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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
_____________________________ TO ____________________________________
COMMISSION FILE NO. 0-29608
GENETRONICS BIOMEDICAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA 33-002-4450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
for Genetronics,
Inc.)
11199 SORRENTO VALLEY ROAD 92121-1334
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (858)
597-6006 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 27,264,218 as of June 20, 2000. 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 June 20, 2000 was approximately
$72,587,411, based on $3.25, the closing price on that date of Common Stock on
the American Stock Exchange. *
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's Form 20-F for the year
ended February 28, 1998, Registration Statement on Form S-1 filed on October 5,
1999 (333-88427), Form 10-Q filed for the quarter ended
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June 30, 1999, Form 10-Q filed for the quarter ended September 30, 1999 and Form
10-Q filed for the quarter ended December 31, 1999 are incorporated by reference
into Part IV of this form 10-K.
----------------
* Excludes 4,929,630 shares of Common Stock held by directors and officers, and
shareholders whose beneficial ownership exceeds 10% of the shares outstanding
on June 20, 2000. 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 Safety 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. had 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 were being conducted in France, and was
closed in May, 2000. 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 and gene delivery
company specializing in developing technology and hardware focused on
electroporation. Electroporation is the application of brief, controlled pulsed
electric fields to cells, which cause tiny pores to temporarily 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 Instrument 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 or gene therapy is that the pharmaceutical agent or gene 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 the drug or gene was administered without
electroporation. When electroporation is used in conjunction with drugs, genes,
or other therapeutic agents, the Company calls it Electroporation Therapy, or
EPT. Through its Drug and Gene Delivery Division, Genetronics is developing
human-use equipment that is designed to allow physicians to use EPT to achieve
more efficient and cost-effective delivery of drugs or genes to patients with a
variety of illnesses, including cancer. The Company's proprietary
electroporation drug and gene delivery system, the Genetronics MedPulser(R)
system, has been used with bleomycin in clinical trials conducted in the United
States, Australia, Europe and Canada for treatment of head and neck cancer, as
well as melanoma, liver, pancreatic, basal cell and Koposi sarcoma cancers.
Electroporation therapy is a broad-based technology, with many potential
paths to achieve commercial success. Genetronics is developing applications for
EPT primarily in the areas of oncology and gene therapy; additional points of
focus are drug and gene delivery in the vascular, transdermal, and dermatology
areas.
The Company operates through its two divisions: (i) the Drug and Gene
Delivery Division, through which the Company is developing drug and gene
delivery systems based on electroporation to be used in the treatment of disease
and, (ii) the BTX Instrument Division, which develops, manufactures, and sells
electroporation equipment to the research laboratory market.
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DRUG AND GENE DELIVERY DIVISION
Overview
Through its Drug and Gene Delivery Division (also known as the Drug and
DNA Delivery Division, and formerly as the 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 treatment
of disease. There are many diseases where improved drug delivery is important.
The Drug and Gene Delivery Division has identified five potential areas of
application for its electroporation technology - oncology, gene therapy,
dermatology, cardiology and transdermal drug delivery. At present, the primary
areas of focus are oncology and gene therapy.
The Drug and Gene 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. Early
stage clinical trials have evaluated the safety and efficacy of the products
under development by the Company primarily in head and neck cancers, and a
pivotal trial is planned. Pivotal clinical trials are used to assess a drug for
efficacy at several independent clinical research sites in a statistically
significant number of patients. Studies designed to evaluate the MedPulser(R)
system in head and neck cancer and in a variety of other tumor types have been
conducted in North America and Europe. Additional Phase I and II United States
studies of the effectiveness of the MedPulser(R) system in the delivery of
bleomycin in the treatment of other tumor types are planned. Phase I clinical
trials are the earliest stage of trials in human subjects, used to test a drug
or drug delivery system for safety. Phase II clinical trials assess the
effectiveness (i.e., dose response) of a drug.
Genetronics Biomedical Ltd. announced that on October 2, 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. On August 5, 1999, the Company announced these agreements
were assigned to Ethicon Endo-Surgery, Inc., another Johnson & Johnson company.
Ethicon, Inc. and Ethicon Endo-Surgery, Inc. are referred to as Ethicon in this
filing. Since mid-January 2000, the Company and Ethicon have been assembling and
reviewing existing clinical and regulatory information relating to human
clinical trials for treating certain cancers with bleomycin and the Company's
MedPulser(R) system. Existing information relating to pre-clinical in vitro (in
the test tube) and in vivo (in the body) animal studies also is being reviewed.
These projects have delayed pre-commercialization activities for the
MedPulser(R) system in Europe and initiation of a pivotal or other clinical
trial in the United States and are expected to further delay European commercial
launch and initiation of new clinical trials for at least several more months.
Pivotal clinical trials are used to assess a drug for efficacy at several
independent sites in a statistically significant large number of patients.
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 and Gene Delivery
Division has been awarded ISO 9001, EN46001 and ISO 13485 registration, as well
as CE mark certification.
Market
The Drug and Gene Delivery Division is expected to 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 years to come. In the United States, approximately 12
million new cases were diagnosed between 1990 and 1999. To further illustrate
the market potential for EPT, solid tumor cancers comprise the first target for
EPT and they constitute the absolute majority of all 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, exceed $100 billion per year; some $40 billion for direct
medical costs (total of all health expenditures), at least $10 billion for
indirect morbidity costs (cost of lost productivity due to illness), and over
$50 billion for indirect mortality costs.
There is still very much that scientists do not know about cancer,
consequently, there are significant unmet needs in the treatment of cancer. The
oncology business unit within the Drug and Gene Delivery Division has initially
targeted those indications for which current treatment modalities result in a
poor quality of life and
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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 minimally invasive procedures.
In the United States, the cumulative dollar value of treatments and
technologies commonly used in the curative and palliative management of cancer
was 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 over 4,000,000 or more cancer
patients, creating an estimated worldwide market opportunity of some $13 billion
per year.
Treatment of Tumors
Equipment made by the BTX Instrument 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.
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 that 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 and 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 when more testing is performed and/or the
information related to clinical and regulatory matters is assembled and reviewed
and the side effect profile of EPT is further defined.
MedPulser(R) system
The MedPulser(R) system 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, several 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
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international product standards. 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 United States, 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.
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, is responsible for selling
and distributing the MedPulser system in Europe.
Medical Device Manufacturing
The Drug and Gene 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 and Gene 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 CE Mark was obtained. To sell in the United States, the Company
will need to be in compliance with FDA current Good Manufacturing Practices
(cGMP).
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 Studies
North America 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 of the head and neck in patients who failed conventional
therapies. The Company also obtained IND clearance from the Canadian Health
Protection Branch to initiate similar clinical trials in Canada. Two protocols
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 single arm, 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 single arm, 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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<TABLE>
<CAPTION>
========================== =============== ============== ===============================
RESPONSE(1)
===============================
RESPONDING NON-RESPONDING
CLINICAL TRIAL PATIENTS TUMORS TUMORS TUMORS
========================== =============== ============== ===============================
<S> <C> <C> <C> <C>
North America Phase I/II 8 8 6 (75%) 2 (25%)
-------------------------- --------------- -------------- ----------------- -------------
North America Phase II 23 33 0 (0%) 32 (97%)
01 Study
Control Group(2)
-------------------------- --------------- -------------- ----------------- -------------
North America Phase II 15 18 11 (61%) 6 (33%)
01 Study
-------------------------- --------------- -------------- ----------------- -------------
North America Phase II 18 24 16 (67%) 6 (25%)
02 Study
-------------------------- --------------- -------------- ----------------- -------------
European Study 12 19 12 (63%) 7 (36%)
-------------------------- --------------- -------------- ----------------- -------------
</TABLE>
(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.
A limited well-controlled Phase III trial for palliative treatment of
head and neck cancer in patients who failed conventional therapy may 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. As noted, the Company and
Ethicon are currently assembling and reviewing existing clinical and regulatory
information relating to human clinical trials for treating certain cancers with
bleomycin and the Company's MedPulser(R) system, including the clinical
information outlined in the preceding paragraphs. This project will take several
months and will delay initiation of further clinical trials in the United States
and abroad.
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 in 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
are being assembled and reviewed and will be released in due course. The Company
achieved CE mark certification in March 1999 from notified body TUV Product
Service GMBH.
Ethicon is responsible for initiating expanded clinical trials in France
and selected EC countries to support European marketing efforts and expanded use
claims. These trials will not begin until the Company and Ethicon complete the
clinical and regulatory information review project referred to above.
Genetronics will collaborate with Ethicon on these trials.
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Research and Development Summary
The Drug and Gene Delivery Division has, in the past, focused its
research primarily in the areas of oncology, gene therapy, vascular therapy,
transdermal delivery and dermatology. At present, the primary areas of focus are
oncology and gene therapy.
The following table summarizes the programs of the Drug and Gene
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.
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SUMMARY TABLE
<TABLE>
<CAPTION>
============================== ====================== ======================================
Stage of Approval
======================================
Programs Development Status US & Canada Europe
============================================================================================
<S> <C> <C> <C>
DERMATOLOGY
------------------------------ ---------------------- ------------------ -------------------
Basal Cell Cancer Clinical Trials Two pilot studies N/A
completed.
------------------------------ ---------------------- ------------------ -------------------
Genital Warts Developmental N/A N/A
--------------------------------------------------------------------------------------------
ONCOLOGY
------------------------------ ---------------------- ------------------ -------------------
Head and Neck Cancer Clinical Trials Phase II CE Mark and ISO
Clinical Trials 9001 Received
------------------------------ ---------------------- ------------------ -------------------
Melanoma Clinical Trials N/A CE Mark and ISO
9001 Received
------------------------------ ---------------------- ------------------ -------------------
Metastatic Liver Cancer Clinical Trials N/A CE Mark and ISO
9001 Received
------------------------------ ---------------------- ------------------ -------------------
Peripheral Sarcoma Preclinical data N/A CE Mark and ISO
9001 Received
------------------------------ ---------------------- ------------------ -------------------
Breast Cancer Preclinical data N/A CE Mark and ISO
9001 Received
------------------------------ ---------------------- ------------------ -------------------
Prostate Cancer Preclinical data N/A CE Mark and ISO
9001 Received
------------------------------ ---------------------- ------------------ -------------------
Glioma Preclinical data N/A CE Mark and ISO
9001 Received
--------------------------------------------------------------------------------------------
GENE THERAPY
------------------------------ ---------------------- ------------------ -------------------
In vivo Gene Transfer - Preclinical data N/A N/A
blood protein encoding
genes
------------------------------ ---------------------- ------------------ -------------------
In vivo Gene Transfer - Preclinical data N/A N/A
DNA vaccines
------------------------------ ---------------------- ------------------ -------------------
In vivo Gene Transfer - Preclinical data N/A N/A
anti-inflammatory
protein encoding genes
------------------------------ ---------------------- ------------------ -------------------
In vivo Gene Transfer - Preclinical data N/A N/A
vascular protein
encoding genes
--------------------------------------------------------------------------------------------
VASCULAR THERAPY
------------------------------ ---------------------- ------------------ -------------------
Coronary Artery Disease, Preclinical data N/A N/A
Marker genes & drugs
------------------------------ ---------------------- ------------------ -------------------
Vascular Disease, Preclinical data N/A N/A
Heparin delivery
(anti-restenosis)
--------------------------------------------------------------------------------------------
TRANSDERMAL DELIVERY
------------------------------ ---------------------- ------------------ -------------------
PGE-1 delivery for Tolerance Study One Device N/A
Erectile dysfunction Tolerance Study
completed
------------------------------ ---------------------- ------------------ -------------------
Calcitonin Preclinical data N/A N/A
(osteoporosis)
------------------------------ ---------------------- ------------------ -------------------
Vitamin C Preclinical data N/A N/A
------------------------------ ---------------------- ------------------ -------------------
"N/A" means not applicable.
</TABLE>
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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 protein
locally or 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 to the patient, usually by blood transfusion or direct engraftment. In
vivo gene therapy is the introduction of genetic information directly into cells
in 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 or by injection 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 directly fight
cancer. The thymidine kinase gene in conjunction with the prodrug ganciclovir
produces a potent antitumor effect based on drug toxicity and apoptotic cell
killing via a bystander effect. Animal trials treating glioblastomas using this
strategy have shown substantial 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 its proprietary DNA constructs, may conduct
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. On November 9, 1999, Genetronics
announced an 18 month research and option agreement between Genetronics and
Boehringer Ingelheim International GmbH (Boehringer Ingelheim) related to the
development of its electroporation technology for use in particular gene therapy
applications. On April 4, 2000, Genetronics announced the signing of its fifth
corporate agreement in the area of gene therapy. The five agreements involve
genes thought to be useful in treating hemophilia, HIV and other infections, and
various forms of cancer among other targets. On June 9, 2000, the Company
announced that research
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studies using Genetronics electroporation systems were presented at a major
international gene therapy conference. Additionally, in collaborations with
Chiron Corporation and Valentis, Inc., Genetronics technology was shown to
effectively deliver a variety of genes and DNA vaccines to skin and muscle of
animals, including animals of large size.
BTX INSTRUMENT DIVISION
Overview
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 and electrofusion 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. Electrofusion is the fusing together of two or more cells to
form hybrid cells. Transformation is a process by which the genetic material
carried by an individual cell is altered by incorporation of exogenous DNA into
its genome. Transfection is the uptake, incorporation, and expression of
exogenous DNA by eukaryotic cells.
The BTX Instrument Division is presently a leader in the development and
marketing of electroporation instruments and supplies, with more than 5,000
customers in universities, companies, and research institutions worldwide. The
BTX Instrument Division sells its electroporation/electro cell fusion
instrumentation and accessories in all states and territories of the United
States and in over 45 foreign countries. BTX currently produces an extensive
line of electroporation instruments and accessories, including electroporation
and electrofusion instruments, one monitoring device, and an assortment of
electrodes and accessories.
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 and high
throughput screening electroporation applicators.
BTX focused its efforts in recent years on product development and promotion
of its new line of products for developing sophisticated applications. BTX
released the ECM(TM) 830 in December of 1998. It is, a sophisticated square wave
electroporation system with a menu driven digital user interface. In August of
1999 the Company introduced the ECM 630, an Exponential Decay Wave
Electroporation system which utilizes a Precision Pulse Technology, the new BTX
Platform technology, and an all-new digital user interface. During the previous
and present year, publications outlined the utilization of BTX equipment in
newly developing animal in vivo gene delivery research. In the support of this
research, BTX expanded its in vivo electrode offering and continues to emphasize
the development of novel applicators.
The BTX Instrument Division's product line includes three different
exponential decay wave generators, two square wave generators, one electro cell
fusion instrument and a graphic wave display monitor. In addition, the BTX
Instrument Division markets over 50 different types of electrodes and related
accessories, 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, hybridoma and quadroma formation, as well
as for all cell fusion techniques, including applications involving adoptive
immunotherapy.
While the Company, through its BTX Instrument 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
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Instrument 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 Institutes 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 Instrument Division supplies three cuvette models, as do its
competitors, plus some 50 additional specialized chambers electrodes, and
accessories for electroporation. BTX in situ electrodes (e.g., Petri Pulser(TM)
electrodes) position the Company to expand the electroporation market for
adherent cell transfection applications, while high throughput screening
electrodes and large volume production systems (e.g., 96-Well Coaxial Electrode,
ElectroFlowPorator(TM) system), respectively, provide the BTX Instrument
Division with an entry into the large volume and multi-sample processing arenas
used by the major pharmaceutical and biotech companies conducting drug research.
The BTX Instrument Division meets regulatory requirements necessary to
provide instrumentation to the research market for in vivo and in vitro animal
experimentation. The BTX Instrument 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 Instrument 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 over 250
representatives dedicated to the biological sciences in the United States and
Canada. In addition, the BTX Instrument Division distributes through
Intermountain Scientific Corporation, which has 25 field sales specialists in
the same territory. The BTX Instrument Division has over 40 international
distributors in the major countries of the world, and its products are presently
sold in over 45 countries. The BTX Instrument Division supports its distributors
with advertising, exhibit exposure and lead generation.
Advertising
The Company's BTX Instrument Division advertises in major national and
international scientific journals such as Science, Nature, Genetic Engineering
News, and BioTechniques. The BTX Instrument Division also attends and displays
its products at about one scientific conference per month such as American
Association for Cancer Research, American Society for Gene Therapy, and
Neuroscience. On a quarterly basis the BTX Instrument Division utilizes direct
mail to an identified mailing list for specific product promotion. The BTX
Instrument Division works closely with distribution partners in joint marketing
campaigns and other value-added suppliers in co-marketing efforts.
Competition
The main competitor of the Company's BTX Instrument Division in the
research marketplace is BioRad Laboratories, Eppendorf Scientific, Inc. and
Invitrogen Corporation. There are other companies entering and departing this
market on a regular basis. The majority of these companies have other molecular
biology product lines besides electroporation, while electroporation and
electrofusion is the only business of the BTX Instrument Division. Most
competing manufacturers concentrate on the exponential decay wave system and do
not compete in the square wave market at this time.
STRATEGIC PARTNERS
License and Development Agreement
On October 2, 1998, Genetronics Biomedical Ltd. entered into a comprehensive
License and Development Agreement and a Supply Agreement with Ethicon, Inc., a
Johnson & Johnson company, involving the use of the MedPulser(R) system for
Electroporation Therapy in the treatment of solid tumor cancer. In addition,
Johnson & Johnson Development Corporation purchased $6 million of common shares
of Genetronics at a price of $2.68 per
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share, pursuant to the October 6, 1998 Stock Purchase Agreement. On August 5,
1999, the Company announced that Ethicon, Inc. had assigned the License and
Development Agreement and Supply Agreement to Ethicon Endo-Surgery, Inc.,
another Johnson & Johnson company.
The License and Development agreement requires that Ethicon apply for
all future development and clinical and regulatory activities worldwide
(excluding Canada) for oncology products utilizing the MedPulser(R) system
within the scope of the agreement. Upon regulatory approval, Ethicon will have
the right to distribute and market worldwide (excluding Canada) the oncology
products supplied by Genetronics. Genetronics retains the right to distribute
and market oncology products in Canada. Genetronics has received a $4 million
up-front license fee and has received, and expects to receive, milestone
payments if and when the milestones are achieved. Under the agreements,
Genetronics receives a percentage of net sales as royalty fees and a purchase
fee for the manufacture of products.
Collaborative Research Agreement
On November 7, 1999, the Company and Boehringer Ingelheim announced the
signing of an 18-month research and option agreement to develop the Genetronics
electroporation technology for use in a particular gene therapy application.
Under the terms of the agreement, Genetronics will develop hardware and perform
preclinical research relating to DNA delivery for cancer DNA vaccination. On
April 4, 2000, Genetronics announced the signing of its fifth corporate
agreement in the area of gene therapy. The five agreements involve genes thought
to be useful in treating hemophilia, HIV and other infections, and various forms
of cancer.
Bleomycin Agreements
The Company 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 after
regulatory approval has been granted for use 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 after regulatory approval has been granted for use. Bleomycin is a
glycopeptidic antibiotic that induces single and double strand DNA breaks when
it is taken up into cells. Bleomycin has been approved by the Food and Drug
Administration in the United States and the Health Protection Branch in Canada,
and 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.
<TABLE>
<CAPTION>
===================== ================= ================ =================
March 31, 2000 March 31, 1999 March 31, 1998
Period Ended: 12 Months 12 Months 13 months
===================== ================= ================ =================
<S> <C> <C> <C>
NET PRODUCT SALES
--------------------- ----------------- ---------------- -----------------
United States $2,759,043 $2,136,180 $ 1,945,389
--------------------- ----------------- ---------------- -----------------
Rest of World 1,375,393 1,297,925 1,151,809
--------------------- ----------------- ---------------- -----------------
INTEREST INCOME
--------------------------------------------------------------------------
United States 497,586 248,417 250,197
--------------------- ----------------- ---------------- -----------------
Canada 58,607 52,494 177,301
--------------------- ----------------- ---------------- -----------------
GRANT FUNDING
--------------------------------------------------------------------------
United States 334,901 354,135 128,069
--------------------- ----------------- ---------------- -----------------
</TABLE>
13.
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<TABLE>
<CAPTION>
--------------------------------------------------------------------------
REVENUES UNDER COLLABORATIVE RESEARCH
AND DEVELOPMENT ARRANGEMENTS
--------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Germany 91,335 0 0
--------------------- ----------------- ---------------- -----------------
United States 100,000 33,048 6,025
--------------------------------------------------------------------------
LICENSE AND DEVELOPMENT AGREEMENTS
--------------------- ----------------- ---------------- -----------------
Ethicon 416,667 4,500,000 0
--------------------- ----------------- ---------------- -----------------
</TABLE>
The Company, like many biomedical companies, devotes a substantial
portion of its annual budget to research and development. For the thirteen
months ended March 31, 1998, research and development expenses totaled
$5,637,955; for the year ended March 31, 1999, they totaled $8,086,959; and for
the year ended March 31, 2000, they totaled $6,977,220. 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 and Gene Delivery
Division. The launch of the first such products in Europe is anticipated to be
2001, and will most likely be followed by launch in the United States. Ethicon.
is responsible for launch of the oncology product worldwide, except in Canada.
INTELLECTUAL PROPERTY
As of June 20, 2000, the Company had 28 issued United States patents, 41
issued foreign patents, 5 allowed United States patent applications, an
additional 29 pending United States applications, and pending foreign patent
applications.
The Company has contracted an independent audit of its patent portfolio
to provide assurance that its key technologies are adequately protected. If
necessary, the Company will take appropriate steps to strengthen its portfolio.
The Company has registered on the Principal Register of the United
States Patent and Trademark Office the following trademarks: BTX, ELECTRONIC
GENETICS, MANIPULATOR, OPTIMIZOR, HUMAN IN SQUARE (Design), ENHANCER, and
MEDPULSER. The following US trademark applications are pending: COSMETRONICS,
GENETRODES and GENETRONICS. The Company has registered the BTX and MEDPULSER
trademarks in Canada, and has applied to trademark GENETRONICS in Canada. The
Company has a European Community Trade Mark registration for GENETRONICS, BTX
and for MEDPULSER. The Company has registered the MEDPULSER and BTX marks in
Japan. The Company has registered the BTX mark in South Korea and has registered
the GENETRONICS mark in the United Kingdom. The Company is not aware of any
claims of infringement or other challenges to the Company's rights to use its
marks.
EMPLOYEES
As of June 20, 2000, the Company employed 70 people on a full-time
basis. Of the total, 39 were in product research and development, 8 in sales,
marketing and support, 6 in manufacturing, and 17 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. None
of the Company's employees is subject to collective bargaining agreements.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
OUR BUSINESS MODEL MAY CHANGE AS OUR PRIORITIES AND OPPORTUNITIES CHANGE; AND
OUR BUSINESS MAY NEVER DEVELOP TO BE PROFITABLE OR SUSTAINABLE.
There are many programs that to us seem promising and that we could pursue.
Current plans for us are described in this filing. However, with limited
resources, management may, in our judgment, decide to change priorities and
shift programs away from what we disclose in this document, for the purpose of
exploiting our core technology of electroporation. The choices we may make will
be dependent upon numerous factors, which cannot always be
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predicted. We cannot assure you that our business model, as it currently exists
or as it may evolve, will enable us to become profitable or to sustain
operations.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE PRODUCTS FROM OUR DRUG AND GENE DELIVERY
DIVISION, THEN OUR BUSINESS WILL SUFFER.
Our Drug and Gene Delivery Division is in the early development stage and the
success of our company depends on the success of the technology being developed
by the Drug and Gene 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
to sell our clinical products in the United States and further clinical trials
are still necessary in North America before we can seek regulatory approval to
sell our product in North America for treating solid tumors. We cannot assure
you that we will successfully develop any products. If we fail to develop or
successfully commercialize any products, then it will have a material adverse
effect on us. 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 Food and Drug
Administration (FDA), or foreign regulatory authorities, 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
assembling and reviewing existing clinical and regulatory information relating
to human clinical trials directed to the use of electroporation to deliver
bleomycin to certain types of tumors, and existing information relating to
pre-clinical in vitro and in vivo animal studies.
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 with limited cash reserves, have
gone out of business after releasing news of unsuccessful clinical trial
results.
If any of the following events arise during our clinical trials or data
review, then we would expect this to have a serious negative effect on our
company and your investment:
- The electroporation-mediated delivery of drugs or other agents may be found
to be ineffective or to cause harmful side effects, including death;
- 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, a scarcity of subjects that
are willing to participate through the end of the trial, administrative
changes within our corporate partner's organization, or data and document
review;
- The reported clinical data may change over time as a result of the
continuing evaluation of patients or the current assembly and review of
existing clinical and pre-clinical information;
- 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
- The FDA and other regulatory authorities may interpret our data differently
than we do, which may delay or deny approval.
Clinical trials are generally quite expensive. A delay in our trials, for
whatever reason, will probably require us to spend even more money to keep the
product(s) moving through the regulatory process. If we do not have or cannot
raise 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
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<PAGE> 16
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 UNITED
STATES 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, in some instances 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, use for administering a certain drug to a certain tumor
type in a patient having 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 any
did occur, any one could have a material adverse effect on us:
- There can be delays, sometimes long, in obtaining approval for our
human-use devices;
- 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;
- 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; and
- Once granted, approval can be withdrawn, or limited, if previously unknown
problems arise with our human-use product or data arising from its use.
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
Endo-Surgery, Inc., a Johnson & Johnson company. On August 5, 1999, we announced
that Ethicon, Inc., another Johnson & Johnson company, had assigned its
obligations and responsibilities under certain development and license, and
supply agreements with us to Ethicon Endo-Surgery, Inc. Ethicon, Inc. made
certain payments to us, and Ethicon Endo-Surgery, Inc. is required to continue
to make milestone-based payments when and if milestones are achieved. Ethicon is
obligated to compensate us for human-use products and to pay royalties on sales
or leases in the future, in exchange for the right to help develop and sell or
lease our human-use equipment to hospitals and others for cancer treatments,
among other rights. We depend on Ethicon for certain research funding, for its
clinical, sales and marketing efforts under the agreement, and for the positive
association we receive by having Ethicon as our partner. Loss of the
relationship between our company and the Johnson & Johnson companies, would
result in a material adverse effect on our company.
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Our clinical trials to date have used our equipment with the anti-cancer drug
bleomycin. It is not the current intent to package 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 Abbott 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, before any product could be launched.
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:
- Our equipment will be used in ways we did not authorize, which can lead to
liability and unwanted competition;
- 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;
- 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;
- 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
- Collaborative associations can damage a company's reputation if they go
awry and, thus, by association or otherwise, the scientific or medical
community holds a negative view of us.
For instance, we have received correspondence from the University of South
Florida, USF, purporting to claim certain rights to intellectual property
assigned to us. We dispute USF's claim of rights to such intellectual property
and have been negotiating with USF for several months to finalize an agreement
that would give us exclusive rights to the technology. We cannot assure you that
the negotiations will be successful or that we will retain full ownership of
this intellectual property.
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.
Our company also works and has worked with a number of hospitals to perform
clinical trials, primarily 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:
- 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.
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- Risk of Improper Conflict of Interest. Physicians working on protocols may
have an improper economic interest in our company, or other conflict of
interest. 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 can create suspicion that the trial results were improperly
influenced by the physician's interest in economic gain. Not only can this
put the clinical trial results at risk, but it can also do serious damage
to a company's reputation.
- 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 on 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. We
are in the process of performing an audit of our patent portfolio to confirm
that our key technologies are adequately protected. If necessary, we will take
steps to strengthen our portfolio, which may include asking that one or more of
our patents be reexamined or reissued by the United States patent office.
The patenting process, enforcement of issued patents, and defense against
claims of infringement are inherently risky. Because our Drug and Gene Delivery
Division relies heavily on patent protection, for us, the risks are significant
and include the following:
- Risk of Inadequate Patent Protection for Product. We cannot say with
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.
- 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 may lose competitive position and may not be able to
receive royalties for products covered in part or whole by that patent
under license agreements.
- 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/or 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.
- Freedom to Operate Risks. We are aware that patents related to electrically
assisted drug delivery have been granted to, and patent applications filed
by, our potential competitors. We or our partners 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
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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 and 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:
- More Money. Some competitors have a lot more money than we do. They can
afford more technical and timeline setbacks than we can.
- Greater Experience. Some competitors have been in the drug delivery
business longer than we have. They have greater experience than us 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.
- 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 developing similar 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.
- 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.
- 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 OR LEASES 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 marketing and sales 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 the majority of
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.
WE HAVE OPERATED AT A LOSS AND WE EXPECT TO CONTINUE TO ACCUMULATE A DEFICIT.
As of March 31, 2000, we had a deficit of $29,598,443. We have 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, research, and development efforts. If these activities are
successful, and if we receive
19.
<PAGE> 20
approval from the FDA to market human-use equipment, then even more money will
be required to market and sell the equipment.
Most of the cash we received during the fiscal year ended March 31, 2000 was
from the sale and distribution of special warrants to investors and funding
received from contracting partners. Other funds came from sales of BTX
research-use equipment, interest income on our investments, Small Business
Innovative Research (SBIR) grants, milestone payments, sales of equipment to
Ethicon for use in clinical trials, and exercise of stock options. It is
possible that we will lose our SBIR grants 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, marketing 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:
- The progress and breadth of preclinical testing and the size of our drug
delivery programs, all of which directly influence cost;
- The costs involved in complying with the regulatory process to get our
human-use products approved, including the number, size, and timing of
necessary clinical trials and costs associated with the current assembly
and review of existing clinical and pre-clinical information;
- The costs involved in patenting our technologies and defending them;
- Changes in our existing research and development relationships and our
ability to enter into new agreements;
- The cost of manufacturing our human-use and research-use equipment; and
- 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 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 new
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 make it difficult for the price of our stock to rise
rapidly, among other things. Dilution will lessen 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 us.
IF WE DO NOT HAVE ENOUGH MONEY TO FUND OPERATIONS, THEN WE WILL HAVE TO CUT
COSTS.
If we are not able to raise needed money under acceptable terms, then we will
have to take measures to cut costs, such as:
- Delay, scale back or discontinue one or more of our drug or gene delivery
programs or other aspects of operations, including laying off some
personnel or stopping or delaying clinical trials;
20.
<PAGE> 21
- Sell or license some of our technologies that we would not otherwise give
up if we were in a better financial position;
- 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
- 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
we may have a lower valuation, which probably would be reflected in our stock
price.
THE MARKET FOR GENETRONICS STOCK IS VOLATILE, WHICH COULD ADVERSELY AFFECT AN
INVESTMENT IN OUR STOCK.
Our 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 trading volume and price of biotechnology stocks to be
unrelated to a company's operations, i.e., to go up or down on positive news and
to go up or down on no news. Our stock has exhibited this type of disconnect in
the past, and may well exhibit it in the future. The historically low trading
volume of our stock, in relation to many other biomedical companies of about our
size, 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:
- Adverse clinical trial results;
- 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, Europe is the only foreign jurisdiction in which we have
sought approval for commercialization;
- Announcement of legal actions brought by or filed against us for patent or
other matters, especially if we do not win such actions;
- Cancellation of important corporate partnerships or agreements, such as the
Ethicon agreement;
- Public concern as to the safety or efficacy of our human-use products
including public perceptions regarding gene therapy in general;
- Shareholders' decisions, for whatever reasons, to sell large amounts of our
stock;
- A decreasing cash-on-hand balance to fund operations, or other signs of
apparent financial uncertainty; and
- Significant advances made by competitors that are perceived 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 are
critical to the financial future of our company. Our products are not yet
approved for sale in the United States and some other jurisdictions 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 shares would likely fall.
21.
<PAGE> 22
OUR BTX INSTRUMENT DIVISION MARKETS ONLY TO THE ELECTROPORATION PRODUCT NICHE
MARKETS AND RELIES ON DISTRIBUTION RELATIONSHIPS FOR SALES.
The BTX Instrument Division currently markets only electroporation equipment
to the research market. If our research-use equipment loses its competitive
position, because the BTX Instrument Division does not have any other product
line on which to rely, our 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 for
our BTX Instrument Division to stay competitive or that the Division will
succeed.
The research-use equipment is sold through United States and international
distributors. Approximately 30% of BTX instrument sales during the fiscal year
ended March 31, 2000 were in the United States through our distribution
relationship with VWR Scientific. This accounted for about 20% of our total
revenue. We rely heavily on our relationship with VWR to sell our product in the
United States. 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 or maintained for the major markets,
e.g., the United States, Europe and Japan, then the BTX Instrument Division may
suffer declining sales, which would have an effect on our 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, researchers 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 Instrument
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 us 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 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 endeavor to 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.
22.
<PAGE> 23
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.
OUR BTX INSTRUMENT DIVISION MUST MANAGE THE RISKS OF INTERNATIONAL OPERATIONS.
The BTX Instrument Division of Genetronics sells a lot of its research-use
equipment in foreign countries, particularly in the Pacific Rim. In the fiscal
year ended March 31, 2000, about 36% of BTX's revenues were from BTX sales into
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:
- We are subject to foreign regulatory requirements, foreign tariffs and
other trade barriers that may change without sufficient notice;
- 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;
- We are subject to various export restrictions and may not be able to obtain
export licenses when needed;
- 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
Instrument Division, have recently suffered considerable turmoil;
- Some of the foreign currencies in which we do business fluctuate
significantly;
- We may have difficulty collecting accounts receivables or enforcing other
legal rights; and
- 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.
We have an employment agreement in place for Martin Nash, our President,
Chief Executive Officer and Chief Financial Officer, and a compensation
agreement is in place for James Lierman, our Chief Operating Officer. If Mr.
Nash or Mr. Lierman leaves us, that might pose significant risks to our
continued development and progress. Our progress may also be curtailed if
Dietmar Rabussay, Ph.D., our Vice President of Research and Development, or
George M. Gill, M.D., our Vice President of Clinical Research and Regulatory
Affairs, were to leave us.
WE MAY NOT MEET ENVIRONMENTAL GUIDELINES, AND AS A RESULT COULD BE SUBJECT TO
CIVIL AND CRIMINAL PENALTIES.
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
23.
<PAGE> 24
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.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR
FORWARD-LOOKING STATEMENTS.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus may constitute
forward-looking statements. These statements, if any, involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by forward-looking statements. The most significant of these factors are
discussed under "Risk Factors" or described elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by words such as
"may," "will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
words or other comparable words.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. In addition, neither us nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
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 current lease runs through December 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, other than
as described below, with respect to itself, its subsidiaries, or any of its
material properties.
On May 23, 2000, the Company received notice that Roger Fuller, a former
employee of the Company, filed a complaint in the Superior Court of San Diego
County against the Company and one of its former managers alleging damages
suffered in connection with his termination. The amount of damages is
unspecified. The Company believes that Mr. Fuller does not have a valid claim
and intends to vigorously defend against such claims.
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 former 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.
<TABLE>
<CAPTION>
========================= =========================== =============================
Toronto Stock Exchange American Stock Exchange
Period CDN$ US$
========================= =========================== =============================
HIGH LOW HIGH LOW
------------------------- --------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
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
------------------------- --------------- ----------- ---------------- ------------
Apr - June 1999 5.70 4.10 3.875 3.81
------------------------- --------------- ----------- ---------------- ------------
July - Sept 1999 5.70 3.40 3.873 2.31
------------------------- --------------- ----------- ---------------- ------------
Oct - Dec 1999 5.15 4.00 3.500 2.69
------------------------- --------------- ----------- ---------------- ------------
Jan - March 2000 17.40 4.50 11.94 3.00
------------------------- --------------- ----------- ---------------- ------------
</TABLE>
On June 20, 2000, the closing price of the Company's common shares was
CDN$4.65 on the TSE and US3.25 on the AMEX. As of June 20, 2000, there were
approximately 353 registered shareholders of record. In addition, approximately
9,463,853 of the Company's common shares or 35% of the total 27,264,218 issued
and outstanding common shares on June 20, 2000, were held among 289 registered
United States record holders.
Dividends
The Company has never paid any cash dividends on its common stock.
FEDERAL INCOME TAX CONSEQUENCES
The discussion under this heading summarizes the principal Canadian and
United States 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 a United States person which does not
own a 10% or more interest in the Registrant and holds their investment as a
capital asset. 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 and the Internal Revenue Code are subject to income tax treaties to
which Canada and the United States are parties, 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
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
25.
<PAGE> 26
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 - United States Shareholders: United States
persons (i.e. citizens, residents, domestic corporations, etc.) are subject to
tax on their worldwide income, regardless of source. Dividends of the Registrant
received by a United States person shareholder would be subject to income tax at
the United States ordinary income tax rates. Any Canadian withholding tax
withheld on dividends of the Registrant should be creditable against United
States 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." Shares of a Canadian corporation listed on a prescribed
stock exchange will only be classified as Taxable Canadian Property if the
shareholder, and persons with whom the shareholder does not deal at arm's
length, owned 25% or more of the issued shares of any class at any time in the
five year period ended at the time of the disposition. Toronto Stock Exchange
is a prescribed stock exchange. 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 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
United States person shareholder whose common shares of the Registrant
constitute capital property and are not shares of a passive foreign investment
company . The shares will generally constitute capital property unless the
holder is a trader or dealer in securities. A United States person 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 tax 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 should be creditable against the United States
income tax.
Determination of PFIC Status: Under United States federal income tax
law, a foreign corporation is considered a passive foreign holding company
("PFIC") if the corporation meets either an asset or income test in any given
year. 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 (generally 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 not classified as a PFIC for the fiscal year ended March 31, 2000.
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.
26.
<PAGE> 27
United States Foreign Tax Credit: United States persons 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
United States federal income tax on foreign source income is subject to
limitation. United States federal foreign tax credit law is a complex topic. It
is suggested that a competent United States tax advisor be consulted with for a
more complete understanding of such provisions.
RECENT SALES OF UNREGISTERED SECURITIES
In the fiscal year ended March 31, 2000, the Company issued a total of
988,542 shares of its common stock to certain of its employees, directors, and
consultants pursuant to the exercise of stock options for total consideration of
$1,516,239.
In June, 1999, the Company sold an aggregate of 4,187,500 special
warrants pursuant to a private placement at a purchase price of $3.00 per
special warrant for total consideration of $12,562,500. 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 March 2000, 23,000 warrants
were converted into 23,000 common shares. Also in March 2000, the Company issued
151,300 common shares pursuant to the exercise of agent's warrants to acquire
151,300 common shares at a price of $3.31 per share. Subsequent to March 31,
2000, the Company issued an additional 180,500 common shares pursuant to the
exercise of agent's warrants at a price of $3.31 per share. In addition, all
remaining special warrants were converted into 4,164,500 common shares.
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 principles generally
accepted in Canada which conform to accounting principals generally accepted in
the United States, except as described in Note 17 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 20, 2000 the Interbank rate of exchange for converting Canadian
dollars into United States dollars equaled 1.4667 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 Ended March 31, 2000 March 31, 1999 March 31, 1998 Feb 28, 1997 Feb 29, 1996
======================= =============== =============== =============== ============= =============
<S> <C> <C> <C> <C> <C>
Period End 1.4494 1.5104 1.4218 1.3556 1.3752
----------------------- --------------- --------------- --------------- ------------- -------------
Average 1.4661 1.5031 1.3994 1.3556 1.3767
----------------------- --------------- --------------- --------------- ------------- -------------
Period's High 1.4878 1.5845 1.4686 1.3752 1.4077
----------------------- --------------- --------------- --------------- ------------- -------------
Period's Low 1.4524 1.4144 1.3594 1.3381 1.3458
----------------------- --------------- --------------- --------------- ------------- -------------
</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. All
amounts are shown in United States dollars.
27.
<PAGE> 28
<TABLE>
<CAPTION>
===================================================================================================
12 Months 12 Months 13 Months 12 Months 12 Months
Fiscal Periods Ended 3/31/00 3/31/99 3/31/98 2/28/97 2/29/96
===================================================================================================
<S> <C> <C> <C> <C> <C>
Net Sales 4,134,436 3,434,105 3,097,198 3,040,734 2,512,131
---------------------------------------------------------------------------------------------------
License Fee and milestone payments 416,667 4,500,000 0 0 0
---------------------------------------------------------------------------------------------------
Interest Income 556,193 300,911 427,498 71,206 64,160
---------------------------------------------------------------------------------------------------
Research Revenue and Grant Funding 526,236 387,183 134,094 47,439 105,292
---------------------------------------------------------------------------------------------------
Net Loss for Period
---------------------------------------------------------------------------------------------------
Canadian GAAP(1) (9,599,942) (6,603,837) (7,596,666) (2,994,610) (1,876,426)
---------------------------------------------------------------------------------------------------
United States GAAP (10,703,830) (7,150,537) (7,904,166) (3,330,110) (2,033,326)
---------------------------------------------------------------------------------------------------
Net Loss per Common Share
---------------------------------------------------------------------------------------------------
Canadian GAAP (0.43) (0.33) (0.43) (0.24) (0.17)
---------------------------------------------------------------------------------------------------
United States GAAP (0.48) (0.35) (0.44) (0.26) (0.18)
---------------------------------------------------------------------------------------------------
Total Assets
---------------------------------------------------------------------------------------------------
Canadian GAAP 14,012,304 9,807,644 9,242,887 4,161,129 4,318,264
---------------------------------------------------------------------------------------------------
U.S. GAAP 14,012,304 9,807,644 9,242,887 4,161,129 4,318,264
---------------------------------------------------------------------------------------------------
Long Term Liabilities 128,356 173,840 122,319 120,598 22,757
---------------------------------------------------------------------------------------------------
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 and Gene Delivery Division, Genetronics is engaged in
developing drug and gene delivery systems based on electroporation to be used in
the site-specific treatment of disease. Through its BTX Instrument Division, the
Company develops, manufactures, and sells electroporation equipment to the
research laboratory market.
In the past the Company's revenues primarily reflected product sales to
the research market through the BTX Instrument Division and research grants
through the Drug and Gene Delivery Division. In October 1998 the Company entered
into a comprehensive License and Development Agreement and a Supply Agreement
with Ethicon, Inc., a Johnson & Johnson company, involving Genetronics'
proprietary drug and DNA delivery system for the electroporation therapy
treatment of solid tumor cancer. As part of the License and Development
Agreement, the Company received an up-front licensing fee. The Company has
received milestone payments and will be receiving future milestone payments if
and when milestones are met. In August 1999, the Company announced that Ethicon
Inc. transferred its responsibilities and obligations under the License and
Development and Supply Agreements to Ethicon Endo-Surgery, Inc., which is also a
Johnson & Johnson company. Since mid-January 2000, the Company and Ethicon have
been assembling and reviewing existing clinical and regulatory information
relating to human clinical trials for treating certain cancers with bleomycin
and the Company's MedPulser(R) system. Existing information relating to
pre-clinical in vitro and in vivo animal studies also is being reviewed. These
projects have delayed pre-commercialization activities for the system in Europe
and initiation of a pivotal or other clinical trial in the United States and are
expected to further delay European commercial launch and initiation of new
clinical trials for at least several more months. Pivotal clinical trials are
used to assess a drug for efficacy at several independent sites in a
statistically large number of patients.
Until the commercialization of clinical products pursuant to the License
and Development and Supply Agreements, the Company expects revenues to continue
to be attributable to product sales to the research market, milestone payments,
grants, collaborative research arrangements, and interest income.
28.
<PAGE> 29
Due to the expenses incurred in the development of the drug and gene
delivery systems, the Company has been unprofitable in the last five years. As
of March 31, 2000 the Company has incurred a cumulative deficit of $29,598,443.
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.
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 operations for the years ended March 31, 2000
and March 31, 1999, and the 13 months ended March 31, 1998. 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 17 to the
consolidated financial statements.
TWELVE MONTHS ENDED MARCH 31, 2000 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1999
Revenues
The BTX Instrument Division produced net sales of $3,827,537 for the
twelve months ended March 31, 2000, compared with net sales of $3,434,105, for
the twelve months ended March 31, 1999, which meant an increase of $393,432, or
11%. The primary factor contributing to this increase was the result of higher
sales through domestic distributors which increased by 31% over the previous
year.
Export sales increased by $76,507, or 6%, from $1,298,886 for the twelve
months ended March 31, 1999 to $1,375,393 for the twelve months ended March 31,
2000. Export sales as a percentage of total sales remained relatively constant
at 36% in the twelve months ended March 31, 2000 compared to 38% in the twelve
months ended March 31, 1999.
In August of 1999 the Company introduced the ECM 630, an Exponential
Decay Wave Electroporation system which utilizes a Precision Pulse Technology,
the new BTX Platform technology, and an all-new digital user interface. The
introduction of the new product also resulted in additional sales. The overall
increase in sales was also attributed to the increased focus on
application-based sales in the in vivo gene therapy area.
The Drug and Gene Delivery Division had its first product sales in the
twelve months ended March 31, 2000 in the amount of $306,899. The product sales
were to Ethicon and consisted of medical instruments and applicators which were
designated for market development activities and future clinical trials.
Revenues from grant funding decreased from $354,135 for the twelve
months ended March 31, 1999 to $334,901 for the twelve months ended March 31,
2000. The grant revenues in the twelve months ended March 31, 2000 were
primarily a result of activities within the Oncology field for which a Phase II
Small Business Innovative Research (SBIR) grant was awarded to the Company by
the NIH in September 1997. In the year ended March 31, 2000 the Company also
received revenues from a Phase I SBIR grant which was awarded in February of
1999 for an In Vivo Skin-Targeted Gene Therapy project. Revenues from grant
funding may fluctuate from period to period based on the level of grant funding
awarded and the level of research activity related to the grants awarded.
In the twelve months ended March 31, 2000, the Drug and Gene Delivery
Division recorded milestone revenues in the amount of $416,667. The milestones
achieved were part of the Licensing Agreement with Ethicon involving the use of
the Medpulser(R) system for Electroporation Therapy in the treatment of solid
tumor cancer. The
29.
<PAGE> 30
decrease in license fees and milestone payments from $4,500,000 for the twelve
months ended March 31, 1999 to $416,667 for the twelve months ended March 31,
2000 was a result of the $4,000,000 up-front licensing fee received from Ethicon
in October of 1998. Milestone revenues may fluctuate from period to period due
to the timing of milestone achievements, the amount of milestone payments, and
whether milestones were achieved.
In the twelve months ended March 31, 2000 the Company recorded contract
research revenues in the amount of $191,335, primarily as a result of
collaborative research agreements to develop Genetronics' electroporation
technology for use in particular gene therapy applications.
Interest income for the twelve months ended March 31, 2000 in the amount
of $556,193 increased by $255,282, or 85%, compared to the interest income for
the twelve months ended March 31, 1999 in the amount of $300,911. The increase
in interest income was attributable to the proceeds from the private placement
in June 1999 which were invested in interest-bearing instruments.
Cost Of Sales
Cost of sales for the BTX Instrument Division increased by 143,337, or
9%, from $1,638,635, for the twelve months ended March 31, 1999 to $1,781,972
for the twelve months ended March 31, 2000. The increase was primarily a result
of higher net sales.
The Drug and Gene Delivery Division recorded cost of sales in the amount
of $241,927 for the twelve months ended March 31, 2000. For the prior year no
cost of sales were incurred since no products were sold.
Gross Profit and Gross Margin
Primarily due to the higher sales, the gross profit for the BTX
Instrument Division for the twelve months ended March 31, 2000 in the amount of
$2,045,565, increased by $250,095, or 14%, compared with $1,795,470 for the
twelve months ended March 31, 1999.
The gross profit margin for BTX products increased from 52% for the
twelve months ended March 31, 1999 to 53% for the twelve months ended March 31,
2000.
The Drug Delivery Division recorded a gross profit in the amount of
$64,972 for the twelve months ended March 31, 2000. The low gross profit margin
of 21% was expected since the products sold were designated for market
development and future clinical trials and therefore were sold at a highly
discounted price.
Selling, General and Administrative Expenses
Selling, general and administrative expenses which include advertising,
promotion and selling expenses, increased by $129,779, or 2%, from $5,481,051
for the twelve months ended March 31, 1999 to $5,610,830 for the twelve months
ended March 31, 2000. The increase was primarily due to higher sales and
marketing expenses in the BTX Instrument Division, partially as a result of
efforts to increase product sales and promote the newly introduced ECM 630.
General and administrative expenses for the year ended March 31, 2000 remained
at about the same level as for the year ended March 31, 1999.
Research and Development/Clinical Trials
Research and development costs decreased by $1,109,739, or 14%, from
$8,086,959 for the twelve months ended March 31, 1999 to $6,977,220 for the
twelve months ended March 31, 2000.
The overall lower R&D expenses were primarily a result from lower
clinical/regulatory expenses due to the winding down of the Head & Neck Phase II
clinical trials in the United States and Canada and decreased activities related
to the development of the Drug and Gene Delivery products. Reduced expenses in
the transdermal and vascular therapy areas, as the result of a shift in the
Company's primary focus to oncology and gene therapy, also contributed to the
lower research and development expenses. The above noted lower R&D expenses in
the Drug and
30.
<PAGE> 31
Gene Delivery Division more than offset increased engineering expenses in the
BTX Instrument Division, which were incurred in the process of upgrades to
certain BTX instrument products.
Restructuring charges
In the summer of 1999 the Company undertook a review of its operating
structure to identify opportunities to improve operating effectiveness. As a
result of this review, certain staffing changes occurred. The Company also
announced that its employment of two senior executives ended in September 1999.
In December 1999, the Company entered into an Agreement for Termination of
Employment with each of the two senior executives. In accordance with the
staffing changes and the terms of the Termination of Employment Agreements, the
Company has accrued and recorded restructuring charges of $597,183 for the
twelve months ended March 31, 2000.
Net results of reportable segments (Net results of reportable segments
do not include unallocated items such as interest income and expense and general
and administrative costs)
The BTX Instrument Division reported a net surplus in the amount of
$332,657 for the twelve months ended March 31, 2000 compared to a net surplus in
the amount of $366,386 for the twelve months ended March 31, 1999. The lower
surplus for the year ended March 31, 2000 was attributable to the higher
engineering expenses to upgrade certain BTX instrument products and the increase
in sales and marketing expenses. The higher operating expenses more than offset
the higher gross profit for the year.
The Drug and Gene Delivery Division reported net expenditures in the
amount of $6,073,667 for the twelve months ended March 31, 2000 compared to net
expenditures in the amount of $2,858,343 for the twelve months ended March 31,
1999, an increase of $3,215,324. The increase in net expenditures was a result
of the one-time $4,000,000 up-front licensing fee received in the twelve months
ended March 31, 1999 from Ethicon as part of the Licensing Agreement. Not
including the one-time licensing fee, net expenditures for the year ended March
31, 2000 decreased by approximately $785,000, primarily as a result of the lower
research and development expenses.
Net Loss
For the twelve months ended March 31, 2000 the Company recorded a net
loss of $9,599,942 compared with a net loss of $6,603,837 for the twelve months
ended March 31, 1999, which meant an increased loss of $2,996,105, or 45%. The
lower loss for the twelve months ended March 31, 1999 was primarily a result of
the $4,000,000 up-front license fee received from Ethicon in October of 1998.
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 Instrument 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
31.
<PAGE> 32
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 Company 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 future sales efforts in Europe.
In October 1998 Genetronics entered into comprehensive Licensing and
Development and Supply Agreements with Ethicon, Inc., a Johnson & Johnson
company, involving its proprietary drug delivery system for 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, which was
substantially received during the year ended March 31, 1999. A Phase I grant for
which no revenues have been received 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
Company 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.
32.
<PAGE> 33
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 Company 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.
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 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, 1998, 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.
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, including preclinical
and clinical trials in the Drug and Gene Delivery Division. The Company has
satisfied its cash requirements principally from proceeds from the sale of
equity. In June 1999 the Company closed a private placement of 4,187,500 special
warrants at a price of $3.00 per special warrant for net proceeds to the Company
of $11,063,758. Each special warrant entitled the holder to acquire one common
share in the capital of the Company at no additional cost upon exercise. In
March 2000, 23,000 warrants were converted into 23,000 common shares. Also in
March 2000, the Company issued 151,300 common shares pursuant
33.
<PAGE> 34
to the exercise of agent's warrants to acquire 151,300 common shares at a price
of $3.31 per share. Subsequent to March 31, 2000 the Company issued an
additional 180,500 common shares pursuant to the exercise of agent's
warrants at a price of $3.31 per share. In addition, all remaining special
warrants were converted into 4,164,500 common shares.
As of March 31, 2000, the Company had working capital of $9,508,012,
compared to $6,204,598, as of March 31, 1999. The increase was a result of the
private placement in June 1999.
On March 31, 2000, the Company's cash and cash equivalents amounted to
$9,742,344. Cash flows used in operating activities were $8,790,736 for the
twelve months ended March 31, 2000 compared to $6,318,900 for the twelve months
ended March 31, 1999. The lower cash used in operating activities for the twelve
months ended March 31, 1999 was primarily attributable to the $4,000,000
up-front license fee received from Ethicon in October 1998.
Investing activities for other assets for the twelve months ended March
31, 2000 increased over the previous year due to increased expenses related to
the strengthening of the Company's patent portfolio through preparation, filing,
and prosecution of patent applications, whereas expenses incurred for the
purchase of capital assets decreased.
In August 1999 the Company entered into a revolving credit agreement
with a bank which provides the Company with the ability to borrow up to
$2,000,000. Borrowings under this facility bear interest at the Bank's floating
reference rate less a discount, or the London Inter Bank Offer Rate (LIBOR) plus
a premium. Under the agreement, outstanding balances are collaterized by
assignment of cash accounts and short-term investment accounts. The credit
facility will expire on June 30, 2000. At March 31, 2000 there was no
outstanding balance on the revolving line of credit.
Receivables in the amount of $1,120,450 at March 31, 2000 were $343,802,
or 44% higher than at March 31, 1999 primarily due to outstanding invoices for
shipments of products for clinical trials during the last month of the year
ended March 31, 2000.
Current liabilities increased from $1,423,335 at March 31, 1999 to
$2,105,847 at March 31, 2000, primarily due to the accrual of restructuring
charges, the recording of $268,665 deferred revenues as a result of the receipt
of an up-front payment as part of a collaborative gene therapy research
agreement, and the prepayment of reimbursable tooling expenses by Ethicon.
The Company believes that its existing cash and cash equivalents 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
34.
<PAGE> 35
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 cannot guarantee that additional funding will be available
when needed. If it is not, the Company will be required to scale back its
research and development programs, preclinical studies and clinical trials,
administrative activities, and financial results and condition would be
materially adversely affected.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of plans
to become Year 2000 ready. In late 1999, the Company completed remediation and
testing of systems. As a result of those planning and implementation efforts, no
significant disruptions in mission critical information technology and
non-information technology systems were experienced. The Company believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $50,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with the Company's products, internal systems, or the
products and services of third parties. The Company will continue to monitor
mission critical computer applications and those of the Company's suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
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.
The Company has invested its excess cash, cash equivalents, and
short-term investments in United States government, municipal, and corporate
debt securities with high quality credit ratings and an average maturity of no
more than six months. These investments are not held for trading or other
speculative purposes. Given the short-term nature of these investments, and that
the Company has no borrowings outstanding, the Company is not subject to
significant interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated 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
None.
35.
<PAGE> 36
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, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
----------------------------------- --- --------------------------------------------
<S> <C> <C>
Martin Nash ....................... 53 Director, Chief Executive Officer, President
and Chief Financial Officer
James Lierman ..................... 53 Chief Operating Officer
James L. Heppell (1)(3) ........... 44 Director, Interim Chairman of the Board
Gunter A. Hofmann ................. 64 Director
Stan Yakatan ...................... 57 Director
Suzanne L. Wood (2)(3) ............ 43 Director
Gordon Politeski (1)(2)(3) ........ 56 Director
Felix Theeuwes (2)(3) ............. 62 Director
Gordon Blankstein(1)(3) ........... 49 Director
Grant Denison, Jr.(3)(4) .......... 50 Director
</TABLE>
----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of Nomination and Corporate Governance Committee
(4) Mr. Denison was appointed to the Board on May 22, 2000.
MARTIN NASH has been the President and Chief Executive Officer of
Genetronics since September 1999 and its Chief Financial Officer since June
1999. He has been a director since July 1997. From April 1996 to September 1999
he was Senior Vice President of Genetronics. He has also served as Senior Vice
President of Genetronics, Inc. since June 1994 and a director of Genetronics,
Inc. since April 1996. 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.
JAMES LIERMAN has been Chief Operating Officer of Genetronics since
September 7, 1999. Prior to that, he was Vice President for Corporate
Development and was responsible for the negotiation and execution of the
strategic license and development agreement between the Company and Ethicon,
Inc., a Johnson & Johnson company, for the use of Genetronics proprietary drug
delivery system for the electroporation therapy of solid tumors. Mr. Lierman is
past President and CEO of the San Diego-based River Medical Inc., a biomedical
company specializing in intravenous drug therapy systems. Prior to managing
River Medical, Mr. Lierman was Director, Commercial Development for Abbott
Laboratories, Hospital Products Division, where he was responsible for
licensing, acquisitions and contract manufacturing sales. He is a graduate of
Monmouth University and holds 15 patents.
GUNTER A. HOFMANN, Ph.D., was the Chairman of the Board and Chief
Scientific Officer of Genetronics Biomedical Ltd. from September 1994 until his
employment ended in September 1999, and was Chairman of the Board and Chief
Scientific Officer of Genetronics, Inc. from January 1992 until September 1999.
Dr. Hofmann
36.
<PAGE> 37
continues to be a director of Genetronics Biomedical Ltd. 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.
JAMES L. HEPPELL has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since September 1994 and interim chairman since September
1999. Mr. Heppell is a partner at Catalyst Corporate Finance Lawyers 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
and the secretary of Pheromone Sciences Corp. and is the secretary of Forbes
Medi-Tech 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. She is currently President and Director of MicroAccel,
Inc., Silva Bay International Inc. and California Cyber Design Inc. Her
experience in financial and corporate management include positions as past
President and Director of The Neptune Society, Inc., Director of Envoy
Communications Group Ltd., Controller and Director of the Mitek Group of
Companies and Vice President and Director of Barrington Petroleum Inc. 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.
STAN YAKATAN has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since July 1997. Mr. Yakatan is currently Chairman of Quantum
Biotechnologies, Inc., a development stage company. Mr. Yakatan is Chairman and
managing partner of Katan Associates, a financial consulting company and he is a
board member of Quantum Biotechnologies, Inc., Phycogen, Inc. and Conjuchem,
Inc. . Mr. Yakatan is an advisory board member of BioCapital, ComMIT Systems,
Arete, S3M, SynData, and he serves in an advisory capacity to Avanir
Pharmaceuticals. 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 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 former 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.
FELIX THEEUWES has been a Director of Genetronics Biomedical Ltd. and
Genetronics, Inc. since August, 1999. From 1970 to June 1999 Dr. Theeuwes held
various positions within Alza Corporation, directing research, technology
development and product development for a variety of controlled drug delivery
systems. Presently, Dr. Theeuwes is the chairman and Chief Scientific Officer of
Durect Corporation which is a spin out from Alza Corporation to focus on the
development of products based on the DUROS(TM) system technology. Dr. Theeuwes
work led to the product introduction of the Alzet(R) mini osmotic pump series
for animal research, and the OSRO(R) systems series of products. He directed
research in transdermal research and development, initiated the
electrotransport/ ionphoresis program, and initiated the DUROS(TM) osmotic
implant program. Dr. Theeuwes holds
37.
<PAGE> 38
more than 210 United States patents covering these systems and has published
more than 80 articles and chapters of books. Dr. Theeuwes is a member of the
board of directors of Vinifera Inc., and Durect Corporation and a member of the
scientific advisory board at Antigenics. In 1993, Dr. Theeuwes completed the
Stanford Executive Program at Palo Alto, California.
GORDON BLANKSTEIN joined the Boards of Genetronics Biomedical Ltd. and
Genetronics, Inc. on September 7, 1999. Mr. Blankstein founded GST Global Light
Telecommunications Inc. ("GSTTT") in 1992. He has been the Chairman of the board
of directors of that corporation since October 1996. Mr. Blankstein was a
director of NACT Telecommunications, Inc. a publicly traded subsidiary of GSTTI.
He is a founder, past President, Chairman of the board and former director of
ICG Communications, Inc. a publicly traded telecommunications services provider.
Mr. Blankstein is also currently the Chairman of the board of directors of
Bluestar Battery Systems International Corp. and Comptec Industries Ltd. and is
Vice-Chairman and a director of Highpoint Telecommunications Inc. He is a former
member of the Policy Advisory Committee of the former Vancouver Stock Exchange.
Mr. Blankstein holds a bachelor's degree and an M.B.A. from the University of
British Columbia.
GRANT DENISON, JR. is co-founder, Chairman and CEO of BioMarin
Pharmaceutical Inc., Novato, Calif., with 25 years experience in pharmaceutical
management. Prior to his present position, he served as President, Consumer
Products, and as Corporate Senior Vice President, Business Development, for
Searle, responsible for the general management of Searle's consumer products
business and all pharmaceutical, diagnostics and consumer licensing and
development. He also served as Vice President, Corporate Planning for Searle's
parent company, Monsanto Company, during a period of major restructuring and
portfolio realignment, and as President of Searle's United States operations
during a period of significant sales and earnings growth in the late 1980s.
Prior to joining Searle, Mr. Denison was Vice President, International
Operations for Squibb Medical Systems. He also held various management positions
at Pfizer, Inc. including Vice President, Pharmaceutical Planning and Business
Development, and was responsible for the formation of numerous licensing,
acquisition and strategic alliances. Mr. Denison previously served on the Board
of Genetronics, Inc. from May 1996 to August 1998. He also serves as director of
several companies including York Medical, Inc., Nastech Pharmaceutical,
Dentalview and Clubb BioCapital. Mr. Denison holds an M.B.A. from Harvard
Graduate School of Business Administration and an A.B. in Mathematical Economics
from Colgate University.
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 (Chair), Gordon Politeski and
Felix Theeuwes.
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 James L. Heppell
(Chair), Gordon Politeski and Gordon Blankstein.
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 the
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
38.
<PAGE> 39
Nomination and Corporate Governance Committee is composed of Gordon Politeski
(Chair), James L. Heppell, Suzanne L. Wood, Felix Theeuwes, Gordon Blankstein,
and Grant Denison.
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>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------- ------------
YEAR SECURITIES
ENDED UNDERLYING
MARCH SALARY BONUS OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION 31 (1) ($) ($)(2) (3) COMPENSATION (4)
--------------------------- ------ ------- ------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Martin Nash 2000 201,808 -0- 300,000 17,347
Director, President, Chief 1999 140,573 27,200 127,200 7,520
Executive Officer and Chief 1998 143,096 -0- 25,000(6) 12,241
Financial Officer (5)
James C. Lierman 2000 155,769 20,834 50,000 3,798(8)
Chief Operating Officer (7) 1999 136,500 200,000 127,000 3,072
1998 146,463 45,000 20,000 3,777
Gunter A. Hofmann 2000 107,146 -0- 97,000(10) 121,969(11)
Former Chairman and Chief 1999 179,785 35,200 135,200 14,083
Scientific Officer (9) 1998 188,923 -0- 25,000 13,383
Lois J. Crandell 2000 114,324 -0- 26,700(13) 133,727(14)
Former Director, President and 1999 179,990 43,125 143,125 14,065
Chief Executive Officer (12) 1998 184,465 -0- 65,000 13,244
</TABLE>
(1) The fiscal year ended March 31, 1998, included 13 months, due to a fiscal
year end change from February 28 to March 31 at that time.
(2) As of the date of this filing, the Board of Directors of the Company has not
considered bonuses for achievements of the Named Executives or other Company
employees during the fiscal year ended March 31, 2000 (other than bonuses based
on contractual right). The Board plans to consider the issue. If bonuses are
granted, then they will be paid from an account carried on the Company's books
to address accrued compensation for the fiscal year ended March 31, 2000.
(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 of the Company for the named
executives' 401(k) accounts. Also included for Dr. Hofmann and Ms. Crandell are
amounts paid for life insurance premiums; for Dr. Hofmann, Ms. Crandell, and Mr.
Nash, that portion of automobile leases attributed to personal use; and, for Ms.
Crandell, amounts paid for disability insurance premiums. Additional
Compensation for Mr. Nash also includes reimbursement for certain personal
travel expenses authorized by the Board of Directors.
(5) On June 10, 1999 Martin Nash was appointed Chief Financial Officer and
retained his position as Senior Vice President. On September 7, 1999 he was
appointed President and Chief Executive Officer and resigned as Senior Vice
President.
(6) An additional grant of 25,000 options, the exercise of which was contingent
upon the occurrence of a future event, was cancelled in the previous fiscal
year. This grant is not included in the Summary Compensation Table.
(7) On September 7, 1999, Mr. Lierman was promoted to Chief Operating Officer.
39.
<PAGE> 40
(8) Beginning in December, 1999, the Company leased an automobile for the
business use of Mr. Lierman. For income tax purposes, the Company determines the
percentage of time each Named Executive uses his or her company-leased car for
personal use during the 12 month period of December 1 through November 30.
Because the lease began after November 30, 1999, that portion of automobile
expenses paid by the Company for Mr. Lierman's personal use of the automobile
during the period of December, 1999 through March 31, 2000, will be recorded as
additional compensation to him in the 10-K filed for the fiscal year ended March
31, 2001.
(9) Dr. Hofmann's employment with the Company ended on September 7, 1999. He
remains a director.
(10) Includes 97,000 options granted to Dr. Hofmann on November 12, 1999, after
his employment by the Company ended. The grant was made pursuant to a Separation
Agreement.
(11) Includes $114,997 of severance and other termination payments paid to, or
for the benefit of, Dr. Hofmann in the fiscal year ended March 31, 2000 after
his employment by the Company ended. The payments were made pursuant to a
Separation Agreement.
(12) Ms. Crandell's employment with the Company ended on September 7, 1999. She
resigned as a director on December 6, 1999.
(13) Includes 26,700 options granted to Ms. Crandell on November 12, 1999, after
her employment by the Company ended. The grant was made pursuant to a Separation
Agreement.
(14) Includes $125,627 of severance and other termination payments paid to, or
for the benefit of, Ms. Crandell in the fiscal year ended March 31, 2000 after
her employment by the Company ended. The payments were made pursuant to a
Separation Agreement.
OPTION/SAR GRANTS TABLE
The following table sets out stock options and stock appreciation rights
granted to each Named Executive Officer during the fiscal year of the Company
ended March 31, 2000:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL EXERCISE ANNUAL RATES OF STOCK
UNDERLYING OPTIONS/SARS OR BASE PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO PRICE OPTION TERM
GRANTED EMPLOYEES IN (US$/ EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR(2) SECURITY) DATE 5% ($) 10% ($)
----------------------- ------------ -------------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Martin Nash 300,000 31% 4.13 02/06/10 779,200 1,974,647
James Lierman 50,000 5% 2.94 11/11/09 92,447 293,936
Gunter A. Hofmann, Ph.D 97,000(3) 10% 2.94 11/11/09 179,348 570,236
Lois J. Crandell 26,700(4) 3% 2.94 11/11/09 49,367 156,962
</TABLE>
----------
(1) The Company does not have Stock Appreciation Rights. All noted securities
are options.
(2) The Company granted a total of 958,200 options to its employees in the
fiscal year ended March 31, 2000, including 123,700 options granted to Dr.
Hofmann and Ms. Crandell after their employment by the Company ended (which are
used in calculating the percentages).
(3) These options were granted to Dr. Hofmann on November 12, 1999, after his
employment by the Company ended.
(4) These options were granted to Ms. Crandell on November 12, 1999, after her
employment by the Company ended.
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 IN-THE-
UNEXERCISED OPTIONS/SARS AT FISCAL MONEY OPTIONS/SARS AT
NAME OF SECURITIES VALUE YEAR END (1) FISCAL YEAR-END ($)(2)
EXECUTIVE ACQUIRED REALIZED
OFFICER ON EXERCISE ($) (#) EXERCISABLE (#) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ----------- --------- --------------- ------------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Nash -0- N/A 299,200(3) 250,000(3) 949,120 570,750
James Lierman -0- N/A 399,481(4) 67,519(4) 1,785,372 222,553
Gunter A.
Hofmann, Ph.D. 150,000(5) 307,500(6) 240,200(7) 97,000(7) 801,529 308,945
20,000 27,000
25,000 23,500
Lois J. Crandell 100,000(8) 205,000(9) 283,125(10) 26,700(10) 907,791 85,040
20,000 23,500
25,000 27,000
</TABLE>
(1) The Company does not have Stock Appreciation Rights. All noted securities
are options.
(2) The closing price of the company's common shares on the AMEX was $6.125 on
March 31, 2000. This price was used in the calculations reported in the column
"Value of Unexercised In-the-Money Options/SARs at Fiscal Year-end
Exercisable/Unexercisable." All Named Executives were "in the money" on March
31, 2000, with respect to all stock options granted to each.
(3) 20,000 options with an exercise price of $1.33; 7,000 options with an
exercise price of $2.19; 25,000 options with an exercise price of $2.55; 45,000
options with an exercise price of $2.78; 25,000 options with an exercise price
of $1.76; 27,200 options with an exercise price of $2.25; 100,000 options with
an exercise price of $2.69; and 300,000 options with an exercise price of $4.13.
(4) 250,000 options with an exercise price of $1.12; 10,000 options with an
exercise price of $2.55; 10,000 options with an exercise price of $2.78; 20,000
options with an exercise price of $2.12; 27,000 options with an exercise price
of $2.25; 100,000 options with an exercise price of $2.69; 50,000 options with
an exercise price of $2.94.
(5) 150,000 options were exercised on July 2, 1999 at an exercise price of
$0.83; 20,000 options were exercised on October 27, 1999 at an exercise price of
$1.53; 25,000 options were exercised on October 27, 1999 at an exercise price of
$1.94.
(6) The closing price of GEB on the AMEX was $2.88 on both July 2, 1999 and
October 27, 1999.
(7) 35,000 options with an exercise price of $2.27; 25,000 options with an
exercise price of $2.81; 45,000 options with an exercise price of $3.06; 35,200
options with an exercise price of $2.48; 100,000 options with an exercise price
of $2.95; and 97,000 options with an exercise price of $2.95. The 97,000 options
were granted to Dr. Hofmann on November 12, 1999, after his employment by the
Company ended; the grant was made pursuant to a Separation Agreement.
(8) 100,000 options were exercised on July 2, 1999 at an exercise price of
$0.83; 20,000 options were exercised on October 27, 1999 at an exercise price of
$1.53; 25,000 options were exercised on October 27, 1999 at an exercise price of
$1.94.
(9) The closing price of GEB on the AMEX was $2.88 on both July 2, 1999 and
October 27, 1999.
(10) 40,000 options with an exercise price of $2.81; 60,000 options with an
exercise price of $3.06; 40,000 options with an exercise price of $3.21; 43,125
options with an exercise price of $2.48; 100,000 options with an exercise price
of $2.95; and 26,700 options with an exercise price of $2.94. The 26,700 options
were granted Ms. Crandell on November 12, 1999, after her employment by the
Company ended; the grant was made pursuant to a Separation Agreement.
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 may receive an annual grant of an option
to purchase the Company's common shares. In the last completed fiscal year, the
outside directors were not granted options to purchase shares of the Company's
common stock, other than grants made to new directors joining the board. 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 15 to the Consolidated Financial Statements, the
Company incurred legal fees charged by the law firm of Catalyst Corporate
Finance Lawyers in Vancouver, British Columbia, Canada, in the amount of
$161,042 in the year ended March 31, 2000. James L. Heppell, a partner of that
law firm, is a Director of the Company. The Company also incurred accounting and
administrative fees charged by Wood & Associates of
41.
<PAGE> 42
Vancouver, British Columbia, Canada, in the amount of $29,055 in the year ended
March 31,2000. Suzanne Wood, the Principal of Wood & Associates, is a Director
of the Company. For the year ended March 31, 2000, the Company incurred $32,600
for certain administration fees charged by a company where one of the principals
was an officer of the Company's former French subsidiary.
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 former President and Chief Executive Officer.
The employment agreement had 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 provided for an annual salary of $220,000, an
annual bonus of up to 25% of her annual salary, payable within 90 days of the
end of the fiscal year, and life insurance in the amount of $500,000. Ms.
Crandell's employment with the Company ended as of September 7, 1999. The
Company entered into a Separation Agreement and Consulting Agreement with Ms.
Crandell, effective December 6, 1999 and September 7, 1999, respectively.
Pursuant to the Separation and Consulting Agreements, the Company made severance
payments and issued additional option grants to Ms. Crandell.
In January 1995, the Company entered into an employment agreement with
Gunter A. Hofmann, Ph.D., the Company's former Chief Scientific Officer, and
such employment agreement had 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 provided for an annual salary of
$200,000, and annual bonus of up to 20% of his annual salary, payable within 90
days of the end of the fiscal year and life insurance in the amount of $500,000.
Dr. Hofmann's employment with the Company ended as of September 7, 1999. The
Company entered into a Separation Agreement and Consulting Agreement with Dr.
Hofmann, effective December 6, 1999 and September 7, 1999, respectively.
Pursuant to the Separation and Consulting Agreements, the Company made severance
payments and issued additional option grants to Dr. Hofmann.
.
In January 1995, the Company entered into an employment agreement with
Martin Nash, the Company's then Senior Vice President. Mr. Nash was also
appointed as the Company's Chief Financial Officer on June 10, 1999 and
President and CEO on September 7, 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 a Board resolution as of September 7, 1999, Mr. Nash
receives an annual salary of $220,000. 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 Mr. Nash's employment for the following reasons; (i)
the Company decides not to renew his employment agreement, (ii) the Company
terminates him or (iii) if without written consent of Mr. Nash, the Company
changes his duties or responsibilities and he terminates his employment with six
months written notice, then the Company must pay to Mr. Nash two months of his
annual salary for each full year of service, such payment to be for no shorter
time period than for six months and Mr. Nash shall be entitled to all other
benefits that he would have been entitled to as an employee. In addition,
pursuant to the terms of the employment agreements between the Company and Mr.
Nash, in recognition of the fact that he requires the use of a car in the
performance of his duties, the Company pays the lease payment, the insurance,
maintenance, and repair costs associated with a car for Mr. Nash. That portion
of such costs associated with personal usage of the car is considered
compensation to Mr. Nash.
In January 1996, the Company entered into an employment agreement with
James Lierman for the position of Vice President of Corporate Development. Mr.
Lierman was appointed Chief Operating Officer of the Company in September 1999.
Mr. Lierman is eligible to receive an annual bonus determined by a percentage of
the licensing activity attributed to Mr. Lierman's employment efforts with the
Company. In recognition of the fact that Mr. Lierman requires the use of a car
in the performance of his duties, the Company pays the lease payment, the
insurance, maintenance, and repair costs associated with a car for Mr. Lierman.
That portion of such costs associated with personal usage of the car is
considered compensation to Mr. Lierman.
42.
<PAGE> 43
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 as of March 31, 2000, are James L. Heppell (Chair),
Gordon J. Politeski, and Gordon Blankstein.
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.
43.
<PAGE> 44
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 until September 7, 1999 of the fiscal year ended March 31, 2000. Ms.
Crandell's annual base compensation was $220,000 on September 7, 1999. Mr. Nash
was appointed President and Chief Executive Officer of the Company on September
7, 1999. His base salary was increased on November 12, 1999, from $165,000 to
$220,000, retroactive to September 7, 1999. Any future increases in salary
and/or bonuses are based upon progress in achieving certain of the Company's
milestones.
COMPENSATION COMMITTEE
James L. Heppell.
Gordon J. Politeski
Gordon Blankstein
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. All dollar values are in Canadian dollars.
COMPARISON OF CUMULATIVE
TOTAL RETURN ON INVESTMENT
<TABLE>
<CAPTION>
Genetronics AMEX Index
Date Indexed Price Indexed Price
---------- ------------- -------------
<S> <C> <C>
March 1996 $100.00 $100.00
March 1997 234.38 100.68
March 1998 221.88 134.36
March 1999 309.37 137.01
March 2000 562.50 186.80
</TABLE>
<TABLE>
<CAPTION>
Genetronics S&P Biotechnology
Date Indexed Price Indexed Price
---------- ------------- -------------
<S> <C> <C>
March 1996 $100.00 $100.00
March 1997 117.19 88.15
March 1998 110.94 102.86
March 1999 154.69 195.26
March 2000 195.26 335.51
</TABLE>
44.
<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 5, 2000 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 currently Named Executive Officer and (iv) all
directors and currently 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 Percent of Class
Beneficial Ownership of Common Stock
Beneficial Owner of Common Stock (1) of Common Stock (2) (2)
------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Johnson & Johnson Development Corporation 2,242,611 8.23%
One Johnson & Johnson
Plaza, New Brunswick, New Jersey
------------------------------------------------------- ---------------------- -------------------
Gunter A. Hofmann 3,158,088(3) 11.37%
11199 Sorrento Valley Road
San Diego, California 92121
------------------------------------------------------- ---------------------- -------------------
Martin Nash 679,661(4) 2.47%
------------------------------------------------------- ---------------------- -------------------
James Lierman 412,481(5) 1.49%
------------------------------------------------------- ---------------------- -------------------
James L. Heppell 80,500(6) *
------------------------------------------------------- ---------------------- -------------------
Suzanne L. Wood 97,500(7) *
------------------------------------------------------- ---------------------- -------------------
Stan Yakatan 252,400(8) *
------------------------------------------------------- ---------------------- -------------------
Gordon Politeski 85,000(9) *
------------------------------------------------------- ---------------------- -------------------
Gordon Blankstein 35,000(10) *
------------------------------------------------------- ---------------------- -------------------
Felix Theeuwes 69,000(11) *
------------------------------------------------------- ---------------------- -------------------
Grant Denison, Jr. 80,000(12) *
------------------------------------------------------- ---------------------- -------------------
Lois Crandell 3,158,088(13) 11.37%
------------------------------------------------------- ---------------------- -------------------
All Executive Officers and Directors as a group (10
persons) 4,949,630(14) 17.3%
------------------------------------------------------- ---------------------- -------------------
</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 June 20, 2000 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 27,264,218 shares of the Company's Common Stock
outstanding as of June 20, 2000.
(3) Includes 240,200 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000. Also includes 777,189
shares owned by Lois J. Crandell, Dr. Hofmann's wife. Dr. Hofmann
disclaims beneficial ownership of Ms. Crandell's shares.
(4) Includes 299,200 shares of common stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(5) Includes 399,481 shares of common stock issuable pursuant to options
exercisable within 60 days of June 20, 2000 and 13,000 shares of common
stock owned by Mr. Lierman's wife. Mr. Lierman disclaims beneficial
ownership of his wife's shares.
(6) Includes 60,000 shares of common stock issuable pursuant to options
exercisable within 60 days of June 20, 2000, 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.
45.
<PAGE> 46
(7) Includes 70,000 shares of common stock issuable pursuant to options
exercisable within 60 days June 20, 2000.
(8) Includes 106,400 shares of common stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(9) Includes 85,000 shares of common stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(10) Includes 35,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(11) Includes 35,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(12) Includes 80,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
(13) Includes 283,125 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000. Also includes 2,380,899
shares owned by Gunter A Hofmann, Ms. Crandell's husband. Ms. Crandell
disclaims beneficial ownership of Dr. Hofmann's shares.
(14) Includes 1,410,281 shares of Common Stock issuable pursuant to options
exercisable within 60 days of June 20, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Note 15 to the Financial Statements, the Company
incurred legal fees charged by the law firm of Catalyst Corporate Finance
Lawyers in Vancouver, British Columbia, Canada, in the amount of $161,042 in the
year ended March 31, 2000. James L. Heppell, a partner of that law firm, is a
Director of the Company.
The Company also incurred accounting and administrative fees charged by
Wood & Associates of Vancouver, British Columbia, Canada, in the amount of
$29,055 in the year ended March 31,2000. Suzanne Wood, the Principal of Wood &
Associates, is a Director of the Company. For the year ended March 31, 2000, the
Company incurred $32,600 for certain administrative fees charged by a company
where one of the principals was an officer of the Company's former French
subsidiary.
The Company entered into Separation Agreements with each of Gunter
Hofmann, Ph.D., the former Chief Scientific Officer and Chairman of the Board,
and Lois Crandell, the former President and Chief Executive Officer. Pursuant to
the terms of the Separation Agreement with Dr. Hofmann, during the fiscal year
ended March 31, 2000, the Company paid $114,997 of severance and other
termination payments to, or on behalf of, Dr. Hofmann, and granted him an option
to purchase 97,000 shares of the Company's common stock. Pursuant to the terms
of the Separation Agreement with Ms. Crandell, during the fiscal year ended
March 31, 2000, the Company paid $125,627 of severance and other termination
payments to, or on behalf of, Ms. Crandell, and granted her an option to
purchase 26,700 shares of the Company's common stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
(a)(1) Index to Financial Statements
The consolidated 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, 2000 and March 31, 1999 ............ F-2
Consolidated Statements of Loss and Deficit for the periods ended March
31, 2000, March 31, 1999 and March 31, 1998 .................................... F-3
Consolidated Statements of cash flows for the periods ended March 31,
2000, March 31, 1999, and March 31, 1998 ....................................... F-4
Notes to Consolidated Financial Statements ..................................... F-5
</TABLE>
46.
<PAGE> 47
(a)(2) Index to Financial Statement Schedules
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 48.
(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.
47.
<PAGE> 48
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)
10.1 1995 Incentive Stock Option Plan (the "1995 Plan"). (1)
10.2 Form of Nonstatutory Stock Option Agreement of Company pursuant to
the 1995 Plan. (1)
10.3 Form of Incentive Stock Option Agreement of Company pursuant to the 1995 Plan. (1)
10.4 Amended 1997 Incentive Stock Option Plan (the "Amended 1997 Plan"). (1)
10.5 Form of Nonstatutory Stock Option Agreement of Company pursuant to
the Amended 1997 Plan. (1)
10.6 Form of Incentive Stock Option Agreement of Company pursuant to the
Amended 1997 Plan. (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 Lois Crandell. (1)
10.8 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)
10.9 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)
10.10 Amendment Number 3 dated January 15, 1999 to Employment Agreement
dated January 9, 1995, as amended, between the Company and Lois
Crandell. (2)
10.11 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. (2)
10.12 Amendment Number 3 dated January 15, 1999 to Employment Agreement
dated January 9, 1995, as amended, between the Company and Martin
Nash (2)
10.13 401(k) Defined Contribution Plan of Company. (1)
10.14 Lease (sublease) between the Company (as sub-leasee), Genix Botek,
Inc. (as lessee) and Olen Property Corp (as landlord) dated April 7, 1998. (1)
10.15 Stock Purchase Agreement dated October 6, 1998 by and between the
Company and Johnson & Johnson Development Corporation. (2)
10.16 License and Development Agreement dated October 2, 1998 by and
between the Company and Ethicon, Inc. (3)
10.17 Supply Agreement dated October 2, 1998 by and between the Company
and Ethicon, Inc. (3)
10.18 Agency Agreement - Special Warrant Private Placement, dated June 8, 1999
by and between the Company and Canaccord International Corporation. (4)
10.19 Special Warrant Indenture, dated June 16, 1999 by and between the
Company and Montreal Trust Company of Canada. (4)
10.20 Lease Agreement by and between the Registrant and Nexus Sorrento Glen
LLC dated August 26, 1999. (5)
10.21 Trade Credit Agreement by and between the Registrant and Union Bank
of California dated August 6, 1999. (5)
10.22 Promissory Note - Trade Finance - Base Rate by the Registrant to
Union Bank of California dated August 6, 1999. (5)
10.23 Promissory Note - Base Rate by the Registrant to Union Bank of California
dated August 6, 1999. (5)
</TABLE>
48.
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.24 Research and Option Agreement dated November 2, 1999 by and between
the Registrant and Boehringer Ingelheim International GMBH. (6)
10.25 Termination of Employment Agreement dated December 6, 1999 by and
between the Registrant and Lois J. Crandell. (6)
10.26 Consulting Services Agreement dated December 6, 1999 by and between the
Registrant and Lois J. Crandell. (6)
10.27 Termination of Employment Agreement dated December 6, 1999 by and
between the Registrant and Gunter A. Hofmann. (6)
10.28 Consulting Services Agreement dated December 6, 1999 by and between
the Registrant and Gunter Hofmann. (6)
10.29 First Amendment to Agreement Concerning Termination of Employment of
Lois Crandell dated May 24, 2000 by and between the Registrant and Lois J. Crandell.
10.30 First Amendment to Consulting Services Agreement dated May 24, 2000 by and
between the Registrant and Lois J. Crandell.
10.31 First Amendment to Agreement Concerning Termination of Employment of Gunter A.
Hofmann dated May 24, 2000 by and between the Registrant and Gunter A. Hofmann.
10.32 First Amendment to Consulting Services Agreement dated May 24, 2000 by and
between the Registrant and Gunter A. Hofmann.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, LLP Independent Auditors.
24.1 Power of Attorney. Reference is made to page 51.
27.1 Financial Data Schedule.
</TABLE>
------------
(1) Incorporated by reference from the Form 20-F for the period ended
February 28, 1998.
(2) Incorporated by reference from the Form 10-K filed for the year
ended March 31, 1999.1
(3) Incorporated by reference from the Registration Statement on Form
S-1 filed on October 5
(4) Incorporated by reference from the Form 10-Q filed for the quarter
ended June 30, 1999.
(5) Incorporated by reference from the Form 10-Q filed for the quarter
ended September 30, 1999.
(6)Incorporated by reference form the Form 10-Q filed for the quarter
ended December 31, 1999.
49.
<PAGE> 50
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 28th day of June, 2000.
GENETRONICS BIOMEDICAL LTD.
By: /s/ MARTIN NASH
-----------------------------------------------
Martin Nash
President, Chief Executive Officer and Director
50.
<PAGE> 51
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Martin Nash and James Lierman, 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/ MARTIN NASH President, Chief Executive Officer, June 28, 2000
--------------------------------- Chief Financial Officer, and Director
Martin Nash (Principal Financial and Accounting
Officer)
/s/ JAMES L. HEPPELL Director June 28, 2000
---------------------------------
James L. Heppell
/s/ GUNTER A. HOFMANN Director June 28, 2000
---------------------------------
Gunter A. Hofmann
/s/ GORDON POLITESKI Director June 28, 2000
---------------------------------
Gordon Politeski
/s/ SUZANNE L. WOOD Director June 28, 2000
---------------------------------
Suzanne L. Wood
/s/ FELIX THEEUWES Director June 28, 2000
---------------------------------
Felix Theeuwes
/s/ GRANT DENISON, JR. Director June 28, 2000
---------------------------------
Grant Denison, Jr.
</TABLE>
51.
<PAGE> 52
GENETRONICS BIOMEDICAL LTD.
(in United States dollars)
Index to Financial Statements
The consolidated 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, 2000 and March 31, 1999 ....... F-2
Consolidated Statements of Loss and Deficit for the periods ended
March 31, 2000, March 31, 1999 and March 31, 1998 ......................... F-3
Consolidated Statements of cash flows for the periods ended March 31,
2000, March 31, 1999, and March 31, 1998 .................................. F-4
Notes to Consolidated Financial Statements ................................ F-5
</TABLE>
<PAGE> 53
AUDITORS' REPORT
To the Shareholders of
GENETRONICS BIOMEDICAL LTD.
We have audited the consolidated balance sheets of GENETRONICS BIOMEDICAL LTD.
as at March 31, 2000 and 1999 and the consolidated statements of loss and
deficit and cash flows for the years ended March 31, 2000 and 1999 and the
thirteen month period ended March 31, 1998. 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, 2000
and 1999, and the results of its operations and its cash flows for the years
ended March 31, 2000 and 1999 and the thirteen month period ended March 31,
1998, 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, 2000. Chartered Accountants
1
<PAGE> 54
GENETRONICS BIOMEDICAL LTD.
Incorporated under the laws of British Columbia
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at March 31 (In US dollars)
2000 1999
$ $
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 9,742,344 6,189,284
Accounts receivable, net of allowance for uncollectible
accounts of $54,925 [1999 - $19,685] [note 3] 1,120,450 776,648
Inventories [note 4] 611,642 655,906
Prepaid expenses and other 139,423 6,095
------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,613,859 7,627,933
------------------------------------------------------------------------------------------
Fixed assets [note 5] 1,014,811 1,177,393
Other assets [note 6] 1,383,634 1,002,318
------------------------------------------------------------------------------------------
14,012,304 9,807,644
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued expenses [note 7] 1,784,084 1,377,443
Current portion of obligations under
capital leases [note 11] 53,098 45,892
Deferred revenue 268,665 --
------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,105,847 1,423,335
------------------------------------------------------------------------------------------
Obligations under capital leases [note 11] 65,286 118,384
Deferred rent 9,972 9,564
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,181,105 1,551,283
------------------------------------------------------------------------------------------
Commitments and contingencies [note 11]
SHAREHOLDERS' EQUITY
Share capital [note 9] 30,491,793 28,357,863
Additional paid in capital [note 9] 35,768 --
Special warrants [note 9] 11,002,992 --
Cumulative translation adjustment (100,911) (103,001)
Deficit (29,598,443) (19,998,501)
------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 11,831,199 8,256,361
------------------------------------------------------------------------------------------
14,012,304 9,807,644
==========================================================================================
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
2
<PAGE> 55
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
LOSS AND DEFICIT
<TABLE>
<CAPTION>
(In US dollars)
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Net sales [note 3] 4,134,436 3,434,105 3,097,198
License fee and milestone payments [note 3] 416,667 4,500,000 --
Grant funding 334,901 354,135 128,069
Revenues under collaborative research
and development arrangements 191,335 33,048 6,025
Interest income 556,193 300,911 427,498
------------------------------------------------------------------------------------------------
5,633,532 8,622,199 3,658,790
------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 2,023,899 1,638,635 1,427,285
Research and development 6,977,220 8,086,959 5,637,955
Selling, general and administrative 5,610,830 5,481,051 4,172,246
Restructuring charges [note 10] 597,183 -- --
Interest expense 24,342 19,391 17,970
------------------------------------------------------------------------------------------------
15,233,474 15,226,036 11,255,456
------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (9,599,942) (6,603,837) (7,596,666)
Deficit, beginning of period (19,998,501) (13,394,664) (5,797,998)
------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD (29,598,443) (19,998,501) (13,394,664)
================================================================================================
LOSS PER COMMON SHARE (0.43) (0.33) (0.43)
================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 22,107,190 20,272,801 17,782,723
================================================================================================
</TABLE>
See accompanying notes
3
<PAGE> 56
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In US dollars)
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period (9,599,942) (6,603,837) (7,596,666)
Items not involving cash:
Depreciation and amortization 566,358 410,268 246,258
Provision for uncollectible accounts 43,149 7,472 26,915
Provision for inventory allowances 65,620 10,976 35,608
Loss on disposal of fixed assets -- 18,986 --
Deferred rent 408 (14,345) (1,196)
Changes in non-cash working capital items:
Accounts receivable (386,951) (280,393) 210,475
Inventories (21,356) (271,792) (37,980)
Prepaid expenses and other (133,328) (1,141) (815)
Accounts payable and accrued expenses 406,641 404,906 329,206
Deferred revenue 268,665 -- --
------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (8,790,736) (6,318,900) (6,788,195)
------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets (289,511) (414,186) (553,687)
Increase in other assets (495,581) (287,771) (304,683)
------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (785,092) (701,957) (858,370)
------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments on obligations under capital leases (45,892) (24,016) (18,549)
Issuance of Special Warrants, net of issue costs 11,155,648 -- --
Issuance of common shares, net of issue costs 2,017,042 6,795,461 12,333,136
------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 13,126,798 6,771,445 12,314,587
------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2,090 (83,294) 14,361
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,553,060 (332,706) 4,682,383
Cash and cash equivalents, beginning of period 6,189,284 6,521,990 1,839,607
------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 9,742,344 6,189,284 6,521,990
======================================================================================================
</TABLE>
See accompanying notes
4
<PAGE> 57
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 and Gene 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 sells the majority of its products to
customers in the United States, Canada, Germany and East Asia.
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 17.
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.
Significant intercompany accounts and transactions have been eliminated on
consolidation.
F-5
<PAGE> 58
2. ACCOUNTING POLICIES (CONT'D.)
STATEMENT OF CASH FLOWS
The Company has adopted the new recommendations of the Canadian Institute of
Chartered Accountants for cash flow statements and has restated the comparative
periods to conform to this revised standard. Accordingly, the Company has
redefined cash and cash equivalents and has excluded non-cash transactions such
as the acquisition of assets under capital leases and shares issued for non-cash
consideration within the statement of cash flows.
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. Cash equivalents consist primarily of
commercial paper with an average interest rate of 6.1% and maturities to June 5,
2000.
FIXED 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 depreciated over the
shorter of the estimated useful lives of the assets or the term of the lease.
Depreciation of leased assets is included in amortization and depreciation.
PATENT COSTS
Patents are recorded at cost and amortized using 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.
F-6
<PAGE> 59
2. ACCOUNTING POLICIES (CONT'D.)
FINANCIAL INSTRUMENTS
The fair values of the financial instruments including cash equivalents,
accounts receivable and accounts payable and accrued expenses approximate their
carrying value due to their short term nature except as otherwise disclosed in
the consolidated financial statements.
The obligations under capital lease bear rates which in management's opinion
approximate the current interest rate and therefore approximate fair value.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years
ended March 31, 2000 and 1999 and the thirteen months ended March 31, 1998 was
$225,035, $173,600, and $205,486, respectively.
REVENUE RECOGNITION
Sales are recognized upon shipment of products and are recorded net of discounts
and sales returns. 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.
Revenues under contractual arrangements are deferred upon receipt and recognized
as revenue over the remaining term of the contract.
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, Special Warrants and warrants are
anti-dilutive.
F-7
<PAGE> 60
2. ACCOUNTING POLICIES (CONT'D.)
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.
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 to the Company's U.S. subsidiary, 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. The effect on the
statement of operations of transaction gains and losses is insignificant.
F-8
<PAGE> 61
2. ACCOUNTING POLICIES (CONT'D.)
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.
STOCK BASED COMPENSATION
The Company grants stock options to executive officers and directors, employees
and consultants pursuant to stock option plans as described in note 9. No
compensation is recognized for these plans when common shares or stock options
are issued. Any consideration received on exercise of stock options or the
purchase of stock is credited to share capital. If common shares are
repurchased, the excess or deficiency of the consideration paid over the
carrying amount of the common shares canceled is charged or credited to
additional paid in capital or retained earnings.
F-9
<PAGE> 62
3. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
At March 31, 2000, two customers accounted for approximately $597,330 [1999 -
$235,000] of total accounts receivable. Approximately 28%, 24% and 19% of net
sales were made to one customer for the years ended March 31, 2000 and 1999, and
the thirteen months ended March 31, 1998, 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,
2000 is in 2016. Pursuant to the agreement, during the year ended March 31,
2000, the Company received milestone payments from the licensee in the amount of
$416,667 [1999 - license fee and milestone payments of $4,500,000; 1998 - $nil].
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>
2000 1999
$ $
--------------------------------------------------------------
<S> <C> <C>
Raw materials 490,926 401,634
Work in process 79,683 81,863
Finished goods 129,470 195,226
--------------------------------------------------------------
700,079 678,723
Less: allowance for obsolescence (88,437) (22,817)
--------------------------------------------------------------
611,642 655,906
==============================================================
</TABLE>
F-10
<PAGE> 63
5. FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Machinery, equipment and office furniture 1,567,415 765,065 802,350
Leasehold improvements 427,647 301,918 125,729
Equipment under capital leases 199,375 112,643 86,732
--------------------------------------------------------------------------------------
2,194,437 1,179,626 1,014,811
======================================================================================
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
======================================================================================
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
2000 1999
$ $
--------------------------------------------------------------------------------------
<S> <C> <C>
Patent costs, net 1,350,174 970,380
Other 33,460 31,938
--------------------------------------------------------------------------------------
1,383,634 1,002,318
======================================================================================
</TABLE>
Patent costs are net of accumulated amortization of $298,267 at March 31, 2000
[1999 - $184,002].
F-11
<PAGE> 64
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
2000 1999
$ $
----------------------------------------------------
<S> <C> <C>
Trade accounts payable 875,646 641,915
Accrued compensation 717,416 601,433
Customer deposits 115,264 4,921
Accrued expenses 75,758 129,174
----------------------------------------------------
1,784,084 1,377,443
====================================================
</TABLE>
8. CREDIT FACILITY
The Company has a trade finance credit facility with a bank to borrow up to
$2,000,000. This facility expires in June 2000. Borrowings under this line of
credit are collateralized by assignment of cash and cash equivalents. This
credit facility bears interest at the bank's floating rate [March 31, 2000 - 9%]
less 1%, or the LIBOR rate [March 31, 2000 - 6.3%] plus 1.75%, and expires on
June 30, 2000. At March 31, 2000, there was no outstanding balance drawn on this
credit facility.
F-12
<PAGE> 65
9. 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 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
For cash
Pursuant to exercise of stock options 988,542 1,516,239
Pursuant to exercise of Agent's Special Warrants 151,300 500,803
Issued for corporate finance services 30,000 91,890
Issued pursuant to exercise of Special Warrants 23,000 60,766
Cancelled escrow shares (26,784) (35,768)
-------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 22,832,324 30,491,793
=====================================================================================
</TABLE>
F-13
<PAGE> 66
9. SHARE CAPITAL (CONT'D.)
During the year ended March 31, 2000, the Company cancelled 26,784 common shares
held in escrow. Accordingly, the weighted average per share amount attributed to
the cancelled shares of $35,768 has been allocated to additional paid in
capital.
At March 31, 2000, the stated capital amount of the Company, as determined in
accordance with the provisions of the Company Act (British Columbia), is
$32,534,618 [1999 - $30,400,688].
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 -- --
Issuance of Special Warrants 4,187,500 12,562,500
Share issue costs -- (1,498,742)
Converted into common shares (23,000) (60,766)
-------------------------------------------------------------------------------
Balance, March 31, 2000 4,164,500 11,002,992
===============================================================================
</TABLE>
Pursuant to an Agency Agreement dated October 25, 1996, the Company issued
1,268,000 Special Warrants at Cdn. $3.00 each for 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 was
exchanged into one common share, which were qualified for distribution by final
receipt of a prospectus dated April 16, 1997.
Pursuant to an Agency Agreement dated June 16, 1999, the Company issued
4,187,500 Special Warrants at $3.00 each for total consideration of $12,562,500
(Cdn. $18,259,594) before deducting the agent's commission of $1,005,000 (Cdn.
$1,460,768) and other estimated issue costs. Each Special Warrant entitles the
holder to receive, at no additional cost, one common share of the Company any
time up until the earliest of: (i) the day which is the fifth business day after
the date of issuance of a receipt for a final prospectus relating to the
distribution of the common shares on the exercise of the Special Warrants by the
last of the British Columbia and Ontario Securities Commissions; and (ii) June
16, 2000, (the "Expiry date"). Any Special Warrants not exercised prior to the
Expiry date will be deemed to have been exercised. In March 2000, the Company
issued 23,000 common shares pursuant to the exercise and conversion of 23,000
Special Warrants.
F-14
<PAGE> 67
9. SHARE CAPITAL (CONT'D.)
WARRANTS
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 ended
March 31, 1999.
In connection with the issuance of 4,187,500 Special Warrants pursuant to an
agency agreement dated June 16, 1999, the Company issued to the Agent's nominee
30,000 common shares and 418,750 Special Warrants exercisable, for no additional
consideration, into 418,750 share purchase warrants, which are exercisable into
418,750 common shares at a price of $3.31 per share on or before June 16, 2000.
During the year ended March 31, 2000, the Company issued 151,300 common shares
pursuant to the exercise of 151,300 of these share purchase warrants.
STOCK OPTIONS
The Company has two stock option plans pursuant to which stock options are
granted to executive officers and directors, employees and consultants.
The 1995 stock option plan (the "1995 Plan") was approved by the shareholders in
1995 and subsequently amended in 1997. The 1995 Plan was suspended by the board
of directors in June 1997 and no further options will be granted pursuant to
this plan. As at March 31, 2000, there are 1,361,150 options outstanding
pursuant to the 1995 Plan and no further options may be granted.
The 1997 stock option plan (the "1997 Plan"), as amended in 1999, was approved
by the shareholders in July 1999, whereby 6,400,000 common shares were reserved
for issuance [1999 - 6,400,000]. The directors have the discretion to specify
the vesting period and the option term, up to ten years, at the time of grant.
As at March 31, 2000, 381,133 common shares are available for grant under the
1997 Plan.
F-15
<PAGE> 68
9. SHARE CAPITAL (CONT'D.)
On March 26, 1999, the Company amended the currency denomination of its stock
options from the Canadian dollar to the U.S. dollar. The exercise price of all
options outstanding on March 26, 1999 were converted into U.S. dollars based on
the exchange rate in effect on that date.
During the year ended March 31, 2000, the Company amended the terms of certain
stock options to officers of the Company pursuant to the agreements in note 10,
by accelerating the remaining vesting period of 200,000 stock options at an
exercise price of $2.95 from 25% each year to 100% immediately.
The following table summarizes the stock options outstanding at March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
NUMBER OF NUMBER OF
OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, REMAINING EXERCISE AT MARCH 31, EXERCISE
PRICES $ 2000 CONTRACTUAL LIFE PRICE $ 2000 PRICE $
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.12 - 1.66 656,500 4.23 years 1.32 611,500 1.29
1.76 - 2.55 1,020,019 6.28 years 2.16 911,269 2.25
2.65 - 3.75 2,345,400 6.30 years 2.94 1,551,021 2.95
4.13 - 5.50 493,625 9.90 years 4.24 130,750 4.14
---------------------------------------------------------------------------------
4,515,544 3,204,540
=================================================================================
</TABLE>
F-16
<PAGE> 69
9. SHARE CAPITAL (CONT'D.)
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NO. OF COMMON EXERCISE PRICE
SHARES ISSUABLE $
---------------------------------------------------------------
<S> <C> <C>
Balance, February 28, 1997 2,595,000 1.67
Options granted 1,331,150 2.30
Options exercised (290,756) 1.24
Options cancelled (568,344) 2.17
---------------------------------------------------------------
Balance, March 31, 1998 3,067,050 1.90
Options granted 1,783,736 2.84
Options exercised (61,525) 1.47
Options cancelled (135,125) 2.39
---------------------------------------------------------------
Balance, March 31, 1999 4,654,136 2.24
Options granted 1,048,200 3.57
Options exercised (988,542) 1.53
Options cancelled (198,250) 2.71
---------------------------------------------------------------
BALANCE, MARCH 31, 2000 4,515,544 2.63
===============================================================
</TABLE>
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.
F-17
<PAGE> 70
10. RESTRUCTURING CHARGES
During the year ended March 31, 2000, the Company undertook a review of its
operating structure to identify opportunities to improve operating
effectiveness. As a result of this review, certain staffing changes occurred and
in December 1999, the Company entered into termination agreements with two of
its senior executives. In accordance with the staffing changes and the terms of
the termination agreements, the Company has accrued and recorded severance costs
and certain benefits amounting to $597,183 for the year ended March 31, 2000. As
at March 31, 2000, $288,042 is included in accounts payable and accrued expenses
relating to these restructuring charges.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
[a] The Company leases its facilities and certain motor vehicles under operating
lease agreements which expire up to 2005. The facilities lease agreements
require the Company to pay maintenance costs. Rent expense under operating
leases was as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Rentals 388,524 277,906 209,066
==================================================================================
At March 31, 2000, future minimum lease payments under non-cancellable
operating leases are as follows:
$
----------------------------------------------------------------------------------
2001 514,669
2002 522,909
2003 526,832
2004 531,228
2005 402,155
----------------------------------------------------------------------------------
2,497,793
==================================================================================
</TABLE>
F-18
<PAGE> 71
11. COMMITMENTS AND CONTINGENCIES (CONT'D.)
[b] At March 31, 2000 future minimum lease payments under non-cancellable
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
$
---------------------------------------------------------------------------------
<S> <C>
2001 67,172
2002 59,573
2003 10,839
2004 4,070
---------------------------------------------------------------------------------
Total minimum lease payments 141,654
Amounts representing interest (approximately 17%) (23,270)
---------------------------------------------------------------------------------
Present value of future minimum lease payments 118,384
Less: amounts due in one year (53,098)
---------------------------------------------------------------------------------
65,286
=================================================================================
</TABLE>
[c] In accordance with the license and development agreement described in note
3, the Company is committed to spend on internal research and development
projects, the greater of $1,500,000 and a percentage of sales per annum.
[d] In accordance with a consulting agreement dated February 10, 2000, the
Company may be required to issue 120,000 warrants to acquire common shares
and pay a fee based on a percentage of future funding upon the occurrence of
certain events as described in the agreement.
F-19
<PAGE> 72
11. 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] In April 1999, the Company received correspondence purporting to a claim to
certain rights to technology of the Company. Whilst the Company disputes
certain aspects of these claims, management has been negotiating with the
third party to finalize an agreement that would give the Company the
exclusive rights to the technology. The outcome of these negotiations is
uncertain at this time.
F-20
<PAGE> 73
12. INCOME TAXES
At March 31, 2000, the U.S. subsidiary has United States federal and California
income tax net operating loss carryforwards of approximately $23,663,000 and
$5,247,000, 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. In addition, the U.S. subsidiary
has U.S. federal and California research tax credit carry-forwards of $790,000
and $388,000, respectively. The California research tax credits may be carried
forward indefinitely. The United States federal and California tax loss
carryforwards and the U.S. federal research tax credits expire as follows:
<TABLE>
<CAPTION>
UNITED STATES FEDERAL
RESEARCH UNITED STATES FEDERAL CALIFORNIA
TAX CREDITS LOSSES LOSSES
$ $ $
-------------------------------------------------------------------------------
Year ended March 31,
<S> <C> <C> <C>
2001 -- -- 346,000
2002 -- -- 769,000
2003 -- -- 1,576,000
2004 -- -- 212,000
2005 2,000 -- 2,344,000
2006 6,000 -- --
2007 7,000 -- --
2008 14,000 46,000 --
2009 14,000 -- --
2010 18,000 542,000 --
2011 15,000 1,816,000 --
2012 58,000 2,947,000 --
2013 152,000 6,901,000 --
2014 266,000 4,691,000 --
2015 -- 6,720,000 --
2020 238,000 -- --
-------------------------------------------------------------------------------
790,000 23,663,000 5,247,000
===============================================================================
</TABLE>
F-21
<PAGE> 74
12. INCOME TAXES (CONT'D.)
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
$2,233,000 of which $1,254,000 expires in 2004 and $979,000 expires in 2005.
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>
$
--------------------------------------------------------------------------------
Year ended March 31,
<S> <C>
2001 40,000
2002 322,000
2003 393,000
2004 602,000
2005 50,000
2006 1,223,000
2007 707,000
--------------------------------------------------------------------------------
3,337,000
================================================================================
</TABLE>
In addition, the Company has unclaimed tax deductions of approximately
$1,857,000 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 consolidated financial statements as their realization
is not virtually certain.
F-22
<PAGE> 75
13. 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, 2000 was $87,104 [1999 - $66,297; thirteen months ended March
31, 1998 - $44,911].
14. SEGMENTED INFORMATION
The Company's reportable business segments include the BTX Instrument Division
and the Drug and Gene 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 note
2.
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.
F-23
<PAGE> 76
14. SEGMENTED INFORMATION (CONT'D.)
<TABLE>
<CAPTION>
BTX DRUG AND GENE
INSTRUMENT DELIVERY
DIVISION DIVISION TOTAL
$ $ $
---------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000
<S> <C> <C> <C>
Reportable segment net sales 3,827,537 306,899 4,134,436
Other reportable segment revenue -- 942,903 942,903
---------------------------------------------------------------------------------
Total segment revenue 3,827,537 1,249,802 5,077,339
Add unallocated item
Interest income 556,193
---------------------------------------------------------------------------------
Total revenue 5,633,532
=================================================================================
Reportable segment cost of sales (1,781,972) (241,927) (2,023,899)
Restructuring charges (19,729) (577,454) (597,183)
Other reportable segment expenses (1,693,179) (6,504,088) (8,197,267)
---------------------------------------------------------------------------------
Net results of reportable segment 332,657 (6,073,667) (5,741,010)
---------------------------------------------------------------------------------
Add (deduct) unallocated items
Interest income 556,193
General and administrative (4,390,783)
Interest expense (24,342)
---------------------------------------------------------------------------------
Net loss (9,599,942)
=================================================================================
</TABLE>
F-24
<PAGE> 77
14. SEGMENTED INFORMATION (CONT'D.)
<TABLE>
<CAPTION>
BTX DRUG AND GENE
INSTRUMENT DELIVERY
DIVISION DIVISION TOTAL
$ $ $
---------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999
<S> <C> <C> <C>
Reportable segment net sales 3,434,105 -- 3,434,105
Other reportable segment revenue -- 4,887,183 4,887,183
---------------------------------------------------------------------------------
Total segment revenue 3,434,105 4,887,183 8,321,288
Add unallocated item
Interest income 300,911
---------------------------------------------------------------------------------
Total revenue 8,622,199
=================================================================================
Reportable segment cost of sales (1,638,635) -- (1,638,635)
Other reportable segment expenses (1,429,084) (7,745,526) (9,174,610)
---------------------------------------------------------------------------------
Net results of reportable segment 366,386 (2,858,343) (2,491,957)
-----------------------------------------------------------------
Add (deduct) unallocated items
Interest income 300,911
General and administrative (4,393,400)
Interest expense (19,391)
---------------------------------------------------------------------------------
Net loss (6,603,837)
=================================================================================
</TABLE>
F-25
<PAGE> 78
14. SEGMENTED INFORMATION (CONT'D.)
<TABLE>
<CAPTION>
BTX DRUG AND GENE
INSTRUMENT DELIVERY
DIVISION DIVISION TOTAL
$ $ $
---------------------------------------------------------------------------------
13 MONTHS ENDED MARCH 31, 1998
<S> <C> <C> <C>
Reportable segment net sales 3,097,198 -- 3,097,198
Other reportable segment revenue -- 134,094 134,094
---------------------------------------------------------------------------------
Total segment revenue 3,097,198 134,094 3,231,292
Add unallocated item
Interest income 427,498
---------------------------------------------------------------------------------
Total revenue 3,658,790
=================================================================================
Reportable segment cost of sales (1,427,285) -- (1,427,285)
Other reportable segment expenses (1,191,414) (5,416,432) (6,607,846)
---------------------------------------------------------------------------------
Net results of reportable segment 478,499 (5,282,338) (4,803,839)
-------------------------------------------------------------------
Add (deduct) unallocated items
Interest income 427,498
General and administrative (3,202,355)
Interest expense (17,970)
---------------------------------------------------------------------------------
Net loss (7,596,666)
=================================================================================
</TABLE>
F-26
<PAGE> 79
15. 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 YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Legal services 161,042 93,778 82,810
Accounting and administration 29,055 26,735 24,020
Rent and administration 32,600 114,900 --
==================================================================================
[b] Included in accounts payable and accrued expenses are the following amounts
owed to the parties identified in note 15[a] which are payable under normal
trade terms:
2000 1999
$ $
----------------------------------------------------------------------------------
Legal services and accounting and
administration 6,130 6,510
==================================================================================
</TABLE>
F-27
<PAGE> 80
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid during
the period 24,342 19,391 17,970
==================================================================================
</TABLE>
17. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
The Company prepares its 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,
2000 and 1999 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,
2000 and 1999 as realization of such assets is uncertain.
F-28
<PAGE> 81
17. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
<TABLE>
<CAPTION>
2000 1999
$ $
---------------------------------------------------------------------------------
<S> <C> <C>
Capitalized research expense 246,000 393,000
Net operating loss carryforwards 10,834,000 7,774,000
Research and development credits 1,042,000 557,000
Share issue costs 854,000 488,000
Other - net 262,000 209,000
---------------------------------------------------------------------------------
Total deferred tax assets 13,238,000 9,421,000
Valuation allowance for deferred tax assets (13,238,000) (9,421,000)
---------------------------------------------------------------------------------
Net deferred tax assets -- --
=================================================================================
</TABLE>
[b] Under U.S. GAAP, 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.
[c] 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.
[d] 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 $250,000 [1999
- $431,000] over future vesting periods.
[e] In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS133). SFAS133 will be effective for
the Company's year ending March 31, 2002. The Company has not determined the
impact, if any, of this pronouncement on its consolidated financial
statements.
F-29
<PAGE> 82
17. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
[f] The United States Securities and Exchange Commission has issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements
(SAB101). This pronouncement is effective for the Company's first quarter
commencing April 1, 2000. The Company has not yet determined the impact of
SAB101 on its consolidated financial statements and its current revenue
recognition policies.
[g] In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN44), an interpretation of APB25. This pronouncement is
effective for the Company's second quarter commencing July 1, 2000. The
Company has not yet determined the impact of FIN44 on its consolidated
financial statements.
[h] U.S. GAAP requires disclosure of comprehensive income which measures all
non-capital changes in shareholders' equity. Other accumulated comprehensive
income for the Company solely relates to foreign exchange translation gains
and losses.
The impact of significant variations to U.S. GAAP on the Consolidated Statements
of Loss are as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss for the period, Canadian GAAP (9,599,942) (6,603,837) (7,596,666)
Adjustment for stock based compensation
- non-employees (1,103,888) (546,700) (307,500)
-------------------------------------------------------------------------------------------------------------------------
Loss for the period, U.S. GAAP (10,703,830) (7,150,537) (7,904,166)
=========================================================================================================================
Unrealized losses on foreign currency translation 2,090 (83,294) 14,361
-------------------------------------------------------------------------------------------------------------------------
Comprehensive loss for the period, U.S. GAAP (10,701,740) (7,233,831) (7,889,805)
=========================================================================================================================
Basic and diluted loss per share, U.S. GAAP (0.48) (0.35) (0.44)
=========================================================================================================================
</TABLE>
F-30
<PAGE> 83
17. 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 years ended March 31, 2000 and March 31, 1999 and the
thirteen months ended March 31, 1998, respectively: risk free interest rates of
6.1%, 5.2% and 5.8%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 0.62, 0.68 and 0.70; and a
weighted average expected life of the options of nine, five, and seven and
one-half.
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, 2000 was $2.56 [1999 - $3.19; thirteen months ended March 31, 1998 - $1.84].
Supplemental disclosure of pro forma loss and loss per share is as follows:
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
$ $ $
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma loss, U.S. GAAP (11,985,791) (9,169,837) (9,257,666)
Pro forma loss per share, U.S. GAAP (0.54) (0.45) (0.52)
==================================================================================
</TABLE>
F-31
<PAGE> 84
17. 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>
2000 1999
$ $
---------------------------------------------------------------------------------
<S> <C> <C>
Share capital 33,028,925 29,791,107
Deficit (32,135,575) (21,431,745)
=================================================================================
</TABLE>
18. SUBSEQUENT EVENTS
The following events occurred subsequent to March 31, 2000.
[a] The Company issued 15,000 common shares pursuant to the exercise of Agent's
Special Warrants at a price of $3.31 per share.
[b] The Company issued 66,894 common shares pursuant to the exercise of stock
options at a weighted average exercise price of $2.43 for proceeds of
$162,827.
F-32
