<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number: 0-23930
---------------------------
TARGETED GENETICS CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1549568
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(206) 623-7612
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 20,210,154
- --------------------------------------- --------------------------------
(Class) (Outstanding at November 3, 1997)
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TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - September 30, 1997 and
December 31, 1996 3
b) Condensed Statements of Operations - for the three and
nine months ended September 30, 1997 and 1996 4
c) Condensed Statements of Cash Flows - for the nine months
ended September 30, 1997 and 1996 5
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk *
PART II OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
* No information is provided due to inapplicability of the item.
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,219,833 $ 3,532,568
Securities available for sale 5,968,082 15,518,502
Prepaid expenses and other 297,663 468,671
------------ ------------
Total current assets 9,485,578 19,519,741
Property, plant and equipment, net 4,195,998 4,991,017
Other assets 556,533 628,294
------------ ------------
$ 14,238,109 $ 25,139,052
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,395,698 $ 1,887,880
Accrued payroll and other liabilities 301,002 364,964
Current portion of long-term obligations 1,020,972 1,250,263
------------ ------------
Total current liabilities 2,717,672 3,503,107
Long-term obligations 1,772,280 2,128,157
Shareholders' equity:
Preferred stock -- --
Common stock (20,207,674 and 20,136,468 shares
outstanding at September 30, 1997 and December 31,
1996, respectively) 73,399,249 73,115,362
Deficit accumulated during development stage (63,651,092) (53,607,574)
------------ ------------
Total shareholders' equity 9,748,157 19,507,788
------------ ------------
$ 14,238,109 $ 25,139,052
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 9, 1989
Three months ended Nine months ended (date of inception)
September 30, September 30, through
------------------------------- ------------------------------ September 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative agreements $ 769,547 $ 752,980 $ 849,977 $ 827,980 $ 2,127,942
Investment income 146,918 299,687 557,732 638,500 3,558,734
Other 135,035 -- 331,544 -- 558,662
------------ ------------ ------------ ------------ ------------
Total revenues 1,051,500 1,052,667 1,739,253 1,466,480 6,245,338
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development 3,089,365 3,634,181 9,457,800 8,431,820 43,731,504
In-process research
and development -- -- -- 13,517,911 13,517,911
General and administrative 665,263 834,847 2,052,595 2,005,820 11,501,631
Interest 82,740 103,686 264,260 299,192 1,156,655
------------ ------------ ------------ ------------ ------------
Total expenses 3,837,368 4,572,714 11,774,655 24,254,743 69,907,701
------------ ------------ ------------ ------------ ------------
Net loss $ (2,785,868) $ (3,520,047) $(10,035,402) $(22,788,263) $(63,662,363)
============ ============ ============ ============ ============
Net loss per share $ (0.14) $ (0.18) $ (0.50) $ (1.50)
============ ============ ============ ============
Shares used in computation of
net loss per share 20,207,213 20,048,355 20,191,792 15,160,884
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
March 9, 1989
Nine months ended (date of inception)
September 30, through
------------------------------- September 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net cash used in operating activities $ (8,814,879) $ (7,707,065) $(43,154,060)
Investing activities:
Purchases of property, plant and equipment (570,453) (1,320,552) (9,283,644)
Purchases of securities available for sale (813,579) (19,941,764) (79,478,224)
Sales of securities available for sale 10,187,579 12,430,340 73,508,606
Net cash acquired in RGene acquisition -- 1,710,239 1,594,386
Increase in other assets -- (115,000) (719,179)
------------ ------------ ------------
Net cash provided by (used in) investing activities 8,803,547 (7,236,737) (14,378,055)
Financing activities:
Advances from Immunex -- -- 2,807,316
Net proceeds from sale of capital stock 283,887 15,044,092 55,658,887
Proceeds from equipment financing 326,287 646,996 5,270,169
Payments under capital leases and installment loans (911,577) (692,164) (2,984,424)
------------ ------------ ------------
Net cash provided by (used in) financing activities (301,403) 14,998,924 60,751,948
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (312,735) 55,122 3,219,833
Cash and cash equivalents, beginning of period 3,532,568 2,154,814 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,219,833 $ 2,209,936 $ 3,219,833
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed financial statements included herein have been prepared by
Targeted Genetics Corporation (the "Company"), without audit, according to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which consist solely of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations as of and for the periods indicated.
The results of operations for the three and nine months ended September
30, 1997, are not necessarily indicative of the results to be expected for the
full year.
Note 2. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("Statement 128"), which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods presented. The impact of Statement 128 on the calculation of
net loss per share for all current and prior periods is not expected to be
material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Risks and Uncertainties
This discussion contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The Company's future cash requirements and
expense levels will depend on many factors, including continued scientific
progress in its research and development programs; the results of research and
development, preclinical studies and clinical trials; acquisition of products or
technology, if any; relationships with corporate collaborators; competing
technological and market developments; the time and costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of manufacturing
scale-up and commercialization activities; and other factors. Reference is made
to the Company's Annual Report on Form 10-K for more detailed description of
such factors. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Financial Condition
The Company had cash, cash equivalents and securities available for sale
totaling $9.2 million as of September 30, 1997, compared to $19.0 million at
December 31, 1996. The change was primarily attributable to the use of $8.8
million to fund operations. Other cash outflows included $570,000 to purchase
property, plant and equipment and $912,000 of principal payments on capital
equipment leases and installment loans. These cash outflows were offset by the
receipt of $326,000 of equipment financing proceeds and $277,000 for the
exercise of warrants by existing shareholders.
The Company is a development stage company conducting gene and cell
therapy research and development. Income earned from investments and, to a
lesser degree, revenues under collaborative agreements have been its only
sources of revenue, covering less than ten percent of expenses. Gene and cell
therapy products are subject to the risks of failure inherent in the development
of products based on innovative technologies. Although the Company's technology
appears promising, it is unknown whether any commercially viable products will
result from the research and development. It is not anticipated that the Company
will have any product-related revenues for a number of years. Accordingly, the
Company expects to incur substantial additional losses over the next several
years and to use its capital resources to fund preclinical and clinical research
programs, development of manufacturing capabilities and the preparation for
commercialization of its products under development.
The Company currently estimates that, at its planned rate of spending,
its existing cash, cash equivalents and securities available for sale will be
sufficient to meet its operating and capital requirements until approximately
April 1998. However, there can be no assurance that the underlying assumed
levels of revenue and expense will prove to be accurate. In any event,
substantial additional funds will be needed to continue the development and
commercialization of the Company's products. Accordingly, the Company is seeking
to establish additional collaborative agreements with corporate partners that
would provide research and development funding and equity investment. The
Company also may seek to raise additional equity capital whenever conditions in
the financial markets allow it to do so. There can be no assurance, however,
that adequate funds will be available when needed or will be available on terms
favorable to the Company, if at all.
Results of Operations
Over the past several years, the Company's net loss has grown,
consistent with the growth in the Company's scope and size of operations. In the
near term, the Company does not expect significant growth in employee headcount
or facilities; however, the Company estimates that operating expenses will
continue to increase moderately as a result of continuing with its current
operating plan, which includes growth in the level of clinical trial activity.
At least until such time as the Company enters into an arrangement providing
ongoing research and development funding, the net loss will continue to increase
as well.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Results of Operations (continued)
Revenue under collaborative agreements for all periods presented
primarily consisted of amounts earned from Laboratoires Fournier S.C.A. related
to tgDCC-E1A milestone payments. The Company cannot predict when or if further
such revenues will be earned in the future.
Investment income for the three and nine months ended September 30,
1997, decreased to $147,000 and $558,000, respectively, compared to $299,000 and
$639,000 during the three and nine months ended September 30, 1996,
respectively. The decrease was largely attributable to lower average cash
balances for investment in 1997 compared to the same periods in 1996.
Other revenue for the three and nine months ended September 30, 1997
represented proceeds from Small Business Innovation Research grants awarded by
the National Institutes of Health.
There were no such comparable revenues in the 1996 periods.
Research and development expenses decreased to $3,089,000 for the three
months ended September 30, 1997, compared to $3,634,000 in the 1996 quarter. The
decrease was attributable to the Company's June 1996 acquisition of RGene
Therapeutics Inc. ("RGene"). Prior period expenses included several one-time
payments, such as employee severance, and other expenses that subsequently were
eliminated through consolidation of RGene's operations with those of the
Company. For the nine months ended September 30, 1997, and 1996, research and
development expenses were $9,458,000 and $8,432,000, respectively. The increase
in 1997 was largely attributable to the ongoing development costs of the
tgDCC-E1A cancer product and related non-viral gene delivery technology, both of
which were added with the acquisition of RGene. Higher expenses related to
patents and licenses also contributed to the increase.
In-process research and development expense resulted from the
acquisition of RGene in the second quarter of 1996. The RGene purchase price
exceeded the fair value of tangible assets acquired and the excess was allocated
to RGene's existing in-process technology and written off in the second quarter
to in-process research and development.
General and administrative expenses decreased to $665,000 for the three
months ended September 30, 1997, compared to $835,000 in the 1996 quarter. As
with research and development expenses, non-recurring prior year expenses
related to the RGene acquisition were responsible for the decline in the third
quarter expenses. After removing the effect of these non-recurring expenses,
general and administrative expenses showed a modest increase in both the three-
and nine-month periods. These increases were largely attributable to increased
corporate development activities.
8
<PAGE> 9
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) A Current Report on Form 8-K, dated July 24, 1997, was filed with the
Securities and Exchange Commission reporting that Targeted Genetics Corporation
had extended the expiration date of certain warrants to January 31, 1998.
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGETED GENETICS CORPORATION
----------------------------------------------
(Registrant)
Date November 7, 1997 /s/ H. STEWART PARKER
----------------------- ----------------------------------------------
H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date November 7, 1997 /s/ JAMES A. JOHNSON
----------------------- ----------------------------------------------
James A. Johnson, Vice President, Finance
(Principal Financial and Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,219,833
<SECURITIES> 5,968,082
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,485,578
<PP&E> 10,006,441
<DEPRECIATION> (5,810,443)
<TOTAL-ASSETS> 14,238,109
<CURRENT-LIABILITIES> 2,717,672
<BONDS> 0
0
0
<COMMON> 73,399,249
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,238,109
<SALES> 0
<TOTAL-REVENUES> 1,739,253
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,510,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,260
<INCOME-PRETAX> (10,035,402)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,035,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,035,402)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
