<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 March 31, 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
incorporation or organization) No.)
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 28,919,381
- -------------------------------------- ------------------------------------
(Class) (Outstanding at May 4, 1998)
<PAGE>
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended March 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - March 31, 1998 and
December 31, 1997 3
b) Condensed Statements of Operations - for the three months
ended March 31, 1998 and 1997 4
c) Condensed Statements of Cash Flows - for the three months
ended March 31, 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 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
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- --------------
<S> <C> <C>
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 556,399 $ 1,011,845
Securities available for sale 1,286,967 4,025,976
Prepaid expenses and other 212,367 248,278
--------------- -------------
Total current assets 2,055,733 5,286,099
Property, plant and equipment, net 4,087,033 3,927,533
Other assets 508,297 553,452
--------------- -------------
$ 6,651,063 $ 9,767,084
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,765,993 $ 1,352,297
Accrued payroll and other
liabilities 285,833 275,876
Current portion of long-term
obligations 1,189,459 1,030,562
--------------- -------------
Total current liabilities 3,241,285 2,658,735
Long-term obligations 1,599,055 1,516,762
Shareholders' equity:
Preferred stock -- --
Common stock (20,216,714 and
20,211,114 shares
outstanding at March 31, 1998
and December 31, 1997,
respectively) 73,404,101 73,401,141
Deficit accumulated during
development stage (71,594,756) (67,782,204)
Accumulated other comprehensive
income 1,378 (27,350)
---------------- -------------
Total shareholders' equity 1,810,723 5,591,587
---------------- -------------
$ 6,651,063 $ 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
Three months ended March 9, 1989
March 31, (date of inception)
----------------------- through
1998 1997 March 31, 1998
---------- --------- ------------------
<S> <C> <C> <C>
Revenues:
Collaborative agreements $ 8,339 $ 77,382 $ 2,174,639
Investment income 42,304 230,336 3,694,198
Other 225,544 98,255 891,912
--------- --------- -------------
Total revenues 276,187 405,973 6,760,749
--------- --------- -------------
Expenses:
Research and development 3,206,574 3,051,538 50,523,566
In-process research and development -- -- 13,517,911
General and administrative 776,792 742,570 13,010,634
Interest 72,842 86,893 1,303,394
--------- --------- -------------
Total expenses 4,056,208 3,881,001 78,355,505
--------- --------- -------------
Net loss $(3,780,021) $(3,475,028) $(71,594,756)
=========== =========== ============
Basic and diluted net loss
per share $ (0.19) $ (0.17)
=========== ==========
Shares used in computation of
basic and diluted net loss
per share 20,213,614 20,162,043
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
Item 1. Financial Statements (continued)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 9, 1989
Three months ended March 31, (date of inception)
---------------------------- through
1998 1997 March 31, 1998
---------------------------- -------------------
<S> <C> <C> <C>
Operating Activities:
Net Loss $(3,780,021) $(3,475,028) $(71,594,756)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development - - 12,867,986
Depreciation and amortization 438,683 425,620 7,162,225
Expenses paid with common stock - - 78,500
Changes in operating assets and liabilities:
(Increase) decrease on other assets 29,386 81,742 (428,690)
Decrease in accrued interest
on securities available for sale 54,123 97,728 61,122
Increase (decrease) in accounts payable 461,843 (312,858) 2,182,113
------------ ----------- ------------
Net cash used in operating activities (2,795,986) (3,182,796) (49,671,500)
Investing activities:
Purchases of property, plant and equipment (48,968) (396,692) (9,467,055)
Purchases of securities available for sale (1,805,472) -- (81,284,368)
Sales of securities available for sale 4,486,555 712,878 79,937,656
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 2,617,115 316,186 (10,003,560)
Financing activities:
Advances from Immunex -- -- 2,807,316
Net proceeds from sale of capital stock 2,960 282,215 55,663,739
Proceeds from equipment financing -- 259,972 5,412,245
Payments under capital leases and installment loans (279,535) (315,527) (3,651,841)
------------ ----------- ------------
Net cash provided by (used in) financing activities (276,575) (226,660) 60,231,459
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (455,446) (2,639,950) 556,399
Cash and cash equivalents, beginning of period 1,011,845 3,532,568 --
------------ ----------- ------------
Cash and cash equivalents, end of period $ 556,399 $ 892,618 $ 556,399
============ =========== ============
</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 months ended March 31, 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 net income and its components;
however, adoption in 1998 will have no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which currently are reported in
shareholders' equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. The total of other comprehensive
income was immaterial during the first quarter of 1998 and 1997.
Note 3. Subsequent Events
- --------------------------
In April 1998, the Company completed a private placement of common stock
and warrants totaling $13 million with a group of four institutional investors.
The group purchased 8.7 million shares at $1.50 per share. For every two shares
purchased in the offering, the investors received one warrant to purchase one
share of common stock for $2.00 per share. Net proceeds from the offering were
approximately $12.7 million, net of offering expenses of approximately $300,000.
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 continued scientific
progress in the Company's research and development programs; the results of
research and
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Risks and Uncertainties (continued)
- -----------------------------------
development activities; 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 $1.8 million in cash, cash equivalents and securities
available for sale as of March 31, 1998, compared to $5.0 million at December
31, 1997. The change was primarily attributable to the use of $2.8 million to
fund operations and $280,000 of principal payments on capital equipment leases
and installment loans. As described in Note 3 to the Condensed Financial
Statements, the Company completed a private placement of common stock and
warrants in April 1998, which resulted in net proceeds of approximately $12.7
million to be used to fund the Company's operations going forward.
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, together with the net proceeds from the aforementioned
private placement of common stock, will be sufficient to meet its operating and
capital requirements through the second quarter of 1999. There can be no
assurance that the underlying assumed levels of revenue and expense will prove
to be accurate. 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 arrangements. 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
the Company announced a reorganization and restructuring plan designed to reduce
operating expenses. The plan focuses the Company's resources on the advancement
of its three lead product opportunities: tgAAV-CFTR, a gene therapy to treat
cystic fibrosis; tgDCC-E1A, a gene therapy product for cancer; and cytotoxic T
lymphocytes (CTLs), a cellular therapy for infectious diseases. The
reorganization plan called for reductions in operating costs throughout the
organization, including a reduction of approximately 24 management and staff
positions. These positions were largely associated with programs in very early
stage development. As a result, following the reorganization, Targeted Genetics
has 66 employees, of which 51 are devoted to research and development. 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 tgDCC-
E1A manufacturing and development.
Investment income for the three months ended March 31, 1998 decreased to
$42,000 compared to $230,000 during the three months ended March 31, 1997. The
decrease was largely attributable to lower average cash balances for investment
in 1998 compared to the same periods in 1997.
Other revenue for the three months ended March 31, 1998 and 1997
represented proceeds from research grants awarded by the National Institutes of
Health.
Research and development expenses increased to $3,207,000 for the three
months ended March 31, 1998, compared to $3,052,000 in the 1997 quarter. The
increase was attributable to the Company's reorganization and restructuring
plan. Approximately $220,000 of employee severance costs were recorded as
research and development expense in the first quarter of 1998 as a result of the
reorganization. After removing the effect of these non-recurring expenses,
research and development expenses showed a modest decrease in the comparable
three-month periods. The Company expects to see continued modest year-to-year
decreases in research and development expenses during the remainder of 1998.
General and administrative expenses increased to $777,000 for the three
months ended March 31, 1998, compared to $743,000 in the 1997 quarter. One-time
reorganization and restructuring expenses of approximately $80,000 were
responsible for the increase in the first quarter expenses. As with research
and development expenses, after removing the effect of these non-recurring
expenses, general and administrative expenses showed a modest decrease in the
comparable three-month periods.
8
<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
9
<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 May 7, 1998 /s/ H. STEWART PARKER
------------- -------------------------------------
H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date May 7, 1998 /s/ JAMES A. JOHNSON
------------- -------------------------------------
James A. Johnson, Vice President, Finance
(Principal Financial and Accounting Officer)
10
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 556,399
<SECURITIES> 1,286,967
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,055,733
<PP&E> 10,679,081
<DEPRECIATION> (6,592,048)
<TOTAL-ASSETS> 6,651,063
<CURRENT-LIABILITIES> 3,241,285
<BONDS> 0
0
0
<COMMON> 73,404,101
<OTHER-SE> (71,593,378)
<TOTAL-LIABILITY-AND-EQUITY> 6,651,063
<SALES> 0
<TOTAL-REVENUES> 276,187
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,983,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,842
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,780,021)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
