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 March 31, 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 - -------------------------------------------------------------------------------- (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 20,205,434 ----------------------------- ------------------------------- (Class) (Outstanding at April 28, 1997)
2 TARGETED GENETICS CORPORATION Quarterly Report on Form 10-Q For the quarter ended March 31, 1997 TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Balance Sheets - March 31, 1997 and December 31, 1996 3 b) Condensed Statements of Operations - for the three months ended March 31, 1997 and 1996 4 c) Condensed Statements of Cash Flows - for the three months ended March 31, 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
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED BALANCE SHEETS <TABLE> <CAPTION> March 31, December 31, 1997 1996 ------------ ------------ ASSETS (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 892,618 $ 3,532,568 Securities available for sale 14,661,159 15,518,502 Prepaid expenses and other 238,550 468,671 ------------ ------------ Total current assets 15,792,327 19,519,741 Property, plant and equipment, net 4,851,738 4,991,017 Other assets 587,918 628,294 ------------ ------------ $ 21,231,983 $ 25,139,052 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,371,395 $ 1,887,880 Accrued payroll and other liabilities 269,363 364,964 Current portion of long-term obligations 1,327,649 1,250,263 ------------ ------------ Total current liabilities 2,968,407 3,503,107 Long-term obligations 1,995,338 2,128,157 Shareholders' equity: Preferred stock -- -- Common stock (20,205,434 and 20,136,468 shares outstanding at March 31, 1997 and December 31, 1996, respectively) 73,397,577 73,115,362 Deficit accumulated during development stage (57,129,339) (53,607,574) ------------ ------------ Total shareholders' equity 16,268,238 19,507,788 ------------ ------------ $ 21,231,983 $ 25,139,052 ============ ============ </TABLE> See accompanying notes. 3
4 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months ended March 9, 1989 March 31, (date of inception) ------------------------------- through 1997 1996 March 31, 1997 ------------ ------------ ------------------- <S> <C> <C> <C> Revenues: Collaborative agreements $ 77,382 $ -- $ 1,355,347 Investment income 230,336 183,536 3,231,338 Other 98,255 -- 325,373 ------------ ------------ ------------ Total revenues 405,973 183,536 4,912,058 ------------ ------------ ------------ Expenses: Research and development 3,051,538 2,366,032 37,325,242 In-process research and development -- -- 13,517,911 General and administrative 742,570 616,862 10,191,606 Interest 86,893 92,381 979,288 ------------ ------------ ------------ Total expenses 3,881,001 3,075,275 62,014,047 ------------ ------------ ------------ Net loss $ (3,475,028) $ (2,891,739) $(57,101,989) ============ ============ ============ Net loss per share $ (0.17) $ (0.23) ============ ============ Shares used in computation of net loss per share 20,162,043 12,342,748 ============ ============ </TABLE> See accompanying notes. 4
5 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three months ended March 9, 1989 March 31, (date of inception) ----------------------------- through 1997 1996 March 31, 1997 ----------- ----------- -------------- <S> <C> <C> <C> Net cash used in operating activities $(3,182,796) $(2,602,558) $(37,521,977) Investing activities: Purchases of property, plant and equipment (396,692) (519,482) (9,109,883) Purchases of securities available for sale -- (1,513,869) (78,664,645) Sales of securities available for sale 712,878 3,366,703 64,033,905 Net cash acquired in RGene acquisition -- -- 1,594,386 Increase in other assets -- -- (719,179) ----------- ----------- ------------ Net cash used in investing activities 316,186 1,333,352 (22,865,416) Financing activities: Advances from Immunex -- -- 2,807,316 Net proceeds from sale of capital stock 282,215 297,289 55,657,215 Proceeds from equipment financing 259,972 554,063 5,203,854 Payments under capital leases and installment loans (315,527) (210,887) (2,388,374) ----------- ----------- ------------ Net cash provided by financing activities 226,660 640,465 61,280,011 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents (2,639,950) (628,741) 892,618 Cash and cash equivalents, beginning of period 3,532,568 2,154,814 -- ----------- ----------- ------------ Cash and cash equivalents, end of period $ 892,618 $ 1,526,073 $ 892,618 =========== =========== ============ </TABLE> See accompanying notes. 5
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 months ended March 31, 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
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Financial Condition The Company had $15.6 million in cash, cash equivalents and securities available for sale as of March 31, 1997, compared to $19.1 million at December 31, 1996. The change was primarily attributable to the use of $3.2 million to fund operations and $397,000 to purchase property, plant and equipment, offset by the receipt of $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 capital requirements until at least early 1998. Such estimates include the impact of future milestone payments potentially receivable under existing collaborative agreements. There can be no assurance that such milestone payments will be received or 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 The Company's net loss has grown from year-to-year, consistent with the growth in the Company's scope and size of operations. In the near term, the Company does not expect additional 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 a collaborative arrangement providing a significant amount of research and development funding, the net loss is expected to continue to increase as well. 7
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations (continued) For the three months ended March 31, 1997, revenue under collaborative agreements was $77,000. The revenue primarily consists of amounts recoverable from Laboratoires Fournier S.C.A. related to tgDCC-E1A process development activities. For the three months ended March 31, 1997, investment income increased to $230,000 compared to $184,000 during the three months ended March 31, 1996. The increase was largely attributable to higher average cash balances for investment in 1997 compared to the same period in 1996. Other revenue was $98,000 for the three months ended March 31, 1997. The revenue represents proceeds from Small Business Innovation Research grants awarded by the National Institutes of Health. Research and development expenses were $3.1 million for the three months ended March 31, 1997, and $2.4 million for the three months ended March 31, 1996. Expenses that resulted directly from the acquisition of RGene Therapeutics Inc., specifically costs related to the continuation of the acquired research, development and clinical programs, were largely responsible for the increase in 1997. Additional factors that contributed to the increase were a moderate increase in the level of preclinical research activities and continued progression of the Company's clinical trial programs. General and administrative expenses were $743,000 for the three months ended March 31, 1997, and $617,000 for the three months ended March 31, 1996. The increase was primarily attributable to an increased level of corporate development activities focused on the completion of additional corporate collaborations. 8
9 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibit is filed as a part of this report. <TABLE> <CAPTION> Exhibit No. Description ----------- ----------- <S> <C> 4.1 Warrant to purchase 50,000 shares of the Common Stock of Targeted Genetics Corporation, issued to The Burnham Institute on March 15, 1997. 27.1 Financial Data Schedule </TABLE> 9
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 May 9, 1997 /s/ H. STEWART PARKER ------------------- --------------------------------------- H. Stewart Parker, Chief Executive Officer (Principal Executive Officer) Date May 9, 1997 /s/ JAMES A. JOHNSON ------------------- --------------------------------------- James A. Johnson, Vice President, Finance (Principal Financial and Accounting Officer) 10
11 Exhibit Index 4.1 Warrant to purchase 50,000 shares of the Common Stock of Targeted Genetics Corporation, issued to The Burnham Institute on March 15, 1997. 27.1 Financial Data Schedule