors and officers, each person, if any, who
controls the Company within the meaning of the 1933 Act, and any underwriter
(within the meaning of the 1933 Act) against any losses, claims, damages, or
liabilities to which the Company or any such person or underwriter may become
subject, under the 1933 Act, the Exchange Act or other federal or state law or
otherwise, insofar as such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) arise out of, or are based upon any untrue or
allegedly untrue statement of any material fact contained in a registration
statement for the Registrable Securities, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements thereto,
or any document incident to the registration or qualification of any Registrable
Securities, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or allegedly
necessary to make the statements therein not misleading; in each case to the
extent that such untrue statement or allegedly untrue statement or omission or
alleged omission was made in such registration statement, preliminary
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with information furnished in writing by such Holder expressly for
use in connection with such registration; provided, however, that the indemnity
agreement contained in this Section 6.7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, expense, liability or action if such
settlement is effected without the written consent of such Holder, which shall
not be unreasonably withheld; and such Holder will reimburse the Company or any
such person or underwriter for any legal or other expenses reasonably incurred
by the Company or any such person or underwriter in connection with
investigating or defending such loss, claim, damage, liability, expense or
action.
(c) Promptly after receipt by an indemnified party under this
Section 6.7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 6.7, notify the indemnifying party in writing of the
commencement thereof and generally summarize such action. The indemnifying party
shall have the right to participate in and to assume the defense thereof with
counsel mutually satisfactory to the parties. An indemnifying party shall not
have the right to direct the defense of such an action on behalf of an
indemnified party if such indemnified party has reasonably concluded that there
may be defenses available to it that are different from or additional to those
available to the indemnifying party; provided, however, that in such event, the
indemnifying party shall bear the fees and expenses of only one (1) separate
counsel for all indemnified parties. The failure to notify in writing an
indemnifying party promptly of the commencement of any such action if
prejudicial to the ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
6.7, but the omission so to notify in writing the indemnifying party will not
relieve such party of any liability that such party may have to any indemnified
party otherwise than under this Section 6.7.
(d) To the extent permitted by law, the indemnification
provided for under this Section 6.7 will remain in full force and effect
regardless of any investigation made by or on behalf of the indemnified party or
any officer, director or controlling person (within the meaning of the 1933 Act)
of such indemnified party and will survive the transfer of any securities.
18.
<PAGE> 19
(e) If for any reason the foregoing indemnity is unavailable
to, or is insufficient to hold harmless an indemnified party, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party on the one hand and the indemnified
party on the other or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, or provides a lesser sum to the indemnified party
than the amount hereinafter calculated, in such proportion as is appropriate to
reflect not only the relative benefits received by the indemnifying party on the
one hand and the indemnified party on the other but also the relative fault of
the indemnifying party and the indemnified party as well as any other relevant
equitable considerations. Notwithstanding the foregoing, no underwriter, if any,
shall be required to contribute any amount in excess of the amount by which the
total price at which the securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The obligation of any underwriters to
contribute pursuant to this Section 6.7(e) shall be several in proportion to
their respective underwriting commitments and not joint.
6.8 Reports under Exchange Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the 1933 Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
Registrable Securities to the public without registration, and with a view to
making it possible for any such Holder to register the Registrable Securities
pursuant to a registration on Form F-3 or S-3, the Company agrees to:
(a) make and keep available public information, as those terms
are understood and defined in Rule 144, at all times;
(b) file with the Canadian SC and the SEC in a timely manner
all reports and other documents required of the Company under the Canadian Act,
the 1933 Act and the Exchange Act; and
(c) furnish to a Holder owning any Registrable Securities upon
request (i) a written statement by the Company that it has complied with the
reporting requirements of the Ontario Act, Rule 144, the 1933 Act and the
Exchange Act, or that it qualifies as a registrant whose Registrable Securities
may be resold pursuant to Form F-3 or S-3 (at any time after it so qualifies),
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably required in availing any Holder of Registrable
Securities of any rule or regulation of the SEC which permits the selling of any
such Registrable Securities without registration or pursuant to such form.
6.9 Transferability. The right to cause the Company to register
Registrable Securities granted by the Company to the Holders under this
Agreement may be assigned by any Holder to a transferee or assignee of any
Registrable Securities, provided that the Company must receive written notice
prior to or at the time of said transfer, stating the name and address of said
19.
<PAGE> 20
transferee or assignee and identifying the securities with respect to which such
rights are being assigned.
6.10 Granting of Registration Rights. The Company shall not, without
the prior written consent of the Holders of at least 66.67% of the Registrable
Securities then outstanding, grant any rights to any Persons to register any
shares of capital stock or other securities of the Company if such rights could
reasonably be expected to conflict with, or be on a parity with, the rights of
the Holders of Registrable Securities.
6.11 The Company agrees to maintain the listing of the Company's Common
Stock on The Toronto Stock Exchange, AMEX, NASDAQ Small Cap or NASDAQ NMS in
good standing for so long as JJDC owns the Shares.
6.12 The registration rights granted pursuant to this Agreement shall
terminate on the second anniversary of this Agreement.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations,
agreements, covenants and undertakings of the Company or JJDC contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and each Closing and shall in no way be affected by an investigation
of the subject matter thereof made by or on behalf of JJDC or the Company.
7.2 Incorporation by Reference. All Exhibits and Schedules appended to
this Agreement are herein incorporated by reference and made a part hereof.
7.3 Successor and Assignees. All terms, covenants, agreements,
representations, warranties and undertakings in this Agreement made by and on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including transferees
of any Shares) whether so expressed or not, subject to Sections 6.9.
7.4 Amendments and Waivers. (a) Any provision of this Agreement may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by JJDC and the Company or, in the case of
a waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
7.5 Governing Law. This Agreement shall be deemed a contract made under
the laws of the State of New Jersey and, together with the rights or obligations
of the parties hereunder, shall be construed under and governed by the laws of
such State.
7.6 Notice . All notices, requests, consents and demands shall be in
writing and shall
20.
<PAGE> 21
be deemed given when (i) personally delivered, (ii) mailed in a registered or
certified envelope, postage prepaid or (iii) sent by Federal Express or another
nationally recognized overnight delivery service (paid by sender):
to the Company at:
Genetronics Biomedical Ltd.
11199 Sorrento Valley Road
San Diego, California 92121-1334
Fax: (619) 597-0119
Attention: President
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121-2128
Fax: (619) 453-3555
Attention: M. Wainwright Fishburn, Esq.
or to JJDC at:
Johnson & Johnson Development Corporation
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Fax: (908) 247-5309
Attention: President
with a copy to:
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Fax: (908) 524-2788
Attention: Office of General Counsel
or such other address as may be furnished in writing by a party to the other
party hereto.
7.7 Counterparts. This Agreement may be executed in counterparts, all
of which together shall constitute one and the same instrument.
7.8 Effect of Headings. The section and paragraph headings herein are
for convenience only and shall not affect the construction hereof.
7.9 Entire Agreement. This Agreement, the Ancillary Agreements and the
Exhibits and Schedules hereto and thereto constitute the entire agreement among
the Company and JJDC with respect to the subject matter hereof. There are no
representations, warranties, covenants or undertakings with respect to the
subject matter hereof other than those expressly set forth herein.
21.
<PAGE> 22
This Agreement supersedes all prior agreements between the parties with respect
to the Shares purchased hereunder and the subject matter hereof.
7.10 Publicity. The Company shall not originate any publicity, news
release or other public announcement, written or oral, whether relating to the
performance under this Agreement or the existence of any arrangement between the
parties, without the prior written consent of JJDC, except where such publicity,
news release or other public announcement is required by law; provided that in
such event, JJDC shall be consulted by the Company in connection with any such
publicity, news release or other public announcement prior to its release and
shall be provided with a copy thereof and shall respond to the Company within a
reasonable period of time following receipt thereof.
7.11 Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written, by the duly authorized representatives of the parties
hereto.
GENETRONICS BIOMEDICAL LTD. GENETRONICS BIOMEDICAL LTD.
By: /s/ Lois Crandell By: /s/ Martin Nash
--------------------------- -----------------------------
Name: Lois Crandell Name: Martin Nash
Title: President and CEO Title: Senior Vice President
JOHNSON & JOHNSON
DEVELOPMENT CORPORATION
By: /s/ Thomas M. Gorrie
-------------------------------
Name: Thomas M. Gorrie, Ph.D.
Title: Vice President
22.
<PAGE> 23
"SCHEDULE "A"
FORM OF DECLARATION FOR REMOVAL OF LEGEND
To: Trust Company,
As registrar and transfer agent for Common Shares of
Genetronics Biomedical Ltd.
The undersigned (a) acknowledges that the sale of the securities of
Genetronics Biomedical Ltd. (the "Company") to which this declaration relates is
being made in reliance on Rule 904 of Regulation S under the United States
Securities Act of 1933, as amended (the "1933 Act"), and (b) certifies that (1)
the seller is not an affiliate of the Company as defined in Rule 405 under the
1933 Act, (2) the offer of such securities was not made to a U.S. person and
either (A) at the time the buy order was originated, the buyer was not a U.S.
person, or the seller and any person acting on its behalf reasonably believed
that the buyer was not a U.S. person, or (B) the transaction was executed in, on
or through the facilities of The Toronto Stock Exchange or any other designated
offshore securities market as defined in Regulation S under the 1933 Act and
neither the seller nor any person acting on its behalf knows that the
transaction has been prearranged with a buyer which is a U.S. person, (3)
neither the seller nor any affiliate of the seller nor any person acting on any
of their behalf has engaged or will engage in any directed selling efforts in
the United States in connection with the offer and sale of such securities, (4)
the sale is bona fide and not for the purpose of "washing off' the resale
restrictions imposed because the securities are "restricted securities" (as such
term is defined in Rule 144(a)(3) under the 1933 Act), (5) the seller does not
intend to replace the securities sold in reliance on Rule 904 under the 1933 Act
with fungible unrestricted securities and (6) the contemplated sale is not a
transaction, or part of a series of transactions which, although in technical
compliance with Regulation S, is part of a plan or scheme to evade the
registration provisions of the 1933 Act. Terms used herein have the meanings
given to them by Regulation S under the 1933 Act.
23.
<PAGE> 24
EXHIBIT "A"
FORM OF LICENSE AND DEVELOPMENT AGREEMENT
[Recital]
24.
<PAGE> 1
Exhibit 21.1
GENETRONICS BIOMEDICAL, LTD.
SUBSIDIARIES OF REGISTRANT
Genetronics, Inc., a California corporation
Genetronics, S.A., a French corporation
1.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CHARTERED ACCOUNTANTS
We consent to the use of our report dated May 3, 1999 [except for note 16 which
is as of June 10, 1999] included in this Annual Report (Form 10-K) of
Genetronics Biomedical Ltd. with respect to the Company's consolidated
financial statements for the year ended March 31, 1999.
/s/ ERNST & YOUNG
Vancouver Canada,
June 25, 1999. Chartered Accountants
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