<PAGE>
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, 1998
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1549568
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(206) 623-7612
- --------------------------------------------------------------------------------
(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 28,982,241
- --------------------------------------- ------------------------------------
(Class) (Outstanding at October 31, 1998)
<PAGE>
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended September 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - September 30, 1998 and December 31, 1997 3
b) Condensed Statements of Operations - for the three and nine months ended
September 30, 1998 and 1997 4
c) Condensed Statements of Cash Flows - for the nine months ended
September 30, 1998 and 1997 5
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
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 11
SIGNATURES 12
</TABLE>
* No information is provided due to inapplicability of the item.
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,693,600 $ 1,011,845
Securities available for sale 6,195,681 4,025,976
Prepaid expenses and other 308,897 248,278
------------- ------------
Total current assets 8,198,178 5,286,099
Property, plant and equipment, net 3,541,895 3,927,533
Other assets 445,937 553,452
------------- ------------
$ 12,186,010 $ 9,767,084
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,441,461 $ 1,352,297
Accrued payroll and other liabilities 253,770 275,876
Current portion of long-term obligations 1,128,462 1,030,562
------------- ------------
Total current liabilities 2,823,693 2,658,735
Long-term obligations 1,214,950 1,516,762
Shareholders' equity:
Preferred stock -- --
Common stock (28,974,741 and 20,211,114 shares
outstanding at September 30, 1998 and December 31,
1997, respectively) 86,203,309 73,401,141
Deficit accumulated during development stage (78,098,323) (67,814,735)
Accumulated other comprehensive income 42,381 5,181
------------- ------------
Total shareholders' equity 8,147,367 5,591,587
------------- ------------
$ 12,186,010 $ 9,767,084
============= ============
</TABLE>
See accompanying notes.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 9, 1989
Three months ended Nine months ended (date of inception)
September 30, September 30, through
-------------------------- ---------------------------
1998 1997 1998 1997 September 30, 1998
------------ ----------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative agreements $ 111,629 $ 769,547 $ 119,968 $ 849,977 $ 2,286,268
Investment income 136,133 146,918 313,457 557,732 3,965,351
Other 14,473 135,035 318,204 331,544 984,572
----------- ----------- ------------ ------------ ------------
Total revenues 262,235 1,051,500 751,629 1,739,253 7,236,191
----------- ----------- ------------ ------------ ------------
Expenses:
Research and development 2,898,981 3,089,365 8,733,860 9,457,800 56,050,852
In-process research and development -- -- -- -- 13,517,911
General and administrative 651,300 665,263 2,091,860 2,052,595 14,325,702
Interest 64,833 82,740 209,497 264,260 1,440,049
----------- ----------- ------------ ------------ ------------
Total expenses 3,615,114 3,837,368 11,035,217 11,774,655 85,334,514
----------- ----------- ------------ ------------ ------------
Net loss $(3,352,879) $(2,785,868) $(10,283,588) $(10,035,402) $(78,098,323)
=========== =========== ============ ============ ============
Basic and diluted net loss per share $ (0.12) $ (0.14) $ (0.40) $ (0.50)
=========== =========== ============ ============
Shares used in computation of
basic and diluted net loss per share 28,974,741 20,207,213 25,529,296 20,191,792
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STATE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 9, 1989
Nine months ended (date of inception)
September 30, through
--------------------------------
1998 1997 September 30, 1998
------------- ------------- ------------------
<S> <C> <C> <C>
Operating Activities:
Net Loss $ (10,283,588) $ (10,035,402) $ (78,098,323)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development -- -- 12,867,986
Depreciation and amortization 1,240,331 1,216,768 7,963,873
Expenses paid with common stock -- -- 78,500
Changes in operating assets and liabilities:
(Increase) decrease in other assets (45,572) 16,104 (503,648)
(Increase) decrease in accrued interest on
securities available for sale (59,099) 168,304 (52,100)
Increase (decrease) in accounts payable
and accrued liabilities (28,508) (180,653) 1,691,762
------------- ------------- ------------------
Net cash used in operating activities (9,176,436) (8,814,879) (56,051,950)
Investing activities:
Purchases of property, plant and equipment (150,995) (570,453) (9,569,082)
Purchases of securities available for sale (12,569,056) (813,579) (92,047,952)
Sales of securities available for sale 10,495,650 10,187,579 85,946,751
Net cash acquired in RGene acquisition -- -- 1,594,386
Increase in other assets (15,000) -- (784,179)
------------- ------------- ------------------
Net cash provided by (used in) investing activities (2,239,401) 8,803,547 (14,860,076)
Financing activities:
Net proceeds from sale of capital stock 12,896,487 283,887 68,557,266
Advances from Immunex -- -- 2,807,316
Proceeds from equipment financing -- 326,287 5,412,245
Payments under capital leases and installment loans (798,895) (911,577) (4,171,201)
------------- ------------- ------------------
Net cash provided by (used in) financing activities 12,097,592 (301,403) 72,605,626
------------- ------------- ------------------
Net increase (decrease) in cash and cash equivalents 681,755 (312,735) 1,693,600
Cash and cash equivalents, beginning of period 1,011,845 3,532,568 --
------------- ------------- ------------------
Cash and cash equivalents, end of period $ 1,693,600 $ 3,219,833 $ 1,693,600
============= ============= ==================
</TABLE>
See accompanying notes.
5
<PAGE>
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, 1998 are not necessarily indicative of the results to be expected for the
full year.
Note 2. Comprehensive Income
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
130, Reporting Comprehensive Income. Statement 130 established new rules for the
reporting and display of comprehensive income and its components; however,
adoption of Statement 130 will have no impact on net loss or shareholders'
equity. Statement 130 requires the inclusion of unrealized gains or losses on
the Company's available-for-sale securities, which currently are reported in
shareholders' equity, in other comprehensive income and the disclosure of total
comprehensive income. The total of other comprehensive income was immaterial in
the three-month and nine-month periods ended September 30, 1998 and 1997.
6
<PAGE>
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 numerous factors, including the availability of
additional capital; continued scientific progress in the Company's research and
development programs; the results of research and development activities; the
results of preclinical studies and clinical trials; acquisition of products or
technology, if any; relationships with existing and future corporate
collaborators, if any; competing technological and market developments; the time
and costs involved in obtaining regulatory approvals; the costs involved in
filing, prosecuting and enforcing patent claims; the time and costs of
manufacturing scale-up and commercialization activities; and other factors.
Reference is made to the Company's Annual Report on Form 10-K for a more
detailed description of such factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. 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.
Financial Condition
- -------------------
The Company had $7.9 million in cash, cash equivalents and securities
available for sale as of September 30, 1998, compared to $5.0 million at
December 31, 1997. The increase was attributable to the completion of a private
placement of common stock and warrants in April 1998, which resulted in net
proceeds to the Company of approximately $12.8 million. The cash provided by
this transaction was partially offset by the use of $9.2 million to fund
operations and $799,000 to make scheduled principal payments on capital
equipment leases and installment loans during the first nine months of 1998.
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 Company's 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, assuming no new revenue sources and
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 the second quarter of 1999. However, there can be no
assurance that the underlying assumed levels of revenue and expense will prove
to be accurate.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Financial Condition (continued)
- -------------------------------
Whether or not these assumptions prove to be accurate, the Company will need to
raise substantial additional capital. The Company intends to seek additional
funding through public or private financing, including equity financing, and
through collaborative relationships with other companies. 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 February 1998,
however, the Company announced a reorganization and restructuring plan designed
to reduce its operating expenses. The plan focused the Company's resources on
the advancement of its lead product candidates in cystic fibrosis, tgAAV-CFTR,
and in cancer, tgDCC-E1A. The reorganization plan called for reductions in
operating costs throughout the organization, including positions that were
largely associated with programs in earlier stages of development. As a result
of the reorganization, the Company recorded a restructuring charge during the
first quarter of 1998 of approximately $300,000.
Revenue under collaborative agreements for the periods presented primarily
consisted of amounts earned from Laboratoires Fournier S.C.A. related to the
European development of tgDCC-E1A. The periods ended September 30, 1997 included
the Company's net proceeds from a $1 million milestone payment earned upon
regulatory clearance for the start of European clinical trials of tgDCC-E1A.
Investment income for the three and nine months ended September 30, 1998
decreased to $136,000 and $314,000, respectively, from $147,000 and $558,000 for
the three and nine months ended September 30, 1997, respectively. The decreases
were largely attributable to lower average cash balances for investment in 1998
compared to the same periods in 1997.
Other revenue for the three and nine months ended September 30, 1998 and
1997 represented proceeds from research grants awarded by the National
Institutes of Health. The decrease in the three-month period ended September 30,
1998 versus the prior year was attributable to the expiration of such grants.
The Company has applied for additional research grants that would provide
similar revenues in future periods, but the timing and extent of the related
funding, if any, cannot be predicted.
Research and development expense decreased to $2,899,000 and $8,734,000
for the three and nine months ended September 30, 1998, respectively, from
$3,089,000 and $9,458,000 in the comparable 1997 periods. The decreases were a
result of the Company's reorganization and restructuring plan which was
implemented in February 1998. Partially offsetting the impact of the
restructuring were increased expenses related to the development and scale-up of
improved manufacturing methods for the production of tgDCC-E1A.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (continued)
- ---------------------------------
Interest expense decreased to $65,000 and $209,000 for the three and nine
months ended September 30, 1998, respectively, from $83,000 and $264,000 in the
comparable 1997 periods. The decreases resulted from declining principal
balances payable under long-term obligations.
General Description of the Year 2000 Issue and the Nature and Effects of the
- ----------------------------------------------------------------------------
Year 2000 on Information Technology ("IT") and Non-IT Systems
- -------------------------------------------------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
computer chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activity.
Because the Company is currently in the development stage, its exposures
to the Year 2000 Issue are limited in comparison to those common to more
developed companies. Based on recent and ongoing assessments, the Company
believes that it will not be required to undertake any major activities or incur
any significant costs related to the Year 2000 Issue.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
- ---------------------------------------------------------------------------
Completion of Each Remaining Phase
- ----------------------------------
For its IT exposures, the Company has completed its assessment of all
systems that could be affected by the Year 2000 Issue and is approximately 30%
complete on the implementation phase. All of the Company's software applications
are purchased from established vendors and all upgrades needed to complete the
implementation phase are currently available or will be available by December
31, 1998. Completion of this process is expected by June 30, 1999.
The remediation of operating equipment (research and development and
manufacturing equipment with embedded chips and software) is also an important
issue for the Company. The Company is fortunate in that most of its operating
equipment is relatively new, commonplace in the biotechnology industry, and, as
a result, supported and maintained by the original manufacturers. The Company is
approximately 50% complete on the assessment of its operating equipment. This
assessment is expected to be complete no later than December 31, 1998. To date,
no significant Year 2000 Issues have been identified that cannot be resolved
through minor hardware or software upgrades that are either currently available
or expected to be available soon. The Company has not yet begun the
implementation phase; however, because of the anticipated limited scope of the
project, it expects to be able to complete this phase no later than June 30,
1999.
Nature and Level of Importance of Third Parties and their Exposure to the Year
- ------------------------------------------------------------------------------
2000
- ----
None of the Company's IT systems interface with those of third parties.
The Company has recently begun the process of querying all significant outside
suppliers and subcontractors ("external agents") regarding the status of their
IT systems with respect to the Year 2000 Issue. To date, the
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Nature and Level of Importance of Third Parties and their Exposure to the Year
- ------------------------------------------------------------------------------
2000 (continued)
- ----------------
Company has not become aware of any external agent with a Year 2000 issue that
would materially impact the Company's operations. The Company expects to
complete this evaluation process by March 31, 1999. To the extent any external
agents currently have Year 2000 issues, the Company has no means of ensuring
that such external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company's operations; however, the effect of such
non-compliance is not determinable.
Summary of Year 2000 Compliance Program
- ---------------------------------------
The Company will utilize both internal and external resources to replace,
test and implement software and hardware upgrades for Year 2000 modifications.
The total future cost of the Year 2000 project is expected to be less than
$100,000 and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue within an acceptable time frame. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event the Company does not complete the additional work required, the
Company's research and development activities may be adversely impacted. In such
event, the significance of the impact cannot be reasonably estimated at this
time. The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion no later than June 30, 1999 and determine
whether such a plan is necessary.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998.
11
<PAGE>
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 10, 1998 /s/ H. STEWART PARKER
----------------------- -----------------------------------------------
H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date November 10, 1998 /s/ JAMES A. JOHNSON
----------------------- -----------------------------------------------
James A. Johnson, Vice President, Finance
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,693,600
<SECURITIES> 6,195,681
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,198,178
<PP&E> 10,873,231
<DEPRECIATION> (7,331,336)
<TOTAL-ASSETS> 12,186,010
<CURRENT-LIABILITIES> 2,823,693
<BONDS> 0
0
0
<COMMON> 86,203,309
<OTHER-SE> (78,055,942)
<TOTAL-LIABILITY-AND-EQUITY> 12,186,010
<SALES> 0
<TOTAL-REVENUES> 751,629
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,825,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209,497
<INCOME-PRETAX> (10,283,588)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,283,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,283,588)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
