Annual Statements Open main menu

INOVIO PHARMACEUTICALS, INC. - Quarter Report: 2004 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

 

 

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 No. 0-29608

 

GENETRONICS BIOMEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

Delaware

 

33-0969592

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

11199 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA  92121-1334

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

 

 

 

(858) 597-6006

(COMPANY’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  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

 

The number of shares outstanding of the registrant’s Common Stock, par value $ 0.001 per share, was 70,015,334 as of April 30, 2004.

 

 



 

GENETRONICS BIOMEDICAL CORPORATION

 

FORM 10-Q

 

For the Quarter Ended March 31, 2004

 

INDEX

 

Part I. Financial Information

 

 

 

Item 1.  Financial Statements

 

 

 

 

 

 

a)

Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003

 

 

 

 

 

 

 

 

 

 

b)

Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

 

 

 

 

 

 

 

 

 

c)

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

 

 

 

 

 

 

 

 

 

d)

Notes to Consolidated Financial Statements

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4. Controls and Procedures

 

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

 

 

 

Item 2. Changes in Securities and Use of Proceeds

 

 

 

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

 

 

 

Signatures

 

 



 

Part I. Financial Information

 

Item 1. Financial Statements

 

GENETRONICS BIOMEDICAL CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current

 

 

 

 

 

Cash and cash equivalents

 

$

13,128,944

 

$

13,460,446

 

Receivables, net

 

7,200

 

175,000

 

Prepaid expenses and other

 

80,755

 

116,526

 

Total current assets

 

13,216,899

 

13,751,972

 

Fixed assets, net

 

152,829

 

175,902

 

Patents and other assets, net

 

2,314,831

 

2,301,116

 

Total assets

 

$

15,684,559

 

$

16,228,990

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current

 

 

 

 

 

Accounts payable and accrued expenses

 

$

554,798

 

$

827,655

 

Deferred revenue

 

268,979

 

331,164

 

Total current liabilities

 

823,777

 

1,158,819

 

Deferred rent

 

16,389

 

22,536

 

Total liabilities

 

840,166

 

1,181,355

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $0.001 par value

 

1

 

1

 

Common stock, $0.001 par value

 

69,687

 

63,682

 

Additional paid in capital

 

92,656,461

 

91,185,936

 

Accumulated deficit

 

(77,881,756

)

(76,201,984

)

Total stockholders’ equity

 

14,844,393

 

15,047,635

 

Total liabilities and stockholders’ equity

 

$

15,684,559

 

$

16,228,990

 

 

See accompanying notes

 

1



 

GENETRONICS BIOMEDICAL CORPORATION

 

CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)

 

 

 

Three Months
Ended March 31,
2004

 

Three Months
Ended March 31,
2003

 

REVENUE

 

 

 

 

 

License fee and milestone payments

 

$

1,471

 

$

1,471

 

Revenues under collaborative research and development arrangement

 

67,914

 

9,666

 

Total revenue

 

69,385

 

11,137

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

Research and development

 

588,860

 

475,734

 

General and administrative

 

1,097,196

 

1,263,463

 

Interest (income) expense, net

 

(35,039

)

17,230

 

 

 

 

 

 

 

Total expenses

 

1,651,017

 

1,756,427

 

 

 

 

 

 

 

Loss from continuing operations

 

(1,581,632

)

(1,745,290

)

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Gain on disposal

 

 

2,034,078

 

Loss from operations

 

 

(110,740

)

Net (loss) income

 

(1,581,632

)

178,048

 

Declared dividends on preferred stock

 

(98,140

)

 

Net (loss) income attributable to common stockholders

 

$

(1,679,772

)

$

178,048

 

 

 

 

 

 

 

Amounts per common share – basic and diluted:

 

 

 

 

 

Loss from continuing operations

 

$

(0.03

)

$

(0.03

)

Income from discontinued operations

 

 

0.03

 

Declared dividends on preferred stock

 

 

 

Net loss per common share

 

$

(0.03

)

$

 

 

 

 

 

 

 

Weighted average number of common shares - basic

 

65,274,581

 

50,406,608

 

Weighted average number of common shares - diluted

 

65,274,581

 

50,632,087

 

 

See accompanying notes

 

2



 

GENETRONICS BIOMEDICAL CORPORATION

 

CONSOLIDATED STATEMENTS OF
CASH FLOWS

 

(Unaudited)

 

 

 

Three Months
Ended March 31,
2004

 

Three Months
Ended March 31,
2003

 

OPERATING ACTIVITIES

 

 

 

 

 

Loss from continuing operations

 

$

(1,581,632

)

$

(1,745,290

)

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

Compensation for services paid in stock options

 

122,738

 

22,169

 

Valuation of warrants issued in connection with debt

 

 

19,800

 

Depreciation and amortization

 

134,006

 

143,391

 

Deferred rent

 

(6,147

)

(3,073

)

Realized loss on foreign currency translation adjustment

 

 

102,238

 

Deferred revenue

 

(62,185

)

(1,138

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

167,800

 

(95,815

)

Prepaid expenses and other

 

35,771

 

66,522

 

Accounts payable and accrued expense

 

(272,857

)

(350,773

)

Cash used in operating activities

 

(1,462,506

)

(1,841,969

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchase of capital assets

 

(3,417

)

 

Increase in other assets

 

(121,231

)

(43,919

)

Cash used in investing activities

 

(124,648

)

(43,919

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from issuance of bridge loan

 

 

1,000,000

 

Repayment of bridge loan

 

 

(1,000,000

)

Payments on obligations under capital leases

 

 

(20,347

)

Proceeds from issuance of common – net

 

1,255,652

 

14,564

 

Cash provided by (used in) financing activities

 

1,255,652

 

(5,783

)

 

 

 

 

 

 

Net cash provided by discontinued operations

 

 

3,039,065

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(331,502

)

1,147,394

 

Cash and cash equivalents, beginning of period

 

13,460,446

 

875,444

 

Cash and cash equivalents, end of period

 

$

13,128,944

 

$

2,022,838

 

 

See accompanying notes

 

3



 

GENETRONICS BIOMEDICAL CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

1.             Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Genetronics Biomedical Corporation (“Company”, “we” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated balance sheet as of March 31, 2004, consolidated statements of operations for the three months ended March 31, 2004 and 2003 and the consolidated statements of cash flows for the three months ended March 31, 2004 and 2003 are unaudited, but include all adjustments (consisting of normal recurring adjustments) which Genetronics Biomedical Corporation considers necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2004 shown herein are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or for any other period. For more complete information, these financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

 

The Company incurred a net loss attributable to common stockholders of $1,679,772 for the three month period ended March 31, 2004, has working capital of $12,393,122 and has an accumulated deficit of $77,881,756 at March 31, 2004. The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and to obtain additional capital.  In January 2003, the Company completed the sale of substantially all of the properties and assets that are primarily used in its BTX Division to a third party for a purchase price of $3,700,000 in cash. On July 16, 2003, the Company announced it had raised an aggregate of $15,670,000 through the sale of $8,170,000 of its Series A Cumulative Convertible Preferred Stock and $7,500,000 of its Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors.  Proceeds from the sale of Series A Cumulative Convertible Preferred Stock were received on July 16, 2003.  Proceeds of $7,500,000 from the sale of Series B Cumulative Convertible Preferred Stock were payable upon achievement of certain milestones, which the Company achieved in October 2003.  Including the cash proceeds received from the July 2003 financing, the exercises of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through April 2005. The Company will continue to rely on outside sources of financing to meet its capital needs beyond next year. If the Company is not able to secure additional funding, it will be required to scale back its research and development programs, preclinical studies and clinical trials, and general, and administrative activities and may not be able to continue in business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should the Company be unable to continue in business.  The Company’s consolidated financial statements for the

 

4



 

year ended December 31, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future.

 

Certain reclassifications have been made to the financial statements for the three months ended March 31, 2004 to conform to the three months ended March 31, 2003 presentation.

 

2.             Principles of Consolidation

 

These consolidated financial statements include the accounts of Genetronics Biomedical Corporation and its wholly owned subsidiary, Genetronics, Inc.  All material intercompany accounts have been eliminated.

 

3.             Stockholders’ Equity

 

Authorized and Issued Stock as of March 31, 2004:

 

Authorized:

 

300,000,000 shares of common stock with a par value of  $0.001 per share and 10,000,000 shares of preferred stock with a par value of $0.001 per share

 

 

 

Issued:

 

380 Shares of Series A Cumulative Convertible Preferred Stock with a par value of $0.001.

 

 

194 Shares of Series B Cumulative Convertible Preferred Stock with a par value of $0.001.

 

 

69,686,604 shares of common stock at a par value of $69,687 with a par value of $0.001.

 

On July 16, 2003 we closed a preferred share private placement and raised an aggregate of $15,670,000, through the sale of $8,170,000 of our Series A Cumulative Convertible Preferred Stock and $7,500,000 of our Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. Each holder of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the taking of a vote.   In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company before any distribution of assets of the Company shall be made to or set apart for the holders of Common Stock, the holders of Preferred Stock shall be entitled to receive payment out of such assets of the Company in an amount equal to $10,000 per share of Preferred Stock plus any accumulated and unpaid dividends.  The Series A Preferred Stock is convertible into our common stock at a conversion price of $0.60 per share, and there is no escrow provision.  In connection with the sale of the Series A Preferred Stock, the Company recorded a one-time imputed dividend charge of $6,045,799 related to the beneficial conversion feature of the stock. The Series B Preferred Stock is convertible into our common stock at a conversion price of $0.70 per share, and the proceeds from the sale of the Series B Preferred Stock will remain in escrow to be released to us upon the achievement of specific milestones.  In October 2003, the Company achieved these milestones and the $7,500,000 was released from escrow.  In connection with the release of Series B Preferred Stock proceeds, the Company recorded a one-time imputed dividend

 

5



 

charge of $11,807,144.  Upon conversion, Preferred Stock will convert into 24,330,953 shares of our common stock. As of March 31, 2004, 574 shares of Series A and Series B Preferred Stock remained outstanding. The holders of Series A and Series B Preferred Stock will receive an annual dividend rate of 6%, in shares of common stock or cash payable quarterly, and each holder received 40% warrant coverage at an exercise price of $0.75 per share exercisable through July 13, 2008. Warrants granted to holders of our Preferred Stock entitle these investors the right to acquire 9,732,381 shares of our common stock.  On March 31, 2004, our Board of Directors declared dividends to the holders of our Preferred Stock, which were paid through the issuance of our common stock.  We issued a total of 59,320 common shares valued at $98,140 on March 31, 2004.  The placement agents for the Series A and B Preferred Stock were also granted warrants entitling the agents to acquire 1,944,428 shares of our common stock.  Each placement agent’s warrant entitles the holder to acquire one share of common stock at a price between $0.60 and $0.75 per share, exercisable through July 13, 2008.  Through March 31, 2004, we have incurred a total of $1,058,864 in expenses related to this offering.  As of March 31, 2004, total warrants exercised were 2,056,874 resulting in $1,344,287 in gross proceeds.

 

Stock Options

 

The 2000 Stock Option Plan, effective July 31, 2000 (the “2000 Plan”), was approved by the shareholders on August 7, 2000, pursuant to which 10,000,000 shares of common stock are reserved for issuance. The 2000 Plan supercedes all previous stock option plans. As of March 31, 2004, 757,788 shares of common stock were available for grant under the 2000 Plan. At December 31, 2003, there were 1,098,413 stock options available for grant under the 2000 Plan.

 

During the three months ended March 31, 2004, the Company granted 740,000 stock options with a weighted average exercise price of $1.34.

 

At March 31, 2004, 7,411,713 stock options remain outstanding at exercise prices ranging from $0.18 to $5.50 with a weighted average remaining life of 7.8 years, of which 4,581,474 are vested as of March 31, 2004.

 

Warrants

 

On January 21, 2003, the Company entered into a $1,000,000 bridge loan with a major shareholder.  Warrants to purchase 60,000 shares of the Company’s common stock at $.01 per share were granted in lieu of interest being charged to the loan.  The warrants expire in January 2005.  The warrants were valued at $19,800 using a fair value model and were charged to interest expense.  In February 2003, the bridge loan was paid in full with proceeds from the sale of the BTX Division. During March 2004, all of such warrants were exercised.

 

In connection with the issuance of the special warrants on June 6, 2002, the Company granted Series A special warrants to the placement agent to acquire 665,000 shares of common stock for $0.47 per share.  In September 2003, 120,000 of these warrants were exercised totaling $56,400 in gross proceeds.  All remaining warrants expire on June 6, 2005.

 

6



 

4.             Net Loss Per Share

 

Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128 “Earnings per Share”. Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period.  Diluted income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock by application of the treasury stock method.  Since the effect of the assumed exercise of common stock options and other convertible securities was anti-dilutive for the three month period ended March 31, 2004, the number of shares used in calculation of basic and diluted loss per share are the same.

 

5.             Discontinued Operations

 

The Company’s Board of Directors decided to focus the attention and resources of the Company on its Drug and Gene Delivery Division.  In connection with this decision, the Company decided to sell the assets of the BTX Division.  On January 31, 2003, we completed the sale of substantially all of the properties and assets that are primarily used in our BTX Division.  Accordingly, the BTX Division, which was previously classified as a separate segment, has been classified as discontinued operations for financial reporting purposes.

 

Operating results of the Company’s discontinued operations are shown separately as a single line item in the accompanying consolidated statements of operations.  The BTX Division did not have any sales due to the division being sold in January 2003 for the three months ended March 31, 2004 and had $162,060 in sales for the three months ended March 31, 2003.  These amounts are not included in sales in the accompanying unaudited consolidated statements of operations.

 

6.             Stock-based compensation

 

The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25) and related interpretations, in accounting for its employee stock options. Under APB25, because the exercise price of the Company’s options for common shares granted to employees is not less than the fair market value of the underlying stock on the date of grant, no compensation expense has been recognized. Options awarded to non-employees, including consultants, are recorded at their fair values using the Black Scholes option pricing model based on the vesting terms of the options.  The Company has also adopted the disclosure-only alternative of FASB Statement No.123, Accounting for Stock-Based Compensation (SFAS 123).

 

Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes pricing model with the following weighted average assumptions: risk free interest rate of 4.00%; dividend yield of 0%; volatility factor of the expected market price of the

 

7



 

Company’s common stock of 1.102; and a weighted average expected life of the options of 9 years.

 

The Black Scholes options valuation model was developed for use in estimating the fair value of trade options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

Supplemental disclosure of pro forma net loss and net loss per common share is as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

(Unaudited)

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders as reported

 

$

(1,679,772

)

$

178,048

 

Add: Stock-based employee compensation expense included in net loss

 

 

 

Deduct: Stock-based employee compensation expense determined under fair value method for all awards

 

(281,201

)

(349,547

)

Pro forma net loss attributable to common stockholders

 

$

(1,960,973

)

$

(171,499

)

 

 

 

 

 

 

Basic and diluted net loss per share as reported

 

$

(0.03

)

$

 

 

 

 

 

 

 

Basic and diluted pro forma net loss per share

 

$

(0.03

)

$

 

 

Item 2.                    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including those statements related to development plans, intentions to seek licensing partners and additional sources of capital, intended inventory levels, expectations concerning the adequacy of existing cash resources and anticipated sources of future revenues, and other financial, clinical, business environment and trend projections. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, without limitation, potential changes in strategy and focus of potential collaborative partners, competitive conditions and demand for its products, the current stage of development of both us and our  products, the timing and uncertainty of results of both research and regulatory processes, the extensive government regulation applicable to our business, the unproven safety and efficacy of our

 

8



 

device products, our significant additional financing requirements, the volatility of our stock price, the uncertainty of future capital funding, our potential exposure to product liability or recall, uncertainties relating to patents and other intellectual property, including whether we will obtain sufficient protection or competitive advantage therefrom, our dependence  upon a  limited number of key personnel and  consultants and our significant reliance upon our collaborative partners for achieving our goals, and other factors detailed in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

General

 

We are a San Diego-based biomedical company developing drug and gene delivery systems that use Electroporation Therapy (EPT) to deliver drugs and genes into cells.  We are developing and commercializing novel medical therapies based on EPT, addressing critical unmet treatment needs.

 

We formerly conducted our operations through two separate divisions, the Drug and Gene Delivery Division and the BTX Division. The Drug and Gene Delivery Division is developing drug and gene delivery systems based on electroporation to be used in the treatment of disease.  The BTX division developed, manufactured and sold electroporation and electrofusion equipment to the research laboratory market.  In 2002, our Board of Directors decided to focus our attention and resources on our Drug and Gene Delivery Division and to sell substantially all of the assets of the BTX Division. On January 31, 2003, we completed the sale of substantially all of the properties and assets that were primarily used in and associated with our BTX Division.  Accordingly, the BTX Division, which was previously classified as a separate segment, has been classified as discontinued operations for financial reporting purposes. In the past, our revenues reflected product sales to the research market through the BTX Division and collaborative research arrangements and research grants through the Drug and Gene Delivery Division.

 

On October 20, 2003, we announced that we had entered into an agreement with Vical Incorporated (NASDAQ: VICL) wherein we granted Vical an option to a worldwide exclusive license for the use of Genetronics’ proprietary in vivo EPT delivery technology in combination with Vical’s vaccine and therapeutic DNA technology for undisclosed targets.  Upon completion of a collaborative research program, this agreement could lead to a definitive licensing agreement, encompassing multiple indications with the potential for commercialization.

 

We will continue to seek new licensing partners for the use of electroporation for the delivery of drugs in the treatment of cancer and delivery of genes into cells. We will not receive any additional milestone or licensing payments for development or sale of our products until a new strategic alliance is in place and we achieve the milestones specified in the new agreement, or product sales commence under the new agreement. There can be no assurance that we will be able to contract with such a partner or that we can achieve the milestones set out in a new agreement.

 

Until the commercialization of clinical products, we expect revenues to continue to be attributable to collaborative research arrangements, licensing fees, grants and interest income.

 

Due to the amount of expenses incurred in the development of the drug and gene delivery systems, we have been unprofitable in the last nine years.  As of March 31, 2004, we have an accumulated deficit of $77,881,756. We expect to continue to incur substantial operating losses in

 

9



 

the future due to our commitment to our research and development programs, the funding of preclinical studies, clinical trials and regulatory activities and the costs of administrative activities.

 

Critical Accounting Policies

 

There have been no changes in our critical accounting policies as discussed in our annual report on Form 10-K for the year ended December 31, 2003.

 

We believe the following critical accounting policies involve significant judgments and estimates that are used in the preparation of our financial statements.

 

Revenue Recognition

 

We have adopted a strategy of co-developing or licensing our gene delivery technology for specific genes or specific medical indications. Accordingly, we have entered into collaborative research and development agreements and have received funding for pre-clinical research and clinical trials. Payments under these agreements, which are non-refundable, are recorded as revenue as the related research expenditures are incurred pursuant to the terms of the agreement and provided collectibility is reasonably assured.

 

License fees comprise initial fees and milestone payments derived from collaborative licensing arrangements. Non-refundable milestone payments continue to be recognized upon (i) the achievement of specified milestones when we have earned the milestone payment, (ii) the milestone payment is substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement. We defer payments for milestone events which are reasonably assured and recognize them ratably over the minimum remaining period of our performance obligations. Payments for milestones which are not reasonably assured are treated as the culmination of a separate earnings process and are recognized as revenue when the milestones are achieved.

 

Patent and license costs

 

Patents are recorded at cost and amortized using the straight-line method over the expected useful lives of the patents or 17 years, whichever is less. Cost is comprised of the consideration paid for patents and related legal costs. If management determines that development of products to which patent costs relate is not reasonably certain or that costs exceed recoverable value, such costs are charged to operations.

 

License costs are recorded based on the fair value of consideration paid and amortized using the straight-line method over the expected useful life of the underlying patents.

 

Long-lived assets

 

We assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we reduce the carrying value of the asset to fair value. While our current and historical operating and cash flow losses are potential indicators of impairment, we believe the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value,

 

10



 

and accordingly, we have not recognized any impairment losses through March 31, 2004.

 

Research and Development Expenses

 

Since our inception, virtually all of our activities have consisted of research and development efforts related to developing our electroporation technologies. We expense all such expenditures in the period incurred.

 

Results of Operations

 

Revenues

 

We had total revenues of $69,385 for the three months ended March 31, 2004 compared to $11,137 for the three months ended March 31, 2003.  Total revenues increased $58,248, or 523% for the three months ended March 31, 2004, as compared to the same period last year.  Revenues consist of license fees, milestone payments and amounts received from collaborative research and development agreements.  Revenues under license fees and milestone payments were $1,471 for the three months ended March 31, 2004 and for the three months ended March 31, 2003. The license fees which were recorded for the three months ended March 31, 2004 and 2003, of $1,471 and $1,471, respectively, resulted from the amortization of a $100,000 license fee we received from a non-exclusive license and supply agreement we entered into with Valentis, Inc. We will receive further payments, in the form of cash and stock of Valentis, if certain milestones are achieved under the agreement.

 

During the three months ended March 31, 2004, we recorded revenues under collaborative research and development arrangements in the amounts of $67,914 compared to $9,666 for the three months ended March 31, 2003.  Research and development collaborative revenues increased $58,248, or 603%, for the three months ended March 31, 2004, as compared to the same period in the prior year.  The increase was primarily due to the extension of an existing research agreement with Chiron and the addition of several small collaborative research and option agreements entered into in late 2003.

 

Research and Development

 

Research and development expenses, which include clinical trial costs, for the three months ended March 31, 2004, were $588,860, compared to $475,734, for the three months ended March 31, 2003,  an increase of $113,126, or 24%, compared to the same period the prior year.  The increase in research and development expenses for the three months ended March 31, 2004, is primarily due to increased use of outside clinical/regulatory consultants associated with the initiation of our clinical trials, increased external research expenses, the absorption of certain BTX fixed costs and additional traveling expenses associated with potential European sites. We initiated two Phase III head and neck clinical trials during 2004 in the United States and Europe.  These trials compare EPT to surgery using a primary endpoint of function preservation and secondary endpoints of local tumor control, disease free survival and overall survival.  Shifting from a primary endpoint of survival to a quality of life outcome allows us to carry out clinical trials that will be faster, less costly and have a higher likelihood of success.  As a result, previously announced Phase III head and neck trials focusing on survival as a primary endpoint have been discontinued.  In addition, we initiated two European post-regulatory approval trials for skin and head and neck cancer to gather

 

11



 

additional clinical and pharmacoeconomic data.  This trial is expected to allow adoption of the technology by European thought leaders and allow us to apply for reimbursement in Europe.  Due to the initiation of the clinical trials, clinical/regulatory expenses will increase substantially over the next year.

 

General and Administrative Expenses

 

General and administrative expenses, which include business development expenses, for the three months ended March 31, 2004, were $1,097,196 compared to $1,263,463 for the three months ended March 31, 2003.  General and administrative expenses decreased by $166,267, or 13%, from $1,263,463 to $1,097,196 for the three months ended March 31, 2004 as compared to the same period in the prior year.  The decrease in general and administrative expenses for the three months ended March 31, 2004, as compared to the same period in the prior year, mainly reflects decreased severance costs resulting from the sale of our BTX division in January 2003.  In addition, during the first quarter of 2003, we recorded a realized loss of $102,238, associated with a foreign currency translation adjustment.

 

Interest Income, Net

 

Interest income, net for the three months ended March 31, 2004, was $35,039 compared to a net interest expense of $17,230 for the three months ended March 31, 2003.  The increase in interest income for the three months ended March 31, 2004, was due to the receipt of investment funds during the middle of 2003, as well as proceeds from the exercise of warrants which increased our cash balance significantly.  In addition, we recorded a one-time interest expense amount of $19,800 related to a bridge loan in the first quarter of 2003.

 

Net Income (Loss)

 

We reported net loss attributable to common stockholders of $1,679,772 for the three months ended March 31, 2004, compared to net income attributable to common stockholders of $178,048 for the three months ended March 31, 2003.  The increased net loss for the three months ended March 31, 2004, as compared to the same period in the prior year, was the result of a one-time gain from the sale of our BTX division, recorded in January 2003 for $2,034,078 and our increased research and development expense of $113,126 in 2004.

 

Liquidity and Capital Resources

 

During the last six fiscal years, our primary uses of cash have been to finance research and development activities and clinical trial activities in the Drug and Gene Delivery Division. Since inception, we have satisfied our cash requirements principally from proceeds from the sale of equity securities.

 

As of March 31, 2004, we had working capital of $12,393,122 as compared to $12,593,153 as of December 31, 2003.  The change in working capital was primarily a result of the exercise of warrants, the July 2003 sale of Preferred Stock and the sale of the BTX Division in January 2003. 

 

On July 16, 2003 we closed a preferred share private placement and raised an aggregate of $15,670,000, through the sale of $8,170,000 of our Series A Cumulative Convertible Preferred

 

12



 

Stock and $7,500,000 of our Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. Each holder of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the taking of a vote.   In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company before any distribution of assets of the Company shall be made to or set apart for the holders of Common Stock, the holders of Preferred Stock shall be entitled to receive payment out of such assets of the Company in an amount equal to $10,000 per share of Preferred Stock plus any accumulated and unpaid dividends.  The Series A Preferred Stock is convertible into our common stock at a conversion price of $0.60 per share, and there is no escrow provision.  In connection with the sale of the Series A Preferred Stock, the Company recorded a one-time imputed dividend charge of $6,045,799 related to the beneficial conversion feature of the stock. The Series B Preferred Stock is convertible into our common stock at a conversion price of $0.70 per share, and the proceeds from the sale of the Series B Preferred Stock will remain in escrow to be released to us upon the achievement of specific milestones.  In October 2003, the Company achieved these milestones and the $7,500,000 was released from escrow.  In connection with the release of Series B Preferred Stock proceeds, the Company recorded a one-time imputed dividend charge of $11,807,144.  Upon conversion, Preferred Stock will convert into 24,330,953 shares of our common stock. As of March 31, 2004, 574 shares of Series A and Series B Preferred Stock remained outstanding. We will pay the holders of Series A and Series B Preferred Stock an annual dividend rate of 6%, in shares of common stock or cash payable quarterly, and each holder received 40% warrant coverage at an exercise price of $0.75 per share exercisable through July 13, 2008. Warrants granted to holders of our Preferred Stock entitle these investors the right to acquire 9,732,381 shares of our common stock.  On March 31, 2004, our Board of Directors declared dividends to the holders of our Preferred Stock which we paid through the issuance of our common stock.  A total of 59,320 common shares valued at $98,140 were issued on March 31, 2004.  The placement agents for the Series A and B Preferred Stock were also granted warrants entitling the agents to acquire 1,944,428 shares of our common stock.  Each placement agent’s warrant entitles the holder to acquire one share of common stock at a price between $0.60 and $0.75 per share, exercisable through July 13, 2008.  Through March 31, 2004, we have incurred a total of $1,058,864 in expenses related to this offering.  As of March 31, 2004, 2,056,874 warrants were exercised, resulting in $1,344,287 in gross proceeds.

 

On January 21, 2003, we entered into a $1,000,000 bridge loan with a major stockholder.  In February 2003, the bridge loan was paid in full with proceeds from the sale of the BTX Division. Warrants to purchase 60,000 shares of our common stock at $0.01 per share were granted in lieu of interest being charged on the loan.  The warrants were exercised in March 2004.

 

On January 31, 2003, we completed the sale of substantially all of the properties and assets that are primarily used in our BTX Division. Our stockholders, in a special stockholder’s meeting held on January 31, 2003, voted to approve the proposed sale to Harvard Bioscience, Inc. The terms of the sale were $3.7 million in cash, subject to certain adjustments, and royalty on net sales of BTX products above certain sales targets for a period of four years.  The net gain on the sale of our BTX Division was $2,034,078.

 

As of March 31, 2004, we had an accumulated deficit of $77,881,756.  We have operated at a loss since 1994, and we expect this to continue for some time. The amount of the accumulated deficit will continue to increase, as it will be expensive to continue clinical, research and development efforts. If these activities are successful and if we receive approval from the FDA to

 

13



 

market equipment, then even more funding will be required to market and sell the equipment.  We are evaluating potential partnerships as additional ways to fund operations. We will continue to rely on outside sources of financing to meet our capital needs beyond next year. The outcome of these matters cannot be predicted at this time. Further, there can be no assurance, assuming we successfully raise additional funds, that we will achieve positive cash flow. If we are not able to secure additional funding, we will be required to further scale back our research and development programs, preclinical studies and clinical trials, general, and administrative activities and may not be able to continue in business.  Including the cash proceeds received from the July 2003 financing, the exercises of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through April 2005.

 

Our long-term capital requirements will depend on numerous factors including:

 

      The progress and magnitude of the research and development programs, including preclinical and clinical trials;

 

      The time involved in obtaining regulatory approvals;

 

      The cost involved in filing and maintaining patent claims;

 

      Competitor and market conditions;

 

      The ability to establish and maintain collaborative arrangements;

 

      The ability to obtain grants to finance research and development projects; and

 

      The cost of manufacturing scale-up and the cost of commercialization activities and arrangements.

 

The ability to generate substantial funding to continue research and development activities, preclinical and clinical studies and clinical trials and manufacturing, scale-up, and selling, general, and administrative activities is subject to a number of risks and uncertainties and will depend on numerous factors including:

 

      The ability to raise funds in the future through public or private financings, collaborative arrangements, grant awards or from other sources;

 

      Our potential to obtain equity investments, collaborative arrangements, license agreements or development or other funding programs in exchange for manufacturing, marketing, distribution or other rights to products developed by us; and

 

      The ability to maintain existing collaborative arrangements.

 

We cannot guarantee that additional funding will be available when needed or on favorable terms. If it is not, we will be required to scale back its research and development programs, preclinical studies and clinical trials, and selling, general, and administrative activities, or otherwise reduce or cease operations and our business and financial results and condition would be materially adversely affected.

 

14



 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual Obligations

 

As of March 31, 2004, we did not have any long-term debt or other known contractual obligations.  Our operating leases consist of a facility lease, which expires on December 31, 2004 and operating leases for copiers, which expire in 2006.

 

RISK FACTORS

 

WE HAVE OPERATED AT A LOSS AND WE EXPECT TO CONTINUE TO ACCUMULATE A DEFICIT.

 

As of March 31, 2004, we had a deficit of $77,881,756.  We have operated at a loss since 1994, and we expect this to continue for some time. The amount of our accumulated deficit will continue to grow, as it will be expensive to continue our clinical, research, and development efforts as well as our product launch in Europe. If these activities are successful, and if we receive approval from the FDA to market human-use equipment, then even more funding will be required to market and sell the equipment in the U.S.

 

The cash we received during the last twelve months, came from the sale of our BTX Division, exercise of employee stock options and investor warrants, and the sale of preferred stock.  Other funds came from collaborative research arrangements and interest income on our investments.  On July 16, 2003, we announced that we had raised an aggregate of $15,670,000, through the sale of $8,170,000 of our Series A Cumulative Convertible Preferred Stock and $7,500,000 of our Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors.  All proceeds from the sale of Series A Cumulative Convertible Preferred Stock were received on July 16, 2003.  The proceeds from the sale of the Series B Preferred Stock remained in escrow to be released to us upon the achievement of specific milestones. In October 2003, we achieved these milestones and the $7,500,000 was released to us.  Including the cash proceeds received from the July 2003 financing, the exercise of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through April 2005.

 

WE WILL HAVE A NEED FOR SIGNIFICANT FUNDS IN THE FUTURE AND THERE IS NO GUARANTEE THAT WE WILL BE ABLE TO OBTAIN THE FUNDS WE NEED.

 

As discussed, we have operated at a loss, and expect that to continue for some time in the future. Our plans for continuing clinical trials, conducting research, furthering development and, eventually, marketing our human-use equipment will involve substantial costs. The extent of these costs will depend on many factors, including some of the following:

 

        The progress and breadth of preclinical testing and the size of our drug delivery programs, all of which directly influence cost;

 

15



 

        The costs involved in complying with the regulatory process to get our human-use products approved, including the number, size, and timing of necessary clinical trials and costs associated with the current assembly and review of existing clinical and pre-clinical information;

 

        The costs involved in patenting our technologies and defending them;

 

        Changes in our existing research and development relationships and our ability to enter into new agreements;

 

        The cost of manufacturing our human-use equipment; and

 

        Competition for our products and our ability, and that of our partners, to commercialize our products.

 

We plan to fund operations by several means. We will attempt to enter into contracts with partners that will fund either general operating expenses or specific programs or projects. Some funding also may be received through government grants. We cannot promise that we will enter into any such contracts or receive such grants or, if we do, that our partners and the grants will provide enough funding to meet our needs.

 

In the past, we have raised funds by public and private sale of our stock, and we are likely to do this in the future to raise needed funds. Sale of our stock to new private or public investors usually results in existing stockholders becoming “diluted”. The greater the number of shares sold, the greater the dilution. A high degree of dilution can make it difficult for the price of our stock to rise rapidly, among other things. Dilution also lessens a stockholder’s voting power.

 

We cannot assure you that we will be able to raise capital needed to fund operations, or that we will be able to raise capital under terms that are favorable to us.

 

IF WE DO NOT HAVE ENOUGH CAPITAL TO FUND OPERATIONS, THEN WE WILL HAVE TO CUT COSTS.

 

If we are not able to raise needed money under acceptable terms, then we will have to take measures to cut costs, such as:

 

        Delay, scale back or discontinue one or more of our drug or gene delivery programs or other aspects of operations, including laying off some personnel or stopping or delaying clinical trials;

 

        Sell or license some of our technologies that we would not otherwise give up if we were in a better financial position;

 

        Sell or license some of our technologies under terms that are a lot less favorable than they otherwise might have been if we were in a better financial position; and

 

16



 

        Consider merging with another company or positioning ourself to be acquired by another company.

 

If it became necessary to take one or more of the above-listed actions, then we may have a lower valuation, which probably would be reflected in our stock price.

 

IF WE ARE NOT SUCCESSFUL DEVELOPING OUR CURRENT PRODUCTS, OUR BUSINESS MODEL MAY CHANGE AS OUR PRIORITIES AND OPPORTUNITIES CHANGE.  OUR BUSINESS MAY NEVER DEVELOP TO BE PROFITABLE OR SUSTAINABLE.

 

There are many products and programs that to us seem promising and that we could pursue. However, with limited resources, we may decide to change priorities and shift programs away from those that we had been pursuing for the purpose of exploiting our core technology of electroporation. The choices we may make will be dependent upon numerous factors, which we cannot predict. We cannot assure you that our business model, as it currently exists or as it may evolve, will enable us to become profitable or to sustain operations.

 

IF WE DO NOT SUCCESSFULLY COMMERCIALIZE PRODUCTS, THEN OUR BUSINESS WILL SUFFER.

 

We have received various regulatory approvals, which apply to Europe for our equipment for use in treating solid tumors, the products related to such regulatory approval have not yet been commercialized. In addition, we have not yet received any regulatory approvals to sell our clinical products in the United States and further clinical trials are still necessary before we can seek regulatory approval to sell our products in the United States for treating solid tumors. We cannot assure you that we will successfully develop any products. If we fail to develop or successfully commercialize any products, then our business will suffer. Additionally, much of the commercialization efforts for our products must be carried forward by a licensing partner. We may not be able to obtain such a partner.

 

PRE-CLINICAL AND CLINICAL TRIALS OF HUMAN-USE EQUIPMENT ARE UNPREDICTABLE.  IF WE EXPERIENCE UNSUCCESSFUL TRIAL RESULTS OUR BUSINESS WILL SUFFER.

 

Before any of our human-use equipment can be sold, the Food and Drug Administration (FDA) or applicable foreign regulatory authorities must determine that the equipment meets specified criteria for use in the indications for which approval is requested. The FDA will make this determination based on the results from our pre-clinical testing and clinical trials.

 

Clinical trials are unpredictable, especially human-use trials. Results achieved in early stage clinical trials may not be repeated in later stage trials, or in trials with more patients. When early positive results were not repeated in later stage trials, pharmaceutical and biotechnology companies have suffered significant setbacks. Not only are commercialization timelines pushed back, but some companies, particularly smaller biotechnology companies with limited cash reserves, have gone out of business after releasing news of unsuccessful clinical trial results.

 

17



 

If we experience unexpected, inconsistent or disappointing results in connection with a clinical or pre-clinical trial our business will suffer. If any of the following events arise during our clinical trials or data review, then we would expect this to have a serious negative effect on our company and your investment:

 

        The electroporation-mediated delivery of drugs or other agents may be found to be ineffective or to cause harmful side effects, including death;

 

        Our clinical trials may take longer than anticipated, for any of a number of reasons including a scarcity of subjects that meet the physiological or pathological criteria for entry into the study, a scarcity of subjects that are willing to participate through the end of the trial, or data and document review;

 

        The reported clinical data may change over time as a result of the continuing evaluation of patients or the current assembly and review of existing clinical and pre-clinical information;

 

        Data from various sites participating in the clinical trials may be incomplete or unreliable, which could result in the need to repeat the trial or abandon the project; and

 

        The FDA and other regulatory authorities may interpret our data differently than we do, which may delay or deny approval.

 

Clinical trials are generally quite expensive. A delay in our trials, for whatever reason, will probably require us to spend additional funds to keep the product(s) moving through the regulatory process. If we do not have or cannot raise the needed funds, then the testing of our human-use products could be shelved. In the event the clinical trials are not successful, we will have to determine whether to put more money into the program to address its deficiencies or whether to abandon the clinical development programs for the products in the tested indications. Loss of the human-use product line would be a significant setback for our company.

 

Because there are so many variables inherent in clinical trials, we cannot predict whether any of our future regulatory applications to conduct clinical trials will be approved by the FDA or other regulatory authorities, whether our clinical trials will commence or proceed as planned, and whether the trials will ultimately be deemed to be successful. To date, our experience has been that submission and approval of clinical protocols has taken longer than desired or expected.

 

OUR BUSINESS IS HIGHLY DEPENDENT ON RECEIVING APPROVALS FROM VARIOUS UNITED STATES AND INTERNATIONAL GOVERNMENT AGENCIES AND WILL BE DRAMATICALLY AFFECTED IF APPROVAL TO MANUFACTURE AND SELL OUR HUMAN-USE EQUIPMENT IS NOT GRANTED OR IS NOT GRANTED IN A TIMELY MANNER.

 

The production and marketing of our human-use equipment and the ongoing research, development, preclinical testing, and clinical trial activities are subject to extensive regulation. Numerous governmental agencies in the US and internationally, including the FDA, must review our applications and decide whether to grant approval. All of our human-use equipment must go through an approval process, in some instances for each indication for which we want to label it for

 

18



 

use (such as use for dermatology, use for transfer of a certain gene to a certain tissue, or use for administering a certain drug to a certain tumor type in a patient having certain characteristics). These regulatory processes are extensive and involve substantial costs and time.

 

We have limited experience in, and limited resources available for, regulatory activities. Failure to comply with applicable regulations can, among other things, result in non-approval, suspensions of regulatory approvals, fines, product seizures and recalls, operating restrictions, injunctions and criminal prosecution.

 

Any of the following events can occur and, if any did occur, any one could have a material adverse effect on our business, financial conditions and results of operations:

 

        As mentioned earlier, clinical trials may not yield sufficiently conclusive results for regulatory agencies to approve the use of our products;

 

        There can be delays, sometimes long, in obtaining approval for our human-use devices, and indeed, we have experienced such delays in obtaining FDA approval of our clinical protocols;

 

        The rules and regulations governing human-use equipment such as ours can change during the review process, which can result in the need to spend time and money for further testing or review;

 

        If approval for commercialization is granted, it is possible the authorized use will be more limited than we believe is necessary for commercial success, or that approval may be conditioned on completion of further clinical trials or other activities; and

 

        Once granted, approval can be withdrawn, or limited, if previously unknown problems arise with our human-use product or data arising from its use.

 

WE RELY ON COLLABORATIVE AND LICENSING RELATIONSHIPS TO FUND A PORTION OF OUR RESEARCH AND DEVELOPMENT EXPENSES.  IF WE ARE UNABLE TO MAINTAIN OR EXPAND EXISTING RELATIONSHIPS, OR INITIATE NEW RELATIONSHIPS, WE WILL HAVE TO DEFER OR CURTAIL RESEARCH AND DEVELOPMENT ACTIVITIES IN ONE OR MORE AREAS.

 

Our partners and collaborators fund a portion of our research and development expenses and assist us in the research and development of our human-use equipment. These collaborations and partnerships can help pay the salaries and other overhead expenses related to research. Our largest partner at this time is Valentis, Inc. In November 2001, we entered into a non-exclusive license and supply agreement with Valentis, whereby Valentis obtained rights to use our electroporation technology in the development of certain GeneMedicine products. In the past, we encountered operational difficulties after the termination of a similar agreement by a former partner.  Because this partnership was terminated, we did not receive significant milestone payments which we had expected and were forced to delay some clinical trials as well as some product development. The Valentis partnership is not of the same size and scope and termination of the Valentis partnership would not present operational difficulties.

 

19



 

Our clinical trials to date have used our equipment with the anti-cancer drug bleomycin. We do not currently intend to package bleomycin together with the equipment for sale, but if it should be necessary or desirable to do this, we would need a reliable source of the drug. We signed a supply agreement with Abbott Laboratories under which Abbott would sell us bleomycin for inclusion in our package. If it becomes necessary or desirable to include bleomycin in our package, and this relationship with Abbott should be terminated, then we would have to form a relationship with another provider of this generic drug before any product could be launched.

 

We also rely on scientific collaborators at companies and universities to further our research and test our equipment. In most cases, we lend our equipment to a collaborator, teach him or her how to use it, and together design experiments to test the equipment in one of the collaborator’s fields of expertise. We aim to secure agreements that restrict collaborators’ rights to use the equipment outside of the agreed upon research, and outline the rights each of us will have in any results or inventions arising from the work.

 

Nevertheless, there is always risk that:

 

        Our equipment will be used in ways we did not authorize, which can lead to liability and unwanted competition;

 

        We may determine that our technology has been improperly assigned to us or a collaborator may claim rights to certain of our technology, which may require us to pay license fees or milestone payments and, if commercial sales of the underlying product is achieved, royalties;

 

        We may lose rights to inventions made by our collaborators in the field of our business, which can lead to expensive legal fights and unwanted competition;

 

        Our collaborators may not keep our confidential information to themselves, which can lead to loss of our right to seek patent protection and loss of trade secrets, and expensive legal fights; and

 

        Collaborative associations can damage a company’s reputation if they go awry and thus, by association or otherwise, the scientific or medical community may develop a negative view of us.

 

We cannot guarantee that any of the results from these collaborations will be fruitful. We also cannot tell you that we will be able to continue to collaborate with individuals and institutions that will further our work, or that we will be able to do so under terms that are not too restrictive. If we are not able to maintain or develop new collaborative relationships, then it is likely the research pace will slow down and it will take longer to identify and commercialize new products, or new indications for our existing products.

 

WE COULD BE SUBSTANTIALLY DAMAGED IF PHYSICIANS AND HOSPITALS PERFORMING OUR CLINICAL TRIALS DO NOT ADHERE TO PROTOCOLS OR PROMISES MADE IN CLINICAL TRIAL AGREEMENTS.

 

20



 

We work and have worked with a number of hospitals to perform clinical trials, primarily in oncology. We depend on these hospitals to recruit patients for the trials, to perform the trials according to our protocols, and to report the results in a thorough, accurate and consistent fashion. Although we have agreements with these hospitals, which govern what each party is to do with respect to the protocol, patient safety, and avoidance of conflict of interest, there are risks that the terms of the contracts will not be followed, such as the following:

 

Risk of Deviations from Protocol. The hospitals or the physicians working at the hospitals may not perform the trial correctly. Deviations from protocol may make the clinical data not useful and the trial could be essentially worthless.

 

Risk of Improper Conflict of Interest. Physicians working on protocols may have an improper economic interest in our company, or other conflict of interest. When a physician has a personal stake in the success of the trial, such as can be inferred if the physician owns stock, or rights to purchase stock, of the trial sponsor, it can create suspicion that the trial results were improperly influenced by the physician’s interest in economic gain. Not only can this put the clinical trial results at risk, but it can also do serious damage to a company’s reputation.

 

Risks Involving Patient Safety and Consent. Physicians and hospitals may fail to secure formal written consent as instructed or report adverse effects that arise during the trial in the proper manner, which could put patients at unnecessary risk. Physicians and hospital staff may fail to observe proper safety measures such as the mishandling of used medical needles, which may result in the transmission of infectious and deadly diseases, such as HIV and AIDS. This increases our liability, affects the data, and can damage our reputation.

 

If any of these events were to occur, then it could have a material adverse effect on our ability to receive regulatory authorization to sell our human-use equipment, not to mention on our reputation. Negative events that arise in the performance of clinical trials sponsored by biotechnology companies of our size and with limited cash reserves similar to ours have resulted in companies going out of business. While these risks are ever present, to date our contracted physicians and clinics have been successful in collecting significant data regarding the clinical protocols under which they have operated, and we are unaware of any conflicts of interest or improprieties regarding our protocols.

 

WE RELY HEAVILY ON OUR PATENTS AND PROPRIETARY RIGHTS TO ATTRACT PARTNERSHIPS AND MAINTAIN MARKET POSITION.

 

Another factor that will influence our success is the strength of our patent portfolio. Patents give the patent holder the right to prevent others from using its patented technology. If someone infringes upon the patented material of a patent holder, then the patent holder has the right to initiate legal proceedings against that person to protect the patented material. These proceedings, however, can be lengthy and costly. We are in the process of performing an ongoing review of our patent portfolio to confirm that our key technologies are adequately protected. If we determine that any of our patents require either additional disclosures or revisions to existing information, we may ask that such patents be reexamined or reissued, as applicable, by the United States patent office.

 

21



 

The patenting process, enforcement of issued patents, and defense against claims of infringement are inherently risky. Because we rely heavily on patent protection, for us the risks are significant and include the following:

 

Risk of Inadequate Patent Protection for Product. The United States or foreign patent offices may not grant patents of meaningful scope based on the applications we have already filed and those we intend to file. If we do not have patents that adequately protect our human-use equipment and indications for its use, then we will not be competitive.

 

Risk That Important Patents Will Be Judged Invalid. Some of the issued patents we now own or license may be determined to be invalid. If we have to defend the validity of any of our patents, the costs of such defense could be substantial, and there is no guarantee of a successful outcome. In the event an important patent related to our drug delivery technology is found to be invalid, we may lose competitive position and may not be able to receive royalties for products covered in part or whole by that patent under license agreements.

 

Risk of Being Charged With Infringement. Although we and our partners try to avoid infringement, there is the risk that we will use a patented technology owned by another person and/or be charged with infringement. Defending or indemnifying a third party against a charge of infringement can involve lengthy and costly legal actions, and there can be no guarantee of a successful outcome. Biotechnology companies of roughly our size and financial position have gone out of business after fighting and losing an infringement battle. If we or our partners were prevented from using or selling our human-use equipment, then our business would be seriously affected.

 

Freedom to Operate Risks. We are aware that patents related to electrically assisted drug delivery have been granted to, and patent applications filed by, our potential competitors. We or our partners have taken licenses to some of these patents, and will consider taking additional licenses in the future. Nevertheless, the competitive nature of our field of business and the fact that others have sought patent protection for technologies similar to ours make these significant risks.

 

In addition to patents, we also rely on trade secrets and proprietary know-how. We try to protect this information with appropriate confidentiality and inventions agreements with our employees, scientific advisors, consultants, and collaborators. We cannot assure you that these agreements will not be breached, that we will be able to do much to protect ourselves if they are breached, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If any of these events occurs, then we run the risk of losing control over valuable company information, which could negatively affect our competitive position.

 

WE RUN THE RISK THAT OUR TECHNOLOGY WILL BECOME OBSOLETE OR LOSE ITS COMPETITIVE ADVANTAGE.

 

The drug delivery business is very competitive, fast moving and intense, and expected to be increasingly so in the future. Other companies and research institutions are developing drug delivery systems that, if not similar in type to our systems, are designed to address the same patient or subject population. Therefore, we cannot promise you that our products will be the best, the safest, the first to market, or the most economical to make or use. If competitors’ products are better than ours, for whatever reason, then we could make less money from sales and our products risk becoming obsolete.

 

22



 

There are many reasons why a competitor might be more successful than us, including:

 

Financial Resources. Some competitors have greater financial resources and can afford more technical and development setbacks than we can.

 

Greater Experience. Some competitors have been in the drug delivery business longer than we have. They have greater experience than us in critical areas like clinical testing, obtaining regulatory approval, and sales and marketing. This experience or their name recognition may give them a competitive advantage over us.

 

Superior Patent Position. Some competitors may have a better patent position protecting their technology than we have or will have to protect our technology. If we cannot use our patents to prevent others from copying our technology or developing similar technology, or if we cannot obtain a critical license to another’s patent that we need to make and use our equipment, then we would expect our competitive position to lessen. However, we feel that our patent position adequately protects our technology portfolio.

 

Faster to Market. Some companies with competitive technologies may move through stages of development, approval, and marketing faster than us. If a competitor receives FDA approval before us, then it will be authorized to sell its products before we can sell ours. Because the first company “to market” often has a significant advantage over late-comers, a second place position could result in less than anticipated sales.

 

Reimbursement Allowed. In the United States, third party payers, such as Medicare, may reimburse physicians and hospitals for competitors’ products but not for our human-use products. This would significantly affect our ability to sell our human-use products in the United States and would have a serious effect on revenues and our business as a whole. Outside of the United States, reimbursement and funding policies vary widely.

 

OUR ABILITY TO ACHIEVE SIGNIFICANT REVENUE FROM SALES OR LEASES OF HUMAN-USE EQUIPMENT WILL DEPEND ON ESTABLISHING EFFECTIVE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR RELATIONSHIPS AND WE LACK SUBSTANTIAL EXPERIENCE IN THESE AREAS.

 

We have no experience in sales, marketing and distribution of clinical and human-use products. If we want to be direct distributors of the human-use products, then we must develop a marketing and sales force. This would involve substantial costs, training, and time. Alternatively, we may decide to rely on a company with a large distribution system and a large direct sales force to undertake the majority of these activities on our behalf. This route could result in less profit for us, but may permit us to reach market faster. In any event, we may not be able to undertake this effort on our own, or contract with another to do this at a reasonable cost. Regardless of the route we take, we may not be able to successfully commercialize any product.

 

THE MARKET FOR OUR STOCK IS VOLATILE, WHICH COULD ADVERSELY AFFECT AN INVESTMENT IN OUR STOCK.

 

23



 

Our share price and volume are highly volatile. This is not unusual for biomedical companies of our size, age, and with a discrete market niche. It also is common for the trading volume and price of biotechnology stocks to be unrelated to a company’s operations, i.e. to go up or down on positive news and to go up or down on no news. Our stock has exhibited this type of behavior in the past, and may well exhibit it in the future. The historically low trading volume of our stock, in relation to many other biomedical companies of about our size, makes it more likely that a severe fluctuation in volume, either up or down, will affect the stock price.

 

Some factors that we would expect to depress the price of our stock include:

 

        Adverse clinical trial results;

 

        Our inability to obtain additional capital;

 

        Announcement that the FDA denied our request to approve our human-use product for commercialization in the United States, or similar denial by other regulatory bodies which make independent decisions outside the United States. To date, Europe is the only foreign jurisdiction in which we have sought approval for commercialization;

 

        Announcement of legal actions brought by or filed against us for patent or other matters, especially if we do not win such actions;

 

        Cancellation of important corporate partnerships or agreements;

 

        Public concern as to the safety or efficacy of our human-use products including public perceptions regarding gene therapy in general;

 

        Stockholders’ decisions, for whatever reasons, to sell large amounts of our stock;

 

        Adverse research and development results;

 

        Declining working capital to fund operations, or other signs of apparent financial uncertainty; and

 

        Significant advances made by competitors that are perceived to limit our market position.

 

ECONOMIC, POLITICAL, MILITARY OR OTHER EVENTS IN THE UNITED STATES OR IN OTHER COUNTRIES COULD INTERFERE WITH OUR SUCCESS OR OPERATIONS  AND HARM OUR BUSINESS

 

The September 11, 2001 terrorist attacks disrupted commerce throughout the United States and other parts of the world. The continued threat of similar attacks throughout the world and the military action taken by the United States and other nations in Iraq or other countries may cause significant disruption to commerce throughout the world. To the extent that such disruptions further slow the global economy, our business and results of operations could be materially adversely affected. We are unable to predict whether the threat of new attacks or the responses thereto will

 

24



 

result in any long-term commercial disruptions or if such activities or responses will have a long-term material adverse effect on our business, results of operations or financial condition.

 

OUR DEPENDENCE UPON NON-MARKETED PRODUCTS, LACK OF EXPERIENCE IN MANUFACTURING AND MARKETING HUMAN-USE PRODUCTS, AND OUR CONTINUING DEFICIT MAY RESULT IN EVEN FURTHER FLUCTUATIONS IN OUR TRADING VOLUME AND SHARE PRICE.

 

Successful approval, marketing, and sales of our human-use equipment are critical to the financial future of our company. Our human-use products are not yet approved for sale in the United States and some other jurisdictions and we may never obtain those approvals. Even if we do obtain approvals to sell our human-use products in the United States, those sales may not be as large or timely as we expect. These uncertainties may cause our operating results to fluctuate dramatically in the next several years. We believe that quarter-to-quarter or annual comparisons of our operating results are not a good indication of our future performance. Nevertheless, these fluctuations may cause us to perform below the expectations of the public market analysts and investors. If this happens, the price of our common shares would likely fall.

 

THERE IS A RISK OF PRODUCT LIABILITY WITH HUMAN-USE EQUIPMENT

 

The testing, marketing and sale of human-use products expose us to significant and unpredictable risks of equipment product liability claims. These claims may arise from patients, clinical trial volunteers, consumers, physicians, hospitals, companies, institutions, researchers or others using, selling, or buying our equipment. Product liability risks are inherent in our business and will exist even after the products are approved for sale. If and when our human-use equipment is commercialized, we run the risk that use (or misuse) of the equipment will result in personal injury. The chance of such an occurrence will increase after a product type is on the market.

 

We possess liability insurance in connection with ongoing business and products, and we will purchase additional policies if such policies are determined by management to be necessary. The insurance we purchase may not provide adequate coverage in the event a claim is made, however, and we may be required to pay claims directly. If we did have to make payment against a claim, then it would impact our financial ability to perform the research, development, and sales activities we have planned.

 

If and when our human-use equipment is commercialized, there is always the risk of product defects. Product defects can lead to loss of future sales, decrease in market acceptance, damage to our brand or reputation, and product returns and warranty costs. These events can occur whether the defect resides in a component we purchased from a third party or whether it was due to our design and/or manufacture. We expect that our sales agreements will contain provisions designed to limit our exposure to product liability claims. However, we do not know whether these limitations are enforceable in the countries in which the sale is made. Any product liability or other claim brought against us, if successful and of sufficient magnitude, could negatively impact our financial performance, even if we have insurance.

 

WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE OUR HUMAN-USE EQUIPMENT IN SUFFICIENT VOLUMES AT COMMERCIALLY REASONABLE RATES.

 

25



 

Our manufacturing facilities for human-use products will be subject to quality systems regulations, international quality standards and other regulatory requirements, including pre-approval inspection for the human-use equipment and periodic post-approval inspections for all human-use products. While we have undergone and passed a quality systems review from an international body, we have never undergone a quality systems inspection by the FDA. We may not be able to pass an FDA inspection when it occurs. If our facilities are not up to the FDA standards in sufficient time, prior to United States launch of product, then it will result in a delay or termination of our ability to produce the human-use equipment in our facility. Any delay in production will have a negative effect on our business. There are no immediate dates set forth for launch of our products in the United States. We plan on launching these products once we successfully perform a Phase III clinical study, obtain the requisite regulatory approval, and engage a partner who has the financial resources and marketing capacity to bring our products to market.

 

Our products must be manufactured in sufficient commercial quantities, in compliance with regulatory requirements, and at an acceptable cost to be attractive to purchasers. We rely on third parties to manufacture and assemble most aspects of our equipment.

 

Disruption of the manufacture of our products, for whatever reason, could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis. This would be expected to affect revenues and may affect our long-term reputation, as well. In the event we provide product of inferior quality, we run the risk of product liability claims and warranty obligations, which will negatively affect our financial performance.

 

WE DEPEND ON THE CONTINUED EMPLOYMENT OF QUALIFIED PERSONNEL.

 

Our success is highly dependent on the people who work for us. If we cannot attract and retain top talent to work in our company, then our business will suffer. Our staff may not decide to stay with our company, and we may not be able to replace departing employees or build departments with qualified individuals.

 

We have an employment agreement in place for Avtar Dhillon, our President and Chief Executive Officer. If Mr. Dhillon leaves us, that might pose significant risks to our continued development and progress. Our progress may also be curtailed if Dietmar Rabussay, Ph.D., our Vice President of Research and Development, were to leave us.

 

WE MAY NOT MEET ENVIRONMENTAL GUIDELINES AND AS A RESULT COULD BE SUBJECT TO CIVIL AND CRIMINAL PENALTIES.

 

Like all companies in our line of work, we are subject to a variety of governmental regulations relating to the use, storage, discharge and disposal of hazardous substances. Our safety procedures for handling, storage and disposal of such materials are designed to comply with applicable laws and regulations. Nevertheless, if we are found to not comply with environmental regulations, or if we are involved with contamination or injury from these materials, then we may be subject to civil and criminal penalties. This would have a negative impact on our reputation, our finances, and could result in a slowdown, or even complete cessation of our business.

 

26



 

OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES AND EQUIPMENT.

 

Our facilities are located near known earthquake fault zones and are vulnerable to damage from earthquakes.  We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously impaired. In addition, the unique nature of our research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.

 

OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS.

 

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy,” “outlook” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from the results expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q. The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this Quarterly Report on Form 10-Q. Among the key factors that have a direct impact on our results of operations are:

 

        general economic and business conditions;

 

        industry trends;

 

        our assumptions about customer acceptance, overall market penetration and competition from providers of alternative products and services;

 

        our actual funding requirements;

 

        availability, terms and deployment of capital; and

 

        the risks and other factors described under the caption “Risk Factors” in this report;

 

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors

 

27



 

emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Item 3.                    Quantitative and Qualitative Disclosures About Market Risk

 

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income that we can earn on our cash equivalents.  We are subject to interest rate risk on our cash equivalents which at March 31, 2004 had an average interest rate of approximately 1.0%.  Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.  We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk.  We mitigate default risk by investing in investment grade securities.  A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments.  Declines in interest rates over time will, however, reduce the interest income.

 

Item 4.                    Controls and Procedures

 

(a)  Evaluation of Disclosure Controls and Procedures

 

The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under Rule 13a – 14 of the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods.  As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed with the SEC under the Exchange Act.

 

(b) Changes in Internal Controls

 

There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date.

 

Part II.   Other Information

 

Item 1.                    Legal Proceedings

 

There are no material pending legal proceedings to which the Company is a party, other than routine litigation incidental to the business of the Company.  Further, there is no material pending legal proceeding in which any director, executive officer, principal stockholder, or affiliate of the Company or any associate of any such director, executive officer, or principal stockholder is a party

 

28



 

of has a material interest adverse to the Company.  None of the routine litigation in which the Company is involved is expected to have a material adverse impact upon the financial position or results of operations of the Company.

 

Item 2.                    Change in Securities and Use of Proceeds – Not applicable

 

Item 3.                    Default Upon Senior Securities – Not applicable

 

Item 4.                    Submission of Maters to a Vote of Security Holders – None

 

Item 5.                    Other Information – Not applicable

 

Item 6.                    Exhibits and Reports on Form 8-K

 

(a)           Exhibits

 

 

Exhibit
Number

 

Description of Document

31.1

 

Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).

31.2

 

Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).

32.1

 

Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.

 

(b)           Reports on Form 8-K

 

During the three-month period ending March 31, 2004, we did not file a report on Form 8-K.

 

29



 

GENETRONICS BIOMEDICAL CORPORATION

 

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.

 

 

 

 

 

Genetronics Biomedical Corporation

 

 

 

 

 

 

 

 

Date:

May 12, 2004

By:

/s/ Peter Kies

 

 

 

Peter Kies, Chief Financial Officer

 

30