UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2003
OR
| o |
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 No. 0-23930
TARGETED GENETICS CORPORATION
| Washington (State of Incorporation) |
91-1549568 (IRS Employer Identification No.) |
1100 Olive Way, Suite 100
Seattle, WA 98101
(Address of principal executive offices, including 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 o
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock, $0.01 par value | 66,200,630 | |
|
|
||
| (Class) | (Outstanding at October 26, 2003) |
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended September 30, 2003
TABLE OF CONTENTS
| Page No. | ||||
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | |||
| a) | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 | 1 | ||
| b) | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 | 2 | ||
| c) | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 | 3 | ||
| d) | Notes to Condensed Consolidated Financial Statements | 4 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | ||
| Item 4. | Controls and Procedures | 21 | ||
| PART II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 22 | ||
| Item 2. | Changes in Securities and Use of Proceeds | 22 | ||
| Item 3. | Defaults Upon Senior Securities | 22 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 22 | ||
| Item 5. | Other Information | 22 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 22 | ||
| SIGNATURES | 23 | |||
| EXHIBIT INDEX | 24 | |||
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (unaudited) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 26,118,000 | $ | 12,606,000 | ||||||
Accounts receivable |
25,000 | 1,170,000 | ||||||||
Prepaid expenses and other |
448,000 | 452,000 | ||||||||
Total current assets |
26,591,000 | 14,228,000 | ||||||||
Property and equipment, net |
3,583,000 | 5,520,000 | ||||||||
Goodwill, net |
31,649,000 | 31,649,000 | ||||||||
Other assets |
1,190,000 | 1,316,000 | ||||||||
Total assets |
$ | 63,013,000 | $ | 52,713,000 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable and accrued expenses |
$ | 1,301,000 | $ | 2,012,000 | ||||||
Accrued employee expenses |
524,000 | 729,000 | ||||||||
Accrued restructure expenses |
1,949,000 | 1,202,000 | ||||||||
Deferred revenue |
2,365,000 | 6,041,000 | ||||||||
Current portion of long-term obligations and short-term debt |
1,332,000 | 1,298,000 | ||||||||
Total current liabilities |
7,471,000 | 11,282,000 | ||||||||
Accrued restructure expenses and deferred rent |
3,685,000 | 2,276,000 | ||||||||
Long-term obligations |
11,339,000 | 20,494,000 | ||||||||
Commitments
|
||||||||||
Minority interest in preferred stock of subsidiary |
750,000 | 750,000 | ||||||||
Series B convertible exchangeable preferred stock |
— | 12,015,000 | ||||||||
Shareholders’ equity: |
||||||||||
Preferred stock, $0.01 par value, 6,000,000 shares authorized: |
||||||||||
Series A preferred stock, 800,000 shares designated, none
issued and outstanding |
— | — | ||||||||
Series B convertible preferred stock, 12,015 shares designated,
issued and outstanding |
— | — | ||||||||
Common stock, $0.01 par value, 120,000,000 shares authorized,
66,177,094 shares issued and outstanding at September 30, 2003 and
50,566,348 shares issued and outstanding at December 31, 2002 |
662,000 | 506,000 | ||||||||
Additional paid-in capital |
249,380,000 | 207,139,000 | ||||||||
Accumulated deficit |
(210,274,000 | ) | (201,749,000 | ) | ||||||
Total shareholders’ equity |
39,768,000 | 5,896,000 | ||||||||
Total liabilities and shareholders’ equity |
$ | 63,013,000 | $ | 52,713,000 | ||||||
See accompanying notes to condensed consolidated financial statements
1
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenue: |
||||||||||||||||||
Collaborative agreements |
$ | 5,002,000 | $ | 4,465,000 | $ | 12,694,000 | $ | 12,814,000 | ||||||||||
Collaborative agreement with unconsolidated,
majority-owned research and development joint
venture |
— | 357,000 | — | 1,971,000 | ||||||||||||||
Total revenue |
5,002,000 | 4,822,000 | 12,694,000 | 14,785,000 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
3,947,000 | 6,824,000 | 12,816,000 | 22,755,000 | ||||||||||||||
General and administrative |
1,133,000 | 1,651,000 | 3,907,000 | 6,316,000 | ||||||||||||||
Restructure charges |
374,000 | 431,000 | 3,554,000 | 431,000 | ||||||||||||||
Equity in net loss of unconsolidated,
majority-owned research and development joint
venture |
— | 315,000 | — | 1,926,000 | ||||||||||||||
Amortization of acquisition-related intangibles |
— | 112,000 | — | 365,000 | ||||||||||||||
Total operating expenses |
5,454,000 | 9,333,000 | 20,277,000 | 31,793,000 | ||||||||||||||
Loss from operations |
(452,000 | ) | (4,511,000 | ) | (7,583,000 | ) | (17,008,000 | ) | ||||||||||
Investment income |
38,000 | 101,000 | 146,000 | 327,000 | ||||||||||||||
Interest expense |
(366,000 | ) | (424,000 | ) | (1,088,000 | ) | (996,000 | ) | ||||||||||
Net loss |
$ | (780,000 | ) | $ | (4,834,000 | ) | $ | (8,525,000 | ) | $ | (17,677,000 | ) | ||||||
Net loss per common share (basic and diluted) |
$ | (0.01 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.40 | ) | ||||||
Shares used in computation of basic and diluted net loss
per common share |
61,270,000 | 44,489,000 | 54,549,000 | 44,263,000 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements
2
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | |||||||||||
| September 30, | |||||||||||
| 2003 | 2002 | ||||||||||
Operating activities: |
|||||||||||
Net loss |
$ | (8,525,000 | ) | $ | (17,677,000 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|||||||||||
Depreciation and amortization |
2,091,000 | 2,434,000 | |||||||||
Non-cash interest expense |
749,000 | 481,000 | |||||||||
Equity in net loss of unconsolidated, majority-owned research and
development joint venture |
— | 1,926,000 | |||||||||
Amortization of purchased intangibles |
— | 365,000 | |||||||||
Changes in assets and liabilities: |
|||||||||||
Decrease in accounts receivable and other current assets |
1,149,000 | 944,000 | |||||||||
Decrease in other non-current assets |
126,000 | 112,000 | |||||||||
Decrease in current liabilities |
(616,000 | ) | (965,000 | ) | |||||||
Increase in accrued restructure expenses and deferred rent |
2,156,000 | 151,000 | |||||||||
Decrease in deferred revenue |
(3,676,000 | ) | (2,672,000 | ) | |||||||
Decrease in accounts receivable from unconsolidated,
majority-owned research and development joint venture |
— | 281,000 | |||||||||
Net cash used in operating activities |
(6,546,000 | ) | (14,620,000 | ) | |||||||
Investing activities: |
|||||||||||
Purchases of property and equipment |
(149,000 | ) | (533,000 | ) | |||||||
Investment in unconsolidated, majority-owned research and development
joint venture |
— | (2,353,000 | ) | ||||||||
Net cash used in investing activities |
(149,000 | ) | (2,886,000 | ) | |||||||
Financing activities: |
|||||||||||
Net proceeds from issuance of common stock |
21,009,000 | 4,036,000 | |||||||||
Proceeds from leasehold improvements and equipment financing arrangements |
159,000 | 591,000 | |||||||||
Payments under leasehold improvements and equipment financing arrangements |
(961,000 | ) | (988,000 | ) | |||||||
Loan proceeds from collaborative partners |
— | 5,950,000 | |||||||||
Net cash provided by financing activities |
20,207,000 | 9,589,000 | |||||||||
Net increase (decrease) in cash and cash equivalents |
13,512,000 | (7,917,000 | ) | ||||||||
Cash and cash equivalents, beginning of period |
12,606,000 | 25,186,000 | |||||||||
Cash and cash equivalents, end of period |
$ | 26,118,000 | $ | 17,269,000 | |||||||
Supplemental information: |
|||||||||||
Common stock issued to Elan for debt conversion |
$ | 9,373,000 | $ | — | |||||||
Cash paid for interest |
409,000 | 221,000 | |||||||||
See accompanying notes to condensed consolidated financial statements
3
TARGETED GENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements included in this quarterly report have been prepared by Targeted Genetics Corporation, or Targeted Genetics, without audit, according to the rules and regulations of the Securities and Exchange Commission, or SEC. Our condensed consolidated financial statements include the accounts of Targeted Genetics, our wholly-owned subsidiaries Genovo, Inc. and TGCF Manufacturing Corporation (inactive), and our majority-owned subsidiary, CellExSys, Inc. The condensed consolidated financial statements do not include the accounts of Emerald Gene Systems, Ltd., or Emerald, our unconsolidated, majority-owned research and development joint venture with Elan International Services Ltd., or Elan, because we do not have operating control of Emerald. The operations of Emerald terminated during 2002. All significant inter-company transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the SEC’s 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 our financial position and results of operations as of and for the periods indicated. Certain reclassifications have been made to conform prior year results to the current year presentation.
Our results of operations for the three and nine months ended September 30, 2003, include certain non-recurring material transactions. During the three months ended September 30, 2003, we recognized $3.4 million in revenue in connection with the conclusion of our collaboration with Biogen, Inc., or Biogen. This amount related to the recognition of previously deferred payments received from Biogen under the collaboration. During the three months ended March 31, 2003, we recognized $3.9 million in revenue in connection with the termination of our development collaboration with Wyeth Pharmaceuticals, or Wyeth. Also, during the three months ended June 30, 2003, we recorded a $2.9 million restructure charge, which represented our revised estimate of the ongoing lease commitment and associated costs of our Bothell, Washington facility lease. Because of these and other factors, we believe that the results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year
The unaudited condensed consolidated financial statements included in this quarterly report should be read in conjunction with our audited consolidated financial statements and related footnotes included in our annual report on Form 10-K for the year ended December 31, 2002.
2. Long-Term Obligations
Long-term obligations consisted of the following:
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Loan payable to Biogen, due August 2006 |
$ | 10,000,000 | $ | 10,000,000 | ||||
Equipment financing obligations |
1,712,000 | 2,383,000 | ||||||
Other long-term obligations |
959,000 | 760,000 | ||||||
Convertible loans payable to Elan |
— | 7,950,000 | ||||||
Accrued interest payable to Elan |
— | 699,000 | ||||||
| 12,671,000 | 21,792,000 | |||||||
Less current portion |
(1,332,000 | ) | (1,298,000 | ) | ||||
| $ | 11,339,000 | $ | 20,494,000 | |||||
Future aggregate principal payments related to long-term obligations are $661,000 for the remainder of 2003, $841,000 in 2004, $1,043,000 in 2005, $10,115,000 in 2006 and $11,000 in 2007.
4
TARGETED GENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
In September 2003, we converted $9,373,000 in outstanding loans and interest payable to Elan into 5,203,244 shares of restricted and unregistered Targeted Genetics common stock. The conversion consisted of $1,887,000 in debt, borrowed at various dates, into 1,625,366 shares of common stock at conversion prices determined at the time of borrowing, and $7,486,000 in debt that was converted into 3,577,878 shares of common stock at a price of $2.09 per share, the 60-day trading average preceding the conversion date. As conversion of this debt was completed under the original terms of our convertible promissory note with Elan, there was no impact on results of operations. The promissory note and interest payable to Elan had a scheduled maturity in July 2005. As a result of this conversion, Elan currently holds a total of approximately 7.7 million shares of Targeted Genetics common stock, representing 11.7 percent of Targeted Genetics’ issued and outstanding common stock. Elan also holds 12,015 shares of Targeted Genetics’ Series B convertible preferred stock that is currently convertible into approximately 4.8 million shares of our common stock.
Generally, Targeted Genetics must provide consent to Elan in order for Elan to assign or transfer shares of our common or preferred stock that it holds. If at any time Elan’s ownership exceeds 10 percent of Targeted Genetics’ common stock, Elan has the right to nominate one director, who must be acceptable to Targeted Genetics, for election to Targeted Genetics’ board of directors.
3. Shareholders’ Equity
The following table presents our equity transactions for the nine months ended September 30, 2003:
| Preferred Stock | |||||||||||||||||
| Common | Shareholders’ | ||||||||||||||||
| Shares | Amount | Stock | Equity | ||||||||||||||
Balance at December 31, 2002 |
12,015 | $ | 12,015,000 | 50,566,348 | $ | 5,896,000 | |||||||||||
Net loss – nine months ended September 30, 2003 |
— | — | — | (8,525,000 | ) | ||||||||||||
Reclassification of preferred stock – April 2003 |
— | (12,015,000 | ) | — | 12,015,000 | ||||||||||||
Public offering – June 2003 |
— | — | 7,777,778 | 16,115,000 | |||||||||||||
Biogen equity purchase – August 2003 |
— | — | 2,515,843 | 4,793,000 | |||||||||||||
Elan debt conversion – September 2003 |
— | — | 5,203,244 | 9,373,000 | |||||||||||||
Exercise of stock options |
— | — | 113,881 | 101,000 | |||||||||||||
Balance at September 30, 2003 |
12,015 | $ | — | 66,177,094 | $ | 39,768,000 | |||||||||||
Issuance of Common Stock to Biogen
In August 2003, we issued 2,515,843 shares of our common stock to Biogen at a price of approximately $1.91 per share and received proceeds of approximately $4.8 million to fund our ongoing research and development activities and general corporate purposes. The issuance of these shares was completed under an equity purchase commitment that was a component of a research and development collaboration that we had with Biogen. Both the equity purchase commitment and the collaboration with Biogen expired in September 2003. Biogen currently holds approximately 12.1 million shares, or 18.3 percent, of our common stock outstanding at September 30, 2003.
Series B Convertible Preferred Stock
In July 1999, we issued shares of our Series B convertible exchangeable preferred stock, valued at $12 million, to Elan in exchange for our 80.1% interest in Emerald. The Series B preferred stock is convertible at Elan’s option into shares of our common stock, at a conversion price of $3.32 per share. Compounding dividends accrue semi-annually at 7% per year on the $1,000 per share face value of the preferred stock until July 2005. Dividends are not paid in cash, but rather result in an increase in the number of shares of common stock to be issued upon conversion. The Series B preferred stock and accrued dividends were convertible into 4,765,000 shares of our common stock at September 30, 2003, and unless converted earlier, will become convertible into approximately 5.5 million shares of our common stock in July 2005 when the accrual of dividends ends.
5
TARGETED GENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Stock Compensation
Consistent with the practice of many other companies, and as permitted by the provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” we have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for employee stock option grants, and we apply the disclosure-only provisions to account for our stock option plans. We do not recognize any compensation expense for options granted to employees because we grant all options at fair market value on the date of grant. Options granted to consultants are recorded as an expense over their vesting term based on their fair value, which is determined using the Black-Scholes method.
If we had elected to recognize compensation expense based on the fair market value at the grant dates for stock options granted, the pro forma net loss and net loss per common share would have been as follows:
| Three months ended | Nine months ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net loss: |
|||||||||||||||||
As reported |
$ | (780,000 | ) | $ | (4,834,000 | ) | $ | (8,525,000 | ) | $ | (17,677,000 | ) | |||||
Stock-based
compensation
based on fair
value method
allowed under
SFAS 123 |
(380,000 | ) | (520,000 | ) | (365,000 | ) | (2,578,000 | ) | |||||||||
Pro forma |
$ | (1,160,000 | ) | $ | (5,354,000 | ||||||||||||