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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
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 NO. 0-29608
GENETRONICS BIOMEDICAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA 33-0024450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
for Genetronics, Inc.)
11199 SORRENTO VALLEY ROAD 92121-1334
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858)597-6006
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Company (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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares outstanding of the Registrant's Common Stock, no par
value, was 33,756,718 as of May 10, 2001. The aggregate market value of the
voting stock (which consists solely of shares of Common Stock) held by
non-affiliates of the Company as of May 10, 2001 was approximately $43,999,300,
based on $1.48, the closing price on that date of Common Stock on the American
Stock Exchange. *
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DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registrant's prior registration statements,
Forms 10-K, 10-Q, and 8-K are incorporated herein by reference into Part IV of
this report.
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* Excludes 4,027,461 shares of Common Stock held by directors and officers,
and shareholders whose beneficial ownership exceeds 10% of the shares
outstanding on May 10, 2001. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Company, or that such person is controlled by or under common control
with the Company.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. SUCH STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"ESTIMATES" AND WORDS OF SIMILAR IMPORTANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS, WHICH REFLECT
MANAGEMENT'S OPINIONS ONLY AS OF THE DATE OF THIS REPORT, AS A RESULT OF SUCH
RISKS AND UNCERTAINTIES. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE OR
PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE FOUND IN THIS ANNUAL REPORT ON FORM 10-K IN PART
I, ITEM 1 UNDER THE CAPTION "CERTAIN RISK FACTORS RELATED TO THE COMPANY'S
BUSINESS," IN PART II, ITEM 7 UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ADDITIONAL
FACTORS DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT AND IN OTHER DOCUMENTS THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING ITS QUARTERLY REPORTS ON FORM 10-Q. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
PLEASE NOTE THAT UNLESS OTHERWISE INDICATED, ALL REFERENCE TO MONEY IS
STATED IN UNITED STATES DOLLARS.
On May 10, 2001, the Interbank rate of exchange for converting Canadian
dollars into United States dollars equalled 1.5390 Canadian dollars for one (1)
United States dollar. The following table presents a history of the exchange
rates of Canadian dollars into one (1) United States dollar for the five most
recent fiscal years of our company.
TWELVE TWELVE TWELVE THIRTEEN TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, FEB. 28,
FISCAL PERIODS ENDED 2001 2000 1999 1998 1997
------------------------ -------- -------- -------- -------- --------
Period End ............. 1.5767 1.4494 1.5104 1.4218 1.3556
Average ................ 1.5038 1.4661 1.5031 1.3994 1.3556
Period's High .......... 1.5791 1.4878 1.5845 1.4686 1.3752
Period's Low ........... 1.4470 1.4524 1.4144 1.3594 1.3381
PART I
ITEM 1. BUSINESS
OVERVIEW
We were incorporated in British Columbia, Canada on August 8, 1979 under
the name of Concord Energy Corp. We changed our name to United Safety Technology
Inc. on February 17, 1988, to Consolidated United Safety Technology Inc. on
January 3, 1990, and then to Genetronics Biomedical Ltd., on September 29, 1994.
We carry on our business through our operating subsidiary Genetronics, Inc., a
California corporation. Genetronics, Inc. was incorporated in California on June
29, 1983. Genetronics, Inc. had a subsidiary called Genetronics S.A., which was
incorporated in France on January 30, 1998. Genetronics S.A. was formed
primarily to manage clinical trials that were being conducted in France.
Effective May 2000, the Company closed the operations of Genetronics S.A. and
subsequently sold its investment for nominal consideration to Geser S.A., a
company owned by Genetronics S.A.'s former General Manager. All our business
activities are conducted through Genetronics, Inc. Unless otherwise indicated,
all references to Genetronics or the Company refer to Genetronics Biomedical,
Ltd. and Genetronics, Inc. on a consolidated basis.
We have called an Extraordinary General Meeting of our shareholders for
May 22, 2001 to consider the continuation of the Company from British Columbia,
Canada into Delaware, U.S.A. This continuation is subject to the approval of the
shareholders and subsequent to their approval, is subject to the approval of our
Board of Directors.
We are a San Diego-based drug and gene delivery company specializing in
developing technology and hardware focused on electroporation. Electroporation
is the application of brief, controlled pulsed electric fields to cells, which
cause tiny pores to temporarily open in the cell membrane. Immediately after
electroporation, the cell membrane is more permeable to drugs and other agents.
In the lab, researchers use electroporation to introduce
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genes, drugs, and other compounds into cells and experimental animals. This is a
common and well-known procedure and more than 4,000 scientific papers have been
published describing results achieved using electroporation.
While widely used in the research arena, electroporation is a relatively
new technology in the therapeutic arena. One of the major difficulties in many
forms of drug or gene therapy is that the pharmaceutical agent or gene is often
not able to penetrate the relatively impermeable walls of cells. The pores
produced by electroporation permit entry of such agents into cells to a much
greater extent than if the drug or gene was administered without
electroporation. When electroporation is used in conjunction with drugs, genes,
or other therapeutic agents, it is referred to as Electroporation Therapy
("EPT"). We operate through our two divisions: (i) the Drug and Gene Delivery
Division, through which we are developing drug and gene delivery systems based
on electroporation to be used in the treatment of disease and, (ii) the BTX
Instrument Division, which develops, manufactures, and sells electroporation
equipment to the research laboratory market for in vitro and for in vivo animal
experimentation.
The Drug and Gene Delivery Division focuses on the development of
human-use equipment that is designed to allow physicians to use EPT to achieve
more efficient and cost-effective delivery of drugs or genes to patients with a
variety of illnesses, including cancer. Our proprietary electroporation drug and
gene delivery system, the Genetronics MedPulser(R) system, has been used with
bleomycin, a chemotherapeutic agent, in clinical trials conducted in the United
States, Australia, Europe and Canada for treatment of head and neck cancer, as
well as melanoma, liver, pancreatic, basal cell and Kaposi sarcoma cancers.
DRUG AND GENE DELIVERY DIVISION
OVERVIEW
Through our Drug and Gene Delivery Division, we are developing drug and
gene delivery systems based on the technology of electroporation to be used in
combination with drugs or genes in the treatment of disease. There are many
diseases where improved drug delivery is important. Our Drug and Gene Delivery
Division has identified five potential areas of application for our
electroporation technology -- oncology, gene therapy, dermatology, cardiology
and transdermal drug delivery. At present, the primary areas of our focus are
oncology and gene therapy.
Our Drug and Gene Delivery Division's most advanced product candidates
treat solid malignant tumors such as squamous cell carcinoma, melanoma, and
adenocarcinoma in the areas of application of oncology and dermatology. We have
completed Phase II clinical trials in the United States of EPT and bleomycin in
the treatment of head and neck cancer and melanoma. Initial results from the
clinical trials carried out in Europe have allowed us to obtain a CE Mark
certification qualifying the MedPulser(R) system for sale in Europe with respect
to the treatment of head and neck cancer and melanoma using EPT and bleomycin.
We intend to initiate the marketing of the MedPulser System in Europe in 2001.
We intend to develop and pursue other appropriate targets using the
MedPulser System to deliver bleomycin or other chemotherapeutic agents. Such
studies will begin as Phase I or Phase II clinical trials. Phase I clinical
trials are early stage trials in human subjects, used to test a drug or delivery
system for safety. Phase II clinical trials assess the effectiveness of a
treatment, as well as adding to safety data. Phase III clinical trials evaluate
the comparative safety and efficacy of a drug or delivery system and the data
from these trials are used by regulatory agencies to approve or reject a product
licensing application.
Our drug delivery system, including the MedPulser(R) instrument and the
disposable applicators, are subject to various regulatory requirements depending
on the country of sale. The Drug and Gene Delivery Division MedPulser(R) system
has been awarded ISO 9001, EN46001 and ISO 13485 registration, as well as CE
mark certification in Europe.
MARKET
Our Drug and Gene Delivery Division is expected to enter the commercial
market with equipment to be used in the treatment of cancer (oncology). Cancer
is a life threatening disease affecting millions of people worldwide. The World
Health Organization reports that cancer will remain one of the leading causes of
death worldwide for years to come. In the United States, approximately 13
million new cases were diagnosed between 1990 and 1999. To further illustrate
the market potential for EPT, solid tumor cancers, the first target for EPT,
constitute the majority of all cancers. The majority of cancer victims is over
age 65 and is supported by government-funded programs. In the United States the
costs of cancer, including mortality, morbidity and direct medical costs, exceed
$107 billion per year: some $37 billion for direct medical costs (total of all
health expenditures); at least $11 billion for indirect morbidity costs (cost of
lost productivity due to illness); and over $59 billion for indirect mortality
costs.
There is still very much that scientists do not know about cancer;
consequently, there are significant unmet needs in the treatment of cancer. The
oncology business unit within the Drug and Gene Delivery Division has initially
targeted those indications for which current treatment modalities result in a
poor quality of life and very high mortality rates. Specialized applicators are
being designed which will allow EPT to treat other solid tumor cancers with
minimally invasive procedures.
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In the United States, the cumulative dollar value of treatments and
technologies commonly used in the curative and palliative management of cancer
exceeded $8 billion in 1999 and is expected to continue growing at a rate of
approximately 12% annually. Our analyses project that EPT could be applicable to
over 4,000,000 cancer patients.
TREATMENT OF TUMORS
Equipment made by our BTX Instrument Division has been used by our
investigators and in other laboratories to screen drugs for their effectiveness
in killing tumor cells in test tubes and to study the drugs' mode of action. Our
scientists, and outside researchers, also have studied the combination of
electroporation and various agents to destroy tumors in animals and humans.
In most of the clinical protocols, the site of the tumor is anesthetized
and the chemotherapeutic agent of choice (bleomycin) is injected directly into
the tumor. The therapeutic agent is allowed to diffuse throughout the tumor,
which can take one to several minutes depending on the size, type and location
of the tumor. Once the drug is distributed in the tumor, the electrical field is
applied by the MedPulser(R) system so as to create a greater permeability in the
cells walls to allow the chemotherapeutic agent to enter the cells.
The entire procedure can be completed in 20 minutes or less and
typically needs to be done only once. The dosage of drug used in the published
results is based on tumor volume, and is typically a small fraction (1/3 to as
little as 1/50) of the dosage that would be used systemically. As a result of
the lower dosage administered locally, side effects have been minimal. Tumor
death with sloughing and ulceration were common reactions following EPT. No
episodes of injury to normal (non-tumor) tissue adjacent to the tumors have been
observed.
MEDPULSER(R) SYSTEM
The MedPulser(R) system is an electroporation system designed for the
clinical application of EPT. The technology is intended to treat various
malignant and non-malignant tumors by locally applying a controlled electric
field to targeted tumor tissues previously injected with a chemotherapeutic
agent. The controlled short duration electric field pulses temporarily increase
the cellular membrane permeability of the tumor cell membrane allowing the
therapeutic agent to more easily enter the tumor cells and kill them.
The system has two components: (1) a medical instrument which creates
the electric field (the MedPulser(R) instrument); and (2) a single use, sterile,
disposable electrode applicator. The electrodes may be needles, plates, or other
configurations, depending on the geometry of the tumor and its location.
The instrument was designed for ease of use, such that minimal user
input is needed to apply the therapy. Based on the size and anatomical location
of the tumor to be treated, a physician selects the most appropriate electrode
applicator. The chosen applicator is then connected to the MedPulser(R)
instrument, and it is the connection of applicator to instrument that
automatically configures the therapy parameters for that particular applicator
size and shape. Currently, several different electrode applicator configurations
are available. The applicators vary in needle length, needle gauge, electrode
needle spacing, tip angle and handle configuration so as to allow the physician
to access a greater range of tumors.
New models of electrode applicators will be considered in the future to
address customer needs. The system is designed such that the installed base of
MedPulser(R) generator instruments allows for a wide variety of new electrode
applicator configurations. Also, the system incorporates other features to
minimize the possibility of applicator reuse as well as prevent the use of
competitive applicators with the MedPulser(R) instrument. The commercial version
MedPulser(R) system has been certified by an independent test laboratory as
meeting strict international product standards. Our drug delivery device,
including the MedPulser(R) system and the disposable electrode applicators, are
subject to various regulatory requirements, depending on the country of sale.
In the United States, EPT utilizing the MedPulser(R) system and
bleomycin drug is currently regulated as a combination drug-device system. We
will be required to obtain both drug labelling and device approvals from the
United States Food and Drug Administration ("FDA"). Clinical trials (Phase I, II
and III) to support drug indication labelling require filing an Investigational
New Drug Application ("IND"), followed by submission of a United States New Drug
Application, and submission of a device Pre-Market Approval or 510(k), for
marketing approval.
In most of the rest of the world, we anticipate that the MedPulser(R)
system will be regulated as a device. In Europe, the device comes under the
Medical Device Directive 93/42/EEC ("MDD") and marketing requires CE mark
certification of conformity to the quality system, production and clinical
investigation essential requirements of the directive. We have obtained CE mark
certification for electroporation devices, which allows us to sell and use the
MedPulser(R) electroporation system for the treatment of solid tumors with
bleomycin in Europe.
MEDICAL DEVICE MANUFACTURING
Our Drug and Gene Delivery Division must comply with a variety of
regulations to manufacture our products for sale around the world. In Europe, we
must comply with MDD. Our Drug and Gene Delivery Division has demonstrated the
quality system is in place by securing ISO 9001
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approval. It demonstrated compliance with international medical device standards
with EN 46001 and ISO 13485 recognition. These all occurred in January 1999. In
March 1999, the CE Mark was obtained for the MedPulser(R) electroporation
system. To sell in the United States, we will need to be in compliance with FDA
current Good Manufacturing Practices (GMP).
We employ modern manufacturing practices, which include outsourcing of
significant custom assemblies used in the manufacture of the MedPulser(R)
instrument. The instrument final assembly, testing and quality control functions
are performed in a physically distinct area of the company where the appropriate
controls are employed. We outsource the manufacture of the disposable electrode
applicators to a GMP/ISO9002 compliant contract manufacturer.
CLINICAL STUDIES
North America Trials
In late 1997 the FDA gave us clearance to initiate multi-center Phase II
clinical trials in the United States utilizing the MedPulser(R) electroporation
system in combination with intralesional bleomycin to treat squamous cell
carcinoma of the head and neck in patients who failed conventional therapies. We
obtained IND clearance from the Canadian Health Protection Branch to initiate
similar clinical trials in Canada. Two protocols were initiated. One
cross-over-controlled study evaluated the effectiveness of the bleomycin-EPT
treatment in tumors that failed an initial bleomycin-alone treatment. The second
study was a single arm study which evaluated the effect of the bleomycin-EPT
treatment as an initial therapy of the study tumors.
Twenty-five patients were enrolled in the controlled study and 25
patients were enrolled into the single arm bleomycin-EPT trial. The results
based on the primary endpoint for response (50% or greater reduction in tumor
size) are provided in the table below.
RESPONSE(1)(2)
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RESPONDING NON-RESPONDING
CLINICAL TRIAL PATIENTS TUMORS TUMORS TUMORS
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North America Phase I/II 8 8 6(75)% 2(25)%
North America Phase II 25 37 1(3)% 36(97)%
01 Study -- Bleomycin only
North America Phase II 17 20 11(55)% 9(45)%
01 Study
North America Phase II 25 31 18(58)% 13(42)%
02 Study
European Study 12 18 10(56)% 8(44)%
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(1) Four tumors could not be evaluated
(2) Control Group patients received only drug, no electric field
The two Phase II protocols involved a total of 42 tumors treated with
bleomycin and EPT. Tumors treated in the trial include squamous cell carcinoma
of the face, oral cavity, pharynx, larynx and sinus. The size of tumors treated
ranged from less than one cubic centimeter to more than 132 cubic centimeters.
In the crossover controlled Phase II study, patients initially received only the
drug. Patients who did not respond to drug alone were then treated with the
complete system of drug and electric field. Of the 37 tumors on 25 patients
treated only with drug, only one demonstrated a clinical response. Seventeen of
these patients, having 20 lesions, were subsequently treated with bleomycin and
EPT and 55% achieved a clinical response. In the open-label Phase II study, all
patients received full EPT as their initial treatment. Among the 25 patients (31
tumors) so treated, 58% achieved a clinical response.
A limited, well-controlled Phase III trial for palliative treatment of
head and neck cancer in patients who failed conventional therapy may be
sufficient to support NDA submission for this indication. Treatment of other
diseases will involve expanded Phase II and Phase III trials pending successful
outcome of the initial Phase I/II studies.
International Trials
In late 1997 and early 1998, we received ethics committee approval from
multiple Consulting Committees for the Protection of Humans in Biomedical
Research (CCPPRB) to initiate clinical trials in France in patients with
pancreatic cancer, metastatic cancer in the liver, head and neck cancer,
melanoma and Kaposi's sarcoma. These trials were initiated to demonstrate the
MedPulser(R) system device's safety and performance in treating a variety of
solid tumors in support of CE mark certification in accordance with the
essential requirements of MDD. Results from the patients with head and neck
cancer are reported under North America Trials above. We achieved CE mark
certification in March 1999 from notified body TUV Product Service GMBH.
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Current Developments
On October 6, 1998, we entered into a comprehensive License and
Development Agreement and a Supply Agreement with Ethicon, Inc., a Johnson &
Johnson company, involving our proprietary drug delivery system for EPT
treatment of cancer. In August 5, 1999, these agreements were assigned to
Ethicon Endo-Surgery, Inc., another Johnson & Johnson company. Ethicon, Inc. and
Ethicon Endo-Surgery, Inc. are referred to as Ethicon in this filing. On July
26, 2000, we received written notice from Ethicon Endo-Surgery, Inc. that it had
elected to exercise its discretionary right to terminate, without cause, the
License and Development Agreement and the Supply Agreement. All rights for the
development and distribution of Genetronics proprietary electroporation drug
delivery system for the treatment of cancer were returned to Genetronics.
In September 2000, we executed an exclusive license agreement with the
University of South Florida Research Foundation, Inc. ("USF") that granted to us
the worldwide license to USF's rights in certain patents and patent applications
generally related to needle electrodes. Genetronics and USF jointly developed
these electrodes. The needle electrodes are components of Genetronics'
electroporations systems and are used to deliver electric pulses to cells and
tissues during the process of electroporation. Pulsed electric fields generated
during the electroporation process cause a temporary but significant increase in
the permeability of human cells. This makes it easier for drugs and genes to
enter cells, a key element for successful cancer or gene therapy treatment. In
April 2001, we initiated a limited release of the MedPulser(R) Electroporation
Therapy System, to key head and neck surgeons in several countries through a
European Access Program (EAP). We have initiated a marketing evaluation of the
technology, under the EAP, with a select group of thought leaders at premier
cancer centers in Austria, the United Kingdom, Germany, the Netherlands,
Switzerland, and the Czech Republic. Genetronics has a CE Mark certification
qualifying the MedPulser(R) system for sale in Europe for the treatment of solid
tumors. The lead indication for the planned launch of the MedPulser(R)
Electroporation Therapy System is the treatment of head and neck cancers and the
initiation of the EAP represents the beginning of the commercialization phase of
our EPT program for head and neck cancer in Europe. We believe we have
sufficient current resources to initiate a variety of activities directed toward
the MedPulser(R) system launch and marketing in Europe, and for initiation of a
Phase III clinical study in the United States. In April 2001, we completed a
review of our existing clinical and regulatory information related to the
Electroporation Drug Delivery System and submitted the results of this review to
the FDA. The responses are described above under "Clinical Studies--North
America Trials." The response rate determined pursuant to the review is
consistent with previous data disclosed by us.
Research and Development Summary
We perform an ongoing review of our patent portfolio to confirm that our
technologies are adequately protected. Each year we review our patent portfolio
and write-off all abandoned patents.
Our Drug and Gene Delivery Division has, in the past, focused its
research primarily in the areas of oncology, gene therapy, vascular therapy,
transdermal delivery and dermatology. At present, the primary areas of focus are
oncology and gene therapy.
The following table summarizes the programs of the Drug and Gene
Delivery Division, the primary indications for each product and the current
status of development. "Developmental" means the program is at the planning
stage, protocols are being developed, and little if any animal work has
commenced. "Preclinical data" means the program is at the stage where results
from animal studies have been obtained. "Clinical Trials" means that human data
is available. "Tolerance study" means a pilot clinical study to determine
patient tolerance of electrical pulses at therapeutic dose.
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SUMMARY TABLE
STAGE OF APPROVAL
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UNITED STATES &
PROGRAMS DEVELOPMENT STATUS CANADA EUROPE
------------------------- ------------------ ----------------------- ----------------
DERMATOLOGY
Basal Cell Cancer .................. Clinical Trials Two pilot studies completed N/A
Genital Warts ...................... Developmental N/A N/A
ONCOLOGY
Head and Neck Cancer ............... Clinical Trials Phase II Clinical Trials CE Mark and ISO
9001 Received
Melanoma ........................... Clinical Trials N/A CE Mark and ISO
9001 Received
Metastatic Liver Cancer ............ Clinical Trials N/A CE Mark and ISO
9001 Received
Peripheral Sarcoma ................. Preclinical data N/A CE Mark and ISO
9001 Received
Breast Cancer ...................... Preclinical data N/A CE Mark and ISO
9001 Received
Prostate Cancer .................... Preclinical data N/A CE Mark and ISO
9001 Received
Glioma ............................. Preclinical data N/A CE Mark and ISO
9001 Received
GENE THERAPY
In vivo Gene Transfer -- blood
protein encoding genes ............. Preclinical data N/A N/A
In vivo Gene
Transfer -- DNA vaccines ........... Preclinical data N/A N/A
In vivo Gene Transfer
anti-inflammatory protein
encoding genes ..................... Preclinical data N/A N/A
In vivo Gene Transfer
vascular protein encoding genes .... Preclinical data N/A N/A
VASCULAR THERAPY
Coronary Artery Disease,
Marker genes & drugs ............... Preclinical data N/A N/A
Vascular Disease, Heparin
delivery (anti-restenosis) ......... Preclinical data N/A N/A
TRANSDERMAL DELIVERY
PGE-1 delivery for
Erectile dysfunction ............... Tolerance Study One Device Tolerance N/A
Study completed
Calcitonin (osteoporosis) .......... Preclinical data N/A N/A
Vitamin C .......................... Preclinical data N/A N/A
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"N/A" means not applicable.
GENE THERAPY
Gene therapy, in classical terms, involves the introduction of new
genetic information into cells (transfection) for therapeutic purposes. Somatic
cells of the body are transfected with a specific functioning gene to compensate
for a genetic defect that results in a deficiency of a specific protein factor.
In this context, one goal of gene therapy is to convert target cells or tissues
into "protein factories" for the production and secretion of a normal protein
locally or into the circulation. Many vexing genetic illnesses, including those
currently treated by regular injection of a missing protein, can potentially be
"cured" by supplying the functional gene to a sufficient number of cells under
conditions which allow these cells to produce a therapeutically effective dose
of the gene product.
Currently, single-gene recessive genetic disorders are the most
accessible targets for correction by gene therapy, but ultimately polygenic and
acquired diseases can and will be treated by using genes as pharmaceutical
agents. In principle, any aspect of metabolism can be manipulated by modifying
gene function, and it is this application of gene therapy that has enormous
potential, extending far beyond the treatment of rare genetic diseases. For
example, the ability to influence cellular metabolism by introducing specific
genes has led to extensive investigation into the use of gene therapy for cancer
treatment. By adding a tumor suppressor gene to certain types of cancers, the
uncontrolled growth of those cells potentially could be brought under normal
regulation. Likewise, transfecting tumor cells with genes capable of inducing
programmed cell death can result in tumor ablation.
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The methods of introducing genes have two specific approaches. Gene
therapy can be performed either ex vivo or in vivo. Ex vivo gene therapy is the
transfection of cells outside the body. Typically, a small amount of tissue is
removed from the patient and the cells within that tissue are put into culture.
The genetically modified cells, typically blood, bone marrow or others, are then
returned to the patient, usually by blood transfusion or direct engraftment. In
vivo gene therapy is the introduction of genetic information directly into cells
in the patient's body. Theoretically, any tissue or cell type in the body can be
used, and the choice is dependent on the specific goals of treatment and
indications being treated. For internal tissue targets, a gene may be transfused
through the blood stream to the organ or site of action, or it may be injected
at the desired site, which is then electroporated to allow the gene to pass
through the cell membrane.
Genes can also be applied topically or by injection to skin and then
transferred into the cells of the skin by electroporation. Skin gene delivery by
electroporation for gene therapy is currently being investigated at Genetronics
as a safe, effective and cost-competitive approach. The skin is also a target
for DNA vaccination. "Vaccinating" skin with DNA that encodes a specific antigen
present in infectious agents or in tumor cells can produce beneficial
immunological responses. Genes can also be used to directly fight cancer. The
thymidine kinase gene, in conjunction with the prodrug ganciclovir, produces a
potent antitumor effect based on drug toxicity and programmed cell killing via a
bystander effect. Animal trials treating glioblastomas using this strategy have
shown substantial success.
To make gene therapy a reality, many obstacles have to be overcome,
including the safe, efficient delivery of the intact DNA construct into the host
cells. The instrumentation we use for high-efficiency in vivo gene transfer is
derived from the instrumentation developed for intratumoral and transdermal drug
delivery. We believe electroporation will become the method of choice for DNA
delivery to cells in many applications of gene therapy.
Because of the broad applicability of this technology, we have adopted
the strategy of co-developing or licensing our technology exclusively or
non-exclusively for specific genes or specific medical indications. In most
cases, we contribute proprietary technology, expertise and instrumentation to
optimize the delivery technology for particular applications. A partner company
provides its proprietary DNA constructs, may conduct the pre-clinical research
and clinical trials, and may introduce the new treatment and products to the
marketplace. Genetronics and the partner company would share in the commercial
success of the project. We have actively sought partners to develop this
exciting technology to its full potential. On November 8, 1999, we entered into
an 18-month research and option agreement with Boehringer Ingelheim
International GmbH (Boehringer Ingelheim) related to the development of our
electroporation technology for use in particular gene therapy applications.
While the research results were successful Boehringer Ingelheim decided not to
pursue that subject field and declined to exercise the option to license. On
June 9, 2000, we announced that research studies using our electroporation
systems were presented at a major international gene therapy conference.
Additionally, in collaborations with Chiron Corporation and Valentis, Inc., our
technology was shown to effectively deliver a variety of genes and DNA vaccines
to skin and muscle of animals, including non-human primates.
BTX INSTRUMENT DIVISION
OVERVIEW
Our company, through our BTX Instrument Division, began developing and
manufacturing electroporation equipment for the research laboratory market in
1983 and sold our first product in 1985. BTX was founded to develop and
manufacture high quality scientific instrumentation that can be used by research
scientists to perform various types of electroporation and electrofusion
experiments. Electroporation in research is commonly used for transformation and
transfection of all cell types, as well as for general molecular delivery at the
cellular level. Electrofusion is the fusing together of two or more cells to
form hybrid cells. Transformation is a process by which the genetic material
carried by an individual cell is altered by incorporation of exogenous DNA into
its genome. Transfection is the uptake, incorporation, and expression of
exogenous DNA by eukaryotic cells.
The BTX Instrument Division is the second largest developer and marketer
of electroporation instruments and supplies, with more than 2,000 customers in
universities, companies, and research institutions worldwide. Our BTX Instrument
Division sells its electroporation/electro cell fusion instrumentation and
accessories to customers located in all states and territories of the United
States and in over 47 foreign countries. The majority of our products are sold
to customers in the United States, Europe and East Asia. The BTX Instrument
Division currently produces an extensive line of electroporation instruments and
accessories, including electroporation and electro cell fusion instruments, a
monitoring device, and an assortment of electrodes and accessories.
PRODUCTS
BTX developed the square wave generator and graphic pulse analyzer for
in vivo gene delivery and nuclear transfer research, fields that are rapidly
increasing in scientific and medical interest. BTX also has developed the most
versatile electro cell fusion system on the market, the only commercial large
volume flow-through electroporation system, and offers an extensive collection
of in situ and high throughput screening electroporation applicators.
BTX focused its efforts in recent years on product development and
promotion of a new line of products for developing sophisticated applications.
We released the ECM(TM) 830 in December 1998. It is a sophisticated square wave
electroporation system with a menu driven digital user interface. In August 1999
we introduced the ECM 630, an Exponential Decay Wave Electroporation system that
utilizes a Precision Pulse Technology, the new BTX
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Platform technology, and an all-new digital user interface. During the fiscal
years ended March 31, 2001 and 2000, publications outlined the utilization of
BTX equipment in newly developing animal in vivo gene delivery research. In the
support of this research, we expanded our in vivo electrode offering and
continue to emphasize the development of novel applicators.
The BTX Instrument Division's product line includes two exponential
decay wave generators, one square wave generator, one electro cell fusion
instrument and a graphic wave display monitor. In addition, this Division
markets over 43 different types of electrodes and related accessories, as well
as the standard disposable electroporation cuvettes, containers for holding
liquid samples.
Exponential decay generators have been traditionally used for the
electroporation of all cell types. Square wave generators have shown the
greatest utility in the electroporation of mammalian and plant cells, as well as
for animal in vivo applications. The Electro Cell Fusion System is used by
researchers for embryo manipulation, hybridoma and quadroma formation, as well
as for all cell fusion techniques, including applications involving adoptive
immunotherapy.
While we, through our BTX Instrument Division, sell devices purportedly
used by others for non-human embryo cloning, we do not ourself conduct embryo
cloning. All of our BTX Instrument Division instruments sold to the research
market carry the label "not for human use." We are not aware of any regulations
or industry guidelines limiting the use of our instrumentation in the animal
research market. We comply with all National Institutes of Health guidelines on
cloning and gene therapy. We also comply with all Federal and State regulations
regarding the restrictions on research imposed on federally funded grants.
The BTX Instrument Division supplies three cuvette models, as do our
competitors, plus some 43 additional specialized chambers electrodes, and
accessories for electroporation. BTX in situ electrodes (e.g., Petri Pulser(TM)
electrodes) position us to expand the electroporation market for adherent cell
transfection applications, while high throughput screening electrodes and large
volume production systems (e.g., 96-Well Coaxial Electrode,
ElectroFlowPorator(TM) system), respectively, provide the BTX Instrument
Division with an entry into the large volume and multi-sample processing arenas
used by the major pharmaceutical and biotech companies conducting drug research.
The BTX Instrument Division meets regulatory requirements necessary to
provide instrumentation to the research market for in vivo and in vitro animal
experimentation. The BTX Instrument Division does not market equipment for use
in humans, and, therefore, is not required to receive marketing approval from
the FDA.
DISTRIBUTION
The main distributors of our BTX Instrument Division products in North
America are VWR Scientific Products Corporation and Fisher Scientific Company,
the two largest laboratory products suppliers in the United States. Both VWR and
Fisher have over 250 representatives dedicated to the biological sciences in
North America. Both VWR and Fisher have dedicated Life Science Programs in which
BTX participates. The Fischer Scientific distribution agreement was signed in
December 2000 and it is anticipated that they will become a main distributor in
the fiscal year ended March 31, 2002. In addition, the BTX Instrument Division
distributes instruments and supplies through Intermountain Scientific
Corporation, which has 20 field sales specialists in the United States. The BTX
Instrument Division has over 45 international distributors in 47 countries, of
which Merck Eurolab Holding GmbH is the biggest distributor in Europe. VWR
Scientific Products Corporation and Merck Eurolab Holding GmbH are both members
of the Merck Group. The BTX Instrument Division supports its distributors with
advertising, exhibit exposure and lead generation.
ADVERTISING
The BTX Instrument Division advertises in major national and
international scientific journals such as Science, Nature, Genetic Engineering
News, and BioTechniques. The Division also attends and displays our products at
about one scientific conference per month such as American Association for
Cancer Research, American Society for Gene Therapy, and Neuroscience meeting. On
a quarterly basis the BTX Instrument Division utilizes direct mail to an
identified mailing list for specific product promotion. The BTX Instrument
Division works closely with distribution partners in joint marketing campaigns
and other value-added suppliers in co-marketing efforts.
COMPETITION
The main competitors of our BTX Instrument Division in the research
marketplace are BioRad Laboratories, Eppendorf Scientific, Inc. and Hybaid
Corporation. There are other companies entering and departing this market on a
regular basis. The majority of these companies have other molecular biology
product lines besides electroporation, while electroporation and electrofusion
is the only business of the BTX Instrument Division. Most competing
manufacturers concentrate on the exponential decay wave system and do not
compete in the square wave market at this time. In the past 12 months, the
competition in the marketing of electroporation cuvettes has increased, leading
to the development of BTX-supplied private label products for both VWR and
Fisher Scientific.
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STRATEGIC PARTNERS
LICENSE AND DEVELOPMENT AGREEMENTS
On October 6, 1998, we entered into a comprehensive License and
Development Agreement and a Supply Agreement with Ethicon, Inc., a Johnson &
Johnson company, involving the use of our MedPulser(R) system for
Electroporation Therapy in the treatment of solid tumor cancer. In addition,
Johnson & Johnson Development Corporation purchased $6 million of shares of
common stock of our company at a price of $2.68 per share, pursuant to the
October 6, 1998 Stock Purchase Agreement. On August 5, 1999, we announced that
Ethicon, Inc. had assigned the License and Development Agreement and Supply
Agreement to Ethicon Endo-Surgery, Inc., another Johnson & Johnson company. On
July 26, 2000, we received written notice from Ethicon Endo-Surgery, Inc. that
it had elected to exercise its discretionary right to terminate, without cause,
the License and Development Agreement and the Supply Agreement. As a result, all
rights for the development and distribution of Genetronics proprietary
electroporation drug delivery system for the treatment of cancer were returned
to Genetronics.
On September 20, 2000, the University of South Florida Research
Foundation, Inc. ("USF") granted to Genetronics, Inc. and Genetronics Biomedical
Limited an exclusive, worldwide license to its rights in certain patents and
patent applications generally related to needle electrodes. Genetronics and USF
jointly developed these electrodes. The needle electrodes are components of
Genetronics electroporation systems and are used to deliver electric pulses to
cells and tissues during the process of electroporation. Pulsed electric fields
generated during the electroporation process cause a temporary but significant
increase in the permeability of human cells. This makes it easier for drugs and
genes to enter cells, a key element for successful cancer or gene therapy
treatment. The terms of the exclusive license include a royalty to be paid to
USF based on net sales or products under the license. At March 31, 2001, no
royalty had accrued as the Company had not yet generated any sales from this
product. In addition, Genetronics has issued a total of 150,000 common shares
and a total of 600,000 warrants of which 300,000 will vest subject to the
achievement of certain milestones in Genetronics Biomedical Ltd. to USF and its
designees, Drs. Heller, Jaroszeski, and Gilbert.
COLLABORATIVE RESEARCH AGREEMENTS
On November 8, 1999, we entered into an 18-month research and option
agreement with Boehringer Ingelheim to develop our electroporation technology
for use in a particular gene therapy application. Under the terms of the
agreement, we will develop hardware and perform preclinical research relating to
DNA delivery for cancer DNA vaccination. While the research results were
successful Boehringer Ingelheim decided not to pursue that subject field and
declined to exercise the option to license. On August 28, 2000, we announced
that we had entered into a collaborative agreement with Johnson & Johnson
Research Pty Ltd., a wholly owned subsidiary of Johnson & Johnson, located in
Eveleigh, Australia, to explore the feasibility of using electroporation,
Genetronics platform technology, to deliver nucleic acid materials into tumors
in vivo.
Sales and Revenue
The following table provides the amount of net product sales, interest
income, and revenue from grant funding and research and development agreements
generated by us for the past three fiscal years. Segmented financial information
is contained in Note 16 of the Consolidated Financial Statements that begin on
Page F-1. The following table sets forth our selected consolidated financial
data for the periods indicated, derived from audited consolidated financial
statements prepared in accordance with accounting principles generally accepted
in Canada which conform to accounting principles generally accepted in the
United States, except as described in Note 19 to the consolidated financial
statements.
MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 1999
PERIOD ENDED: 12 MONTHS 12 MONTHS 12 MONTHS
------------- -------------- -------------- --------------
PRODUCT SALES
United States .......................... $ 2,890,875 $ 2,905,065 $ 2,174,364
Rest of World .......................... 1,562,064 1,229,371 1,259,741
INTEREST INCOME
United States .......................... 431,729 497,586 248,417
Canada ................................. 11,900 58,607 52,494
GRANT FUNDING
United States .......................... 101,086 334,901 354,135
REVENUES UNDER COLLABORATIVE RESEARCH
AND DEVELOPMENT ARRANGEMENTS
Germany ................................ 411,616 91,335 0
United States .......................... 48,095 100,000 33,048
LICENSE FEE AND MILESTONE PAYMENTS
United States .......................... 83,333 416,667 4,500,000
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We, like many biomedical companies, devote a substantial portion of our
annual budget to research and development. For the year ended March 31, 1999,
research and development expenses totaled $8,086,959; for the year ended March
31, 2000, they totaled $6,977,220 and for the year ended March 31, 2001, they
totaled $6,436,377. These amounts far exceed revenues from research arrangements
and contribute substantially to our losses. We anticipate a reduction in losses
when we market products developed by our Drug and Gene Delivery Division. The
launch of the first such products in Europe is anticipated to be in 2001, and
will most likely be followed by launch in the United States subject to FDA
approval at a later date.
INTELLECTUAL PROPERTY
As of April 21, 2001, we had 36 issued United States patents, 48 issued
and granted foreign patents, 3 allowed United States patent applications, an
additional 18 pending United States applications, and additional pending foreign
patent applications.
We have registered on the Principal Register of the United States Patent
and Trademark Office the following trademarks: BTX (Mark), BTX (Logo),
ELECTRONIC GENETICS, MANIPULATOR, OPTIMIZOR, HUMAN IN SQUARE (Design), ENHANCER,
and MEDPULSER. The following United States trademark applications are pending:
COSMETRONICS and GENETRODES. We have registered the BTX and MEDPULSER trademarks
in Canada, and have applied to trademark GENETRONICS in Canada. We have a
European Community Trade Mark registration for GENETRONICS, BTX and for
MEDPULSER. We have registered the MEDPULSER and BTX marks in Japan. We have
registered the BTX mark in South Korea and have registered the GENETRONICS mark
in the United Kingdom. We are not aware of any claims of infringement or other
challenges to our right to use our marks.
EMPLOYEES
As of May 10, 2001, we employed 66 people on a full-time basis. Of the
total, 21 were in product research and development, 10 in sales, marketing and
support, 11 in manufacturing, and 24 in finance and administration. Our success
is dependent on our ability to attract and retain qualified employees.
Competition for employees is intense in the biomedical industry. None of our
employees is subject to collective bargaining agreements.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
OUR BUSINESS MODEL MAY CHANGE AS OUR PRIORITIES AND OPPORTUNITIES CHANGE
AND OUR BUSINESS MAY NEVER DEVELOP TO BE PROFITABLE OR SUSTAINABLE.
There are many 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 other aspects of 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 FROM OUR DRUG AND GENE
DELIVERY DIVISION, THEN OUR BUSINESS WILL SUFFER.
Our Drug and Gene Delivery Division is in the early development stage
and our success depends on the success of the technology being developed by the
Drug and Gene Delivery Division. Although we have received various regulatory
approvals that 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 product
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.
UNPREDICTABILITY OF CONDUCTING PRE-CLINICAL AND CLINICAL TRIALS OF OUR
HUMAN-USE EQUIPMENT.
Before any of our human-use equipment can be sold, the 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. 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 are 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.
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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 delivery of drugs or other agents by electroporation 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 to the end of the trial, or data and document
review;
-- The reporting clinical data may change over time as a result of the
continuing evaluation of patients or the current assembly or 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.
OUR BUSINESS IS HIGHLY DEPENDENT ON RECEIVING APPROVALS FROM VARIOUS
UNITED STATES AND INTERNATIONAL GOVERNMENT AGENCIES AND CAN BE
DRAMATICALLY AFFECTED IF APPROVAL TO MANUFACTURE AND SELL OUR HUMAN-USE
EQUIPMENT IS NOT GRANTED.
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 U.S. 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 in which we want to
label it for 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.
Our company has 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 us:
-- There can be delays, sometimes long, in obtaining approval for
our human-use devices;
-- 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 HEAVILY ON COLLABORATIVE AND LICENSING RELATIONSHIPS, AND WILL BE
NEGATIVELY AFFECTED IF WE CANNOT MAINTAIN OR EXPAND EXISTING RELATIONSHIPS, AND
INITIATE NEW ONES.
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We rely and will continue to rely on partners and collaborators to fund
some of our research and development expenses and to assist us in the research
and development of our human-use equipment. Our largest partner had been Ethicon
Endo-Surgery, Inc., a Johnson & Johnson company. On July 26, 2000, we received
written notice from Ethicon Endo-Surgery, Inc. that it had elected to exercise
its discretionary right to terminate, without cause, our License and Development
Agreement and our Supply Agreement. If we are unable to enter into a
relationship with a new partner for the Electroporation Drug Delivery System,
our business could be adversely impacted. Moreover, loss of or any significant
change in any of our material collaborative relationships could adversely impact
our business.
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. In 1998, 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 universities and companies
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
commercialise 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.
Our company also works and has 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.
For instance:
-- 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.
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-- 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. 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.
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 keep others out of
its patented territory. If someone practices within the patented territory of a
patent holder, then the patent holder has the right to charge that person with
infringement and begin legal proceedings, which can be lengthy and costly. We
perform an ongoing review of our patent portfolio to confirm that our key
technologies are adequately protected. If necessary, we may ask that one or more
of our patents be re-examined or reissued by the United States patent office.
The patenting process, enforcement of issued patents, and defense
against claims of infringement are inherently risky. Because our Drug and Gene
Delivery Division relies 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 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, then it will
require a lot of time and money to do so, 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 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 against a charge of infringement can involve lengthy and
costly legal actions, with 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 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, along with some of
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 makes
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 will make less money
from sales and our products risk becoming obsolete.
There are many reasons why a potential competitor might be more
successful than us, including:
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-- More Money. Some competitors have significantly more money
than we do. They can afford more technical and development setbacks than
we can, and can devote more resources in an effort to improve
development times or pursue alternate approaches.
-- 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.
-- 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.
Our company has 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 a lot of money, 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.
WE HAVE OPERATED AT A LOSS AND WE EXPECT TO CONTINUE TO ACCUMULATE A
DEFICIT.
As of March 31, 2001, we had a deficit of $38,238,798. 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 grow, as it will be expensive to
continue our clinical, research, and development efforts. If these activities
are successful, and if we receive approval from the FDA to market human-use
equipment, then even more money will be required to market and sell the
equipment.
Most of the cash we received during the year ended March 31, 2001 was
from proceeds from issuance of common shares and from sales of BTX research-use
equipment. Other funds came from interest income on our investments, revenue
under collaborative research and development agreements, Small Business
Innovative Research (SBIR) grants, and milestone payments. We do not expect to
receive enough money from these sources to completely pay for future activities.
WE WILL HAVE A NEED FOR SIGNIFICANT AMOUNTS OF MONEY IN THE FUTURE AND
THERE IS NO GUARANTEE THAT WE WILL BE ABLE TO OBTAIN THE AMOUNTS 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 cost signficant amounts of money. 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;
-- 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;
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-- Changes in our existing research and development relationships
and our ability to enter into new agreements;
-- The cost of manufacturing our human-use and research-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 money to meet our needs.
In the past, we have raised funds by public and private sale of our
stock, and we may 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 money needed to fund
operations, or that we will be able to raise money under terms that are
favorable to us.
IF WE DO NOT HAVE ENOUGH MONEY 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
-- Consider merging with another company or positioning ourselves
to be acquired by another company.
If it became necessary to take one or more of those actions, then we may
have a lower valuation, which probably would be reflected in our stock price.
THE MARKET FOR OUR STOCK IS VOLATILE, WHICH COULD ADVERSELY AFFECT AN
INVESTMENT IN OUR STOCK.
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;
-- 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;
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-- Stockholders' decisions, for whatever reasons, to sell large
amounts of our stock;
-- A decreasing cash-on-hand balance to fund operations, or other
signs of apparent financial uncertainty; and
-- Significant advances made by competitors that are perceived to
limit our market position.
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 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
products, 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
shares of common stock would likely fall.
OUR BTX INSTRUMENT DIVISION MARKETS ONLY TO THE ELECTROPORATION PRODUCT
NICHE MARKETS AND RELIES ON DISTRIBUTION RELATIONSHIPS FOR SALES.
The BTX Instrument Division currently markets only electroporation
equipment to the research market. If our research-use equipment loses its
competitive position, because the BTX Instrument Division does not have any
other product line on which to rely, our sales would likely decline. Therefore,
if we do not develop and introduce new products directed to research-use
electroporation, at a reasonable price, then we will lose pace with our
competitors. We may not have the necessary funds for our BTX Instrument Division
to stay competitive and that division may not ultimately succeed.
The research-use equipment is sold through United States and
international distributors. Approximately 39% of BTX instrument sales during the
twelve months ended March 31, 2001 were through our distribution relationships
with the Merck Group, which includes Merck Eurolab Holding GmbH and VWR
Scientific Products Corporation. This accounted for about 31% of our total
revenue. We rely heavily on our relationships with VWR and Fisher Scientific
Company to sell our product in the United States and on Merck Eurolab Holding
GmbH to sell our product in Europe. We may not be able to maintain or replace
our current distribution relationship with the Merck Group, Fisher, or other
distributors, or establish sales, marketing and distribution capabilities of our
own. If we cannot develop or maintain distribution relationships for major
markets such as the United States and Europe, then the BTX Instrument Division
may suffer declining sales, which would have an effect on our financial
performance.
THERE IS A RISK OF PRODUCT LIABILITY WITH HUMAN-USE EQUIPMENT AND
RESEARCH-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, and with respect to the
research-use equipment that is currently marketed by our BTX Instrument
Division, 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 purchased liability insurance in connection with the ongoing oncology
clinical trials, and we would expect to purchase additional policies for any
additional clinical trial. The insurance we purchase may not provide adequate
coverage in the event a claim is made, 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.
With respect to our research-use equipment, 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. Our sales agreements typically 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
AND RESEARCH-USE EQUIPMENT IN SUFFICIENT VOLUMES AT COMMERCIALLY
REASONABLE RATES.
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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.
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.
OUR BTX INSTRUMENT DIVISION MUST MANAGE THE RISKS OF INTERNATIONAL
OPERATIONS.
Our BTX Instrument Division sells a significant amount of its
research-use equipment to customers outside of the United States. In the year
ended March 31, 2001, 35% of BTX's revenues were from BTX sales into non-U.S.
countries. Like any company having foreign sales, BTX's sales are influenced by
many factors outside of our control.
For instance, the following factors can negatively influence BTX's sales
or profitability in foreign markets:
-- We are subject to foreign regulatory requirements, foreign
tariffs and other trade barriers that may change without sufficient
notice;
-- Our expenses related to international sales and marketing,
including money spent to control and manage distributors, may increase
to a significant extent due to political and/or economic factors out of
our control;
-- We are subject to various export restrictions and may not be
able to obtain export licenses when needed;
-- Some of the foreign countries in which we do business suffer
from political and economic instability;
-- Some of the foreign currencies in which we do business
fluctuate significantly;
-- We may have difficulty collecting accounts receivables or
enforcing other legal rights; and
-- We are subject to the Foreign Corrupt Practices Act, which may
place us at a competitive disadvantage to foreign companies that do not
have to adhere to this statute.
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 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.
THE MAJORITY OF OUR DIRECTORS ARE CANADIAN CITIZENS AND SERVICE AND
ENFORCEMENT OF LEGAL PROCESS UPON THEM MAY BE DIFFICULT.
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The majority of our directors are residents of Canada and most, if not
all, of these persons' assets are located outside of the United States. It may
be difficult for a stockholder in the United States to effect service or realize
anything from a judgment against these Canadian residents as a result of any
possible civil liability resulting from the violation of United States federal
securities laws.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR
FORWARD-LOOKING STATEMENTS.
This report contains forward-looking statements, including statements
about our expectations, beliefs, plans, objectives, assumptions or future events
or performance, especially as they relate to our product development plans and
expectation of clinical trial progress and results. These statements are often,
but not always, made through the use of words or phrases such as "believe,"
"anticipate," "may," "could," "believe," "predict," "potential," "continue,"
"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 report. 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 report. Among the key factors that have a direct impact
on our results of operations are:
-- the risks and other factors described under the caption "Risk
Factors" in this annual report;
-- 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; and
-- availability, terms and deployment of capital.
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 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 2. PROPERTIES
We own no real property and have no plans to acquire any real property
in the future. We currently lease a facility of 24,931 square feet at our
headquarters in San Diego. This facility provides adequate space for our current
research, manufacturing, sales and administrative operations. The current lease
runs through December 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings with respect to us,
our subsidiaries, or any of our material properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The principal trading markets for the common shares of Genetronics
Biomedical Ltd. are the American Stock Exchange (AMEX) and the Toronto Stock
Exchange (TSE). Trading began on the AMEX on December 8, 1998. The Company's
common shares have also traded on the former Vancouver Stock Exchange (VSE),
however the Company voluntarily de-listed from that exchange on March 6, 1998.
The table below sets forth the quarterly high and low sales prices of the
Company's common shares in the two most recent fiscal years.
TORONTO STOCK EXCHANGE AMERICAN STOCK EXCHANGE
CDN$ US$
---------------------------- ------------------------
YEAR ENDED MARCH 31, 2001 HIGH LOW HIGH LOW
------------------------- ------------- ------------- ------------- ---------
First Quarter 9.00 4.50 6.19 3.00
Second Quarter 5.00 1.80 3.25 1.25
Third Quarter 2.45 1.20 1.75 0.75
Fourth Quarter 2.40 1.10 1.55 0.75
TORONTO STOCK EXCHANGE AMERICAN STOCK EXCHANGE
CDN$ US$
---------------------------- ------------------------
YEAR ENDED MARCH 31, 2000 HIGH LOW HIGH LOW
------------------------- ------------- ------------- ------------- ---------
First Quarter 5.70 4.10 3.875 3.81
Second Quarter 5.70 3.40 3.873 2.31
Third Quarter 5.15 4.00 3.500 2.69
Fourth Quarter 17.40 4.50 11.94 3.00
On May 10, 2001, the closing price of the Company's common shares was
CDN$2.30 on the TSE and US1.48 on the AMEX. As of May 10, 2001, there were
approximately 187 registered shareholders of record. In addition, approximately
10,014,550 of the Company's common shares or 30% of the total 33,756,718 issued
and outstanding common shares on May 10, 2001, were held among 161 registered
United States record holders.
Dividends
We have never paid any cash dividends on our common stock and do not
expect to pay any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In the fiscal year ending March 31, 2001, the Company issued a total of
180,500 shares of its common stock pursuant to the exercise of agent's warrants
for a total consideration of $597,455.
On September 20, 2001, we entered into an exclusive license agreement
with the University of South Florida Research Foundation, Inc. ("USF"). Pursuant
to the above license agreement, we issued 150,000 common shares and warrants to
purchase 600,000 common shares at a purchase price of $2.25 per share until
September 14, 2010 to USF and its designees. These shares were issued in a
private transaction exempt from registration pursuant to section 4(2) of the
Securities Act.
On January 17, 2001, we completed a public offering in Canada, through
Canaccord Capital Corporation, of 6,267,500 common shares at a price of CDN
$1.35 per share for gross proceeds of CDN $ 8,461,125 (US $5,640,750) less
expenses of CDN $1,102,877 (US $734,368). We also issued to Canaccord 50,000
common shares as compensation for corporate finance services and 500,000
compensation warrants exercisable at CDN $1.35 per share at any time until
January 16, 2002. A total of 1,000,000 of these shares were issued to two
institutional investors in the United States pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D. The remainder were exempt from registration under Regulation S as
an offering conducted on a designated offshore securities market.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
for the periods indicated, derived from audited consolidated financial
statements prepared in accordance with accounting principles generally accepted
in Canada which conform to accounting principles generally accepted in
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the United States, except as described in Note 19 to the consolidated financial
statements. The data set forth below should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth below. Effective January 23, 1998, our Board of Directors approved the
change of our fiscal year-end from February 28 to March 31.
The following summarizes certain selected consolidated financial information
prepared in accordance with Canadian generally accepted accounting principles,
except where noted, with respect to our company and is qualified in its entirety
by reference to our Consolidated Financial Statements and the Notes thereto
prepared in accordance with Canadian generally accepted accounting principles.
All amounts are shown in United States dollars.
TWELVE TWELVE TWELVE THIRTEEN TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, FEB.28,
FISCAL PERIODS ENDED 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Net Sales ......................... 4,452,939 4,134,436 3,434,105 3,097,198 3,040,734
License Fee and milestone
payments ........................ 83,333 416,667 4,500,000 0 0
Interest Income ................... 443,629 556,193 300,911 427,498 71,206
Revenues Under Collaborative
Research and Development
Arrangements and
Government grants ............... 560,797 526,236 387,183 134,094 47,439
Net Loss for Period
Canadian GAAP(1) ................ (8,640,355) (9,599,942) (6,603,837) (7,596,666) (2,994,610)
United States GAAP(2) ........... (8,866,355) (10,703,830) (7,150,537) (7,904,166) (3,330,110)
Net Loss per Common Share
Canadian GAAP ................... (0.31) (0.43) (0.33) (0.43) (0.24)
United States GAAP(2) ........... (0.32) (0.48) (0.35) (0.44) (0.26)
Total Assets
Canadian GAAP ................... 11,484,114 14,012,304 9,807,644 9,242,887 4,161,129
United States GAAP(2) ........... 11,486,266 14,012,304 9,807,644 9,242,887 4,161,129
Long Term Liabilities ............. 117,463 118,384 164,276 98,410 95,493
Dividends per Share ............... 0 0 0 0 0
----------
(1) GAAP means Generally Accepted Accounting Principles.
(2) Refer to footnote 19 of the audited consolidated financial
statements for the year ended March 31, 2001.
The following is a summary of the results of operations in accordance
with accounting principles generally accepted in the United States for fiscal
year ended March 31, 2001:(1)
Fourth
Quarter
Ended
First Quarter Ended Second Quarter Ended Third Quarter Ended March 31,
June 30, 2000 Sept. 30, 2000 Dec. 31, 2000 2001
------------------------ ------------------------ ------------------------- ---------
Previously Previously Previously
Reported As Restated Reported As Restated Reported As Restated
---------- ----------- ---------- ----------- ---------- ----------- ---------
License fee and
milestone payments .............. -- 58,823 83,333 142,156 -- 58,823 3,470,590
Net income/(loss) before
cumulative effect of change in
accounting principle ............ (2,007,171) (1,948,348) (2,107,320) (2,048,497) (2,225,404) (2,166,581) 944,130
Cumulative effect of a change in
accounting principle ............ -- (3,647,059) -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ---------
Net income/(loss) ................. (2,007,171) (5,595,407) (2,107,320) (2,048,497) (2,225,404) (2,166,581) 944,130
========== ========== ========== ========== ========== ========== =========
AMOUNTS PER COMMON SHARE:
Income/(loss) before cumulative
effect of change in accounting
principle ....................... (0.08) (0.08) (0.08) (0.08) (0.08) (0.08) 0.03
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Cumulative effect of a change in
accounting principle ............ -- (0.15) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss .......................... (0.08) (0.23) (0.08) (0.08) (0.08) (0.08) 0.03
========== ========== ========== ========== ========== ========== ==========
Weighted average # shares ......... 23,629,490 23,629,490 27,272,642 27,272,642 27,289,218 27,289,218 32,404,066
========== ========== ========== ========== ========== ========== ==========
-------------------
(1) During the fourth quarter ended March 31, 2001, the Company changed its
method of accounting for revenue recognition in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Pursuant to Financial Accounting Standards Board Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, effective April 1,
2000, the Company recorded the cumulative effect of the accounting change
and accordingly, the quarterly information for the first three quarters of
fiscal year ended March 31, 2001 which had been previously reported has
been restated. No restatement for the fiscal year ended March 31, 2000 was
necessary.
The following is a summary of the results of operations in accordance
with accounting principles generally accepted in the United States for fiscal
year ended March 31, 2000:
First Quarter Ended Second Quarter Ended Third Quarter Ended Fourth Quarter Ended
June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 March 31, 2000
------------------- -------------------- ------------------- --------------------
License fee and
milestone payments ............... -- 333,334 83,333 --
Net income/(loss) before
cumulative effect of change in
accounting principle ............... (3,046,771) (3,031,514) (2,000,566) (2,624,979)
Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net income/(loss) .................. (3,046,771) (3,031,514) (2,000,566) (2,624,979)
=========== =========== =========== ===========
AMOUNTS PER COMMON SHARE:
Income/(loss) before cumulative
effect of change in accounting
principle ........................ (0.14) (0.14) (0.09) (0.12)
Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net loss ........................... (0.14) (0.14) (0.09) (0.12)
=========== =========== =========== ===========
Weighted average # shares .......... 21,673,079 (22,017,670) 22,212,606 22,525,405
The following is a summary of the results of operations in accordance
with accounting principles generally accepted in Canada for fiscal year ended
March 31, 2001:
First Quarter Ended Second Quarter Ended Third Quarter Ended Fourth Quarter Ended
June 30, 2000 Sept. 30, 2000 Dec. 31, 2000 March 31, 2001
------------------- -------------------- ------------------- --------------------
License fee and
milestone payments ............... -- 83,333 -- --
Net income/(loss) before
cumulative effect of change in
accounting principle .............. (1,907,280) (1,902,886) (2,160,253) (2,669,936)
Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net income/(loss) .................. (1,907,280) (1,902,886) (2,160,253) (2,669,936)
=========== =========== =========== ===========
AMOUNTS PER COMMON SHARE:
Income/(loss) before cumulative
effect of change in accounting
principle ........................ (0.08) (0.07) (0.08) (0.08)
Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net loss ........................... (0.08) (0.07) (0.08) (0.08)
=========== =========== =========== ===========
Weighted average # shares .......... 23,629,490 27,272,642 27,289,218 32,404,066
The following is a summary of the results of operations in accordance
with accounting principles generally accepted in Canada for fiscal year ended
March 31, 2000:
First Quarter Ended Second Quarter Ended Third Quarter Ended Fourth Quarter Ended
June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 March 31, 2000
------------------- -------------------- ------------------- --------------------
License fee and
milestone payments ............... -- 333,334 83,333 --
Net income/(loss) before
cumulative effect of change in
accounting principle .............. (2,944,228) (2,243,919) (1,986,202) (2,425,593)
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Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net income/(loss) .................. (2,944,228) (2,243,919) (1,986,202) (2,425,593)
=========== =========== =========== ===========
AMOUNTS PER COMMON SHARE:
Income/(loss) before cumulative
effect of change in accounting
principle ........................ (0.14) (0.10) (0.09) (0.11)
Cumulative effect of a change in
accounting principle ............. -- -- -- --
----------- ----------- ----------- -----------
Net loss ........................... (0.14) (0.10) (0.09) (0.11)
=========== =========== =========== ===========
Weighted average # shares .......... 21,673,079 22,017,670 22,212,606 22,525,405
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (All figures in U.S. Dollars unless noted otherwise.)
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto prepared in accordance
with Canadian GAAP contained elsewhere in this Form 10-K. A reconciliation of
amounts presented in accordance with U.S. GAAP is detailed in note 19 to the
audited consolidated financial statements for the year ended March 31, 2001.
The following discussion and analysis explains trends in our financial
condition and results of operations for the years ended March 31, 2001, March
31, 2000 and March 31, 1999. This discussion and analysis of the results of
operations and financial condition of our Company should be read in conjunction
with the Consolidated Financial statements and the Notes thereto included
elsewhere in this Form 10-K. The consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted accounting
principles, which conform to United States generally accepted accounting
principles, except as described in Note 19 to the Consolidated Financial
Statements.
OVERVIEW
Through its Drug and Gene Delivery Division, the Company is engaged in
developing drug and gene delivery systems based on electroporation to be used in
the site-specific treatment of disease. Through its BTX Instrument Division, the
Company develops, manufactures, and sells electroporation equipment to the
research laboratory market for non-human use.
In the past the Company's revenues primarily reflected product sales to
the research market through the BTX Instrument Division, research grants through
the Drug and Gene Delivery Division, and revenues from collaborative research
and development arrangements. From October 1998 to August 2000 the Company
received up-front licensing fees and milestone payments from Ethicon, Inc. and
Ethicon Endo-Surgery, Inc.
The Company plans to seek a new licensing partner for the
Electroporation Drug Delivery System. The Company will not receive any milestone
or licensing payments for development or sale of the products until a new
agreement is in place with a new partner and the Company achieves the milestones
specified in the new agreement or product sales commence under the new
agreement. The Company believes it has sufficient current resources to initiate
activities directed toward product launch and marketing in Europe, and for
initiation of a Phase III clinical study in the United States.
Until it achieves the commercialization of clinical products, the
Company expects revenues to continue to be attributable to product sales to the
research market, grants, collaborative research arrangements, and interest
income.
Due to the expenses incurred in the development of the drug and gene
delivery systems, the Company has been unprofitable in the last five years. As
of March 31, 2001, the Company has incurred a cumulative deficit of $38,238,798.
The Company expects to continue to incur substantial operating losses in the
future due to continued spending on research and development programs, the
funding of preclinical studies, clinical trials and regulatory activities and
the costs of manufacturing and administrative activities.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000
REVENUES
The BTX Instrument Division produced net sales of $4,452,939 for the
twelve months ended March 31, 2001, compared with net sales of $3,827,537, for
the twelve months ended March 31, 2000, which meant an increase of $625,402, or
16.3%. The primary factor contributing to this increase was the result of higher
sales through the Company's main distributors, VWR Scientific and Merck Eurolab,
both members of the Merck Group. Merck Eurolab was added as a distributor in
April of 2000. Also, in December 2000 the Company signed a non-exclusive
distributorship agreement with Fisher Scientific Company to further promote
sales to the United States.
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25
Non-U.S. sales increased by $332,693, or 27%, from $1,229,371 for the
twelve months ended March 31, 2000 to $1,562,064 for the twelve months ended
March 31, 2001. Export sales as a percentage of total sales by the BTX
Instrument Division increased slightly from 32% in the twelve months ended March
31, 2000 to 35% in the twelve months ended March 31, 2001. The increase is
mainly attributable to the addition of Merck Eurolab as a distributor to promote
sales to Europe.
Total sales for the Company increased only by 8% since in the Drug
Delivery Division no product for clinical trials was shipped in the year ended
March 31, 2001 as opposed to shipments in the previous year. That is mainly
attributable to the fact that the Phase II clinical trials were winding down and
that in July 2000 the Company received notice from Ethicon that it had elected
to exercise its discretionary right to terminate the License and Development
Agreement and Supply Agreement.
Revenues from government grants funding decreased from $334,901 for the
year ended March 31, 2000 to $101,086 for the year ended March 31, 2001. The
reason for the decrease in grant revenues was that activities for grants awarded
in previous years in the Oncology field and Gene Therapy field were winding down
in the year ended March 31, 2001 and all active grants had expired by December
31, 2000. No new grants have been awarded as of the time of this filing.
Revenues from grant funding may fluctuate from period to period based on the
level of grant funding awarded and the level of research activity related to the
grants awarded.
During the year ended March 31, 2001 the Drug and Gene Delivery Division
recorded revenues under collaborative research and development arrangements in
the amount of $459,711 as a result of collaborative research agreements to
develop electroporation technology for use in particular gene therapy
applications. This represents a significant increase over the same period of the
previous year since the Company did not enter into these research agreements
until the end of calendar 1999.
In August 2000, the Company received from Ethicon a final milestone
payment in the amount of $83,333 in accordance with the above mentioned
terminated License and Development Agreement.
Interest income for the year ended March 31, 2001 in the amount of
$443,629 decreased by $112,564, or 25%, compared to the interest income for the
year ended March 31, 2000 in the amount of $556,193. The decrease in interest
income was attributable to the cash used in operating activities which resulted
in decreased levels of interest bearing financial instruments.
COST OF SALES
Cost of sales for the BTX Instrument Division increased by $143,146, or
8%, from $1,781,972, for the twelve months ended March 31, 2000 to $1,925,118
for the twelve months ended March 31, 2001. The increase was primarily a result
of the 16.5% increase in net sales.
GROSS PROFIT AND GROSS MARGIN
Primarily due to the higher sales, the gross profit for the BTX
Instrument Division for the twelve months ended March 31, 2001 in the amount of
$2,527,821, increased by $482,256, or 24%, compared with $2,045,565 for the
twelve months ended March 31, 2000.
The gross profit margin for BTX products increased slightly from 53% for
the twelve months ended March 31, 2000 to 57% for the twelve months ended March
31, 2001. The 4% increase is mainly attributable to a change in product mix in
favor of products with a higher profit margin due to the successful
implementation of a niche market strategy in developing a market for the ECM 830
and ECM 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses which include advertising,
promotion and selling expenses, increased by $121,895, or 2%, from $5,610,830
for the twelve months ended March 31, 2000 to $5,732,725 for the twelve months
ended March 31, 2001. While selling expenses for the year ended March 31, 2001
remained relatively constant compared to the previous year, general and
administrative expenses increased slightly. The increase was primarily due to
legal expenses incurred in the year ended March 31, 2001 for a review of our
patent portfolio by a third party as well as legal expenses incurred for the
planned continuation of the Company into the U.S. The increased legal expenses
more than offset a decrease of other administrative expenses due to the closing
of Genetronics SA as well as a decrease of outside consulting services.
RESEARCH AND DEVELOPMENT/CLINICAL TRIALS
Research and development costs decreased by $540,843, or 8%, from
$6,977,220 for the twelve months ended March 31, 2000 to $6,436,377 for the
twelve months ended March 31, 2001.
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26
The expenses in the twelve months ended March 31, 2001, decreased over
the previous year, primarily in the clinical and regulatory areas as a result of
the delay of initiation of pivotal and other clinical trials in the U.S. These
lower expenses more than offset higher expenses in the Gene Therapy area due to
the increased focus on this field and higher engineering expenses in the BTX
Instrument Division. The higher BTX Instrument engineering expenses were
primarily related to an increase in the effective headcount and skill level of
personnel assigned to a project to improve manufacturability and engineering
design of the overall BTX product line.
NET INCOME/LOSS (NET INCOME/LOSS OF REPORTABLE SEGMENTS DOES NOT INCLUDE
UNALLOCATED ITEMS SUCH AS INTEREST INCOME AND EXPENSE AND GENERAL AND
ADMINISTRATIVE COSTS)
The BTX Instrument Division reported a net income in the amount of
$670,903 for the twelve months ended March 31, 2001 compared to a net income in
the amount of $332,657 for the twelve months ended March 31, 2000. The $338,246
increase was attributable to the 16.5% increase in net sales, which more than
offset the higher operating expenses.
The Drug and Gene Delivery Division reported a net loss in the amount of
$5,166,428 for the twelve months ended March 31, 2001 compared to a net loss in
the amount of $6,073,667 for the twelve months ended March 31, 2000, a decrease
of $907,239. The decrease is a result of lower operating expenditures in the
year ended March 31, 2001, which did not include -- as opposed to the previous
year -- any restructuring charges. The lower operating expenses more than offset
the decrease in revenues for the Drug Delivery Division, which were a result of
lower revenues from grant funding and milestone payments.
For the twelve months ended March 31, 2001 the Company recorded a total
net loss of $8,640,355 compared with a total net loss of $9,599,942 for the
twelve months ended March 31, 2000, which meant a decrease of $959,587, or 10%.
The higher loss in the previous year was mainly attributable to the one-time
restructuring charges in the amount of $ 597,183 and the higher research and
development expenses.
YEAR ENDED MARCH 31,2000 COMPARED TO YEAR ENDED MARCH 31, 1999
REVENUES
The BTX Instrument Division produced net sales of $3,827,537 for the
twelve months ended March 31, 2000, compared with net sales of $3,434,105 for
the twelve months ended March 31, 1999, which meant an increase of $393,432, or
11%. The primary factor contributing to this increase was the result of higher
sales through domestic distributors, which increased by 31% over the previous
year due to the successful implementation of the dedicated life sciences program
at VWR.
Non-U.S. sales were basically flat. They decreased by $30,370, or 2%,
from $1,259,741 for the twelve months ended March 31, 1999 to $1,229,371 for the
twelve months ended March 31, 2000. As a result of the increased sales to
domestic distributors non-U.S. sales as a percentage of total sales by the BTX
Instrument Division decreased from 37% in the twelve months ended March 31, 1999
to 32% in the twelve months ended March 31, 2000.
In August of 1999 we introduced the ECM 630, an Exponential Decay Wave
Electroporation system, which utilizes a Precision Pulse Technology, the new BTX
Platform technology, and an all-new digital user interface. The introduction of
the new product also resulted in additional sales amounting to $448,629. The
overall increase in sales was also attributed to the increased focus on
application-based sales in the in vivo gene therapy area.
Our Drug and Gene Delivery Division had its first product sales in the
twelve months ended March 31, 2000 in the amount of $306,899. The product sales
were to Ethicon and consisted of medical instruments and applicators which were
designated for market development activities and future clinical trials.
Revenues from grant funding decreased from $354,135 for the twelve
months ended March 31, 1999 to $334,901 for the twelve months ended March 31,
2000. The grant revenues in the twelve months ended March 31, 2000 were
primarily a result of activities within the oncology field for which a Phase II
Small Business Innovative Research (SBIR) grant was awarded to us by the
National Institutes of Health ("NIH") in September 1997. In the year ended March
31, 2000 we also received revenues from a Phase I SBIR grant which was awarded
in February of 1999 for an In Vivo Skin-Targeted Gene Therapy project. Revenues
from grant funding may fluctuate from period to period based on the level of
grant funding awarded and the level of research activity related to the grants
awarded.
In the twelve months ended March 31, 2000, our Drug and Gene Delivery
Division recorded milestone revenues in the amount of $416,667. The milestones
achieved were part of the License and Development Agreement with Ethicon
involving the use of the MedPulser(R) system for Electroporation Therapy in the
treatment of solid tumor cancer. The decrease in license fees and milestone
payments from $4,500,000 for the twelve months ended March 31, 1999 to $416,667
for the twelve months ended March 31, 2000 was a result of the $4,000,000
licensing fee received from Ethicon in October
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27
of 1998. Milestone revenues may fluctuate from period to period due to the
existence or absence of contractual milestones, the timing of milestone
achievements, the amount of milestone payments, and whether milestones were
achieved.
In the twelve months ended March 31, 2000 we recorded contract research
revenues under collaborative research and development arrangements in the amount
of $191,335, primarily as a result of collaborative research agreements to
develop our electroporation technology for use in particular gene therapy
applications.
Interest income for the twelve months ended March 31, 2000 in the amount
of $556,193 increased by $255,282, or 85%, compared to the interest income for
the twelve months ended March 31, 1999 in the amount of $300,911. The increase
in interest income was attributable to the proceeds from the private placement
in June 1999, which were invested in interest-bearing instruments.
COST OF SALES
Cost of sales for our BTX Instrument Division increased by $143,337, or
9%, from $1,638,635, for the twelve months ended March 31, 1999 to $1,781,972,
for the twelve months ended March 31, 2000. The increase was primarily a result
of higher net sales.
Our Drug and Gene Delivery Division recorded cost of sales in the amount
of $241,927 for the twelve months ended March 31, 2000. For the prior year no
cost of sales were incurred since no products were sold.
GROSS PROFIT AND GROSS MARGIN
Primarily due to the higher sales, the gross profit for our BTX
Instrument Division for the twelve months ended March 31, 2000 in the amount of
$2,045,565, increased by $250,095, or 14%, compared with $1,795,470 for the
twelve months ended March 31, 1999.
The gross profit margin for BTX products increased from 52% for the
twelve months ended March 31, 1999 to 53% for the twelve months ended March 31,
2000.
Our Drug Delivery Division recorded a gross profit in the amount of
$64,972 for the twelve months ended March 31, 2000. The low gross profit margin
of 21% was expected since the products sold were designated for market
development and future clinical trials and therefore were sold at a highly
discounted price.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, which include advertising,
promotion and selling expenses, increased by $129,779, or 2%, from $5,481,051
for the twelve months ended March 31, 1999 to $5,610,830 for the twelve months
ended March 31, 2000. The increase was primarily due to higher sales and
marketing expenses in our BTX Instrument Division, partially as a result of
efforts to increase product sales and promote the newly introduced ECM 630.
General and administrative expenses for the year ended March 31, 2000 remained
at about the same level as for the year ended March 31, 1999.
RESEARCH AND DEVELOPMENT/CLINICAL TRIALS
Research and development costs decreased by $1,109,739, or 14%, from
$8,086,959 for the twelve months ended March 31, 1999 to $6,977,220 for the
twelve months ended March 31, 2000.
The overall lower research and development expenses were primarily a
result of lower clinical/regulatory expenses due to the winding down of the Head
& Neck Phase II clinical trials in the United States and Canada and decreased
activities related to the development of the Drug and Gene Delivery products.
Reduced expenses in the transdermal and vascular therapy areas, as the result of
a shift in our primary focus to oncology and gene therapy, also contributed to
the lower research and development expenses. The above noted lower R&D expenses
in our Drug and Gene Delivery Division more than offset increased engineering
expenses in our BTX Instrument Division, which were incurred in the process of
upgrades to certain BTX instrument products.
RESTRUCTURING CHARGES
In the summer of 1999 we undertook a review of our operating structure
to identify opportunities to improve operating effectiveness. As a result of
this review, certain staffing changes occurred. We also announced that our
employment of two senior executives ended in September 1999. In December
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1999, we entered into an Agreement for Termination of Employment with each of
the two senior executives. In accordance with the staffing changes and the terms
of the Termination of Employment Agreements, we recorded restructuring charges
of $597,183 for the twelve months ended March 31, 2000. We paid $309,141 of the
restructuring charges in the fiscal year ended March 31, 2000 and $277,151 in
the fiscal year ended March 31, 2001.
NET INCOME/LOSS (NET INCOME/LOSS OF REPORTABLE SEGMENTS DO NOT INCLUDE
UNALLOCATED ITEMS SUCH AS INTEREST INCOME AND EXPENSE AND GENERAL AND
ADMINISTRATIVE COSTS)
Our BTX Instrument Division reported a net income in the amount of
$332,657 for the twelve months ended March 31, 2000 compared to a net income in
the amount of $366,386 for the twelve months ended March 31, 1999. The lower net
income for the year ended March 31, 2000 was attributable to the higher
engineering expenses to upgrade certain BTX instrument products and the increase
in sales and marketing expenses. The higher operating expenses more than offset
the higher gross profit for the year.
The Drug and Gene Delivery Division reported a net loss in the amount of
$6,073,667 for the twelve months ended March 31, 2000 compared to a net loss in
the amount of $2,858,343 for the twelve months ended March 31, 1999, an increase
of $3,215,324. The increase in net loss was a result of the one-time $4,000,000
up-front licensing fee received in the twelve months ended March 31, 1999 from
Ethicon as part of the License and Development Agreement. Not including the
one-time licensing fee, the net loss for the year ended March 31, 2000 decreased
by approximately $785,000, primarily as a result of the lower research and
development expenses.
For U.S. GAAP purposes, during the fourth quarter ended March 31, 2001, the
Company changed its accounting policy for upfront non-refundable license
payments received in connection with collaborative license arrangements in
accordance with Staff Accounting Bulletin No. 101 (SAB 101), as amended by SAB
101(A) and (B), issued by the U. S. Securities and Exchange Commission. The
one-time $4,000,000 up-front licensing fee was received in the fiscal year ended
March 31, 1999. In accordance with SAB 101, the Company is required to record
these fees over the life of the arrangement, which was terminated in the year
ended March 31, 2001. As a result of this change, revenues in the year ended
March 31, 2001 have increased by $3,647,059 and the cumulative effect of this
change in accounting principle is a charge of $3,647,059 to net loss in the year
ended March 31, 2001.
For the twelve months ended March 31, 2000 the Company recorded a total
net loss of $9,599,942 compared with a total net loss of $6,603,837 for the
twelve months ended March 31, 1999, which meant an increased loss of $2,996,105,
or 45%. The lower loss for the twelve months ended March 31, 1999 was primarily
a result of the $4,000,000 up-front license fee received from Ethicon in October
of 1998.
The Company does not believe that inflation has had a material impact on
its result of operations for the years ended March 31, 2001, March 31, 2000, and
March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the last five fiscal years, the Company's 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, the Company
has satisfied its cash requirements principally from proceeds from the sale of
equity securities. In June 1999 the Company closed a private placement of
4,187,500 Special Warrants at a price of $3.00 per special warrant for total
consideration of $12,562,500 before deducting the agent's commission and share
issue costs of $1,498,742. In March 2000, the Company issued 23,000 common
shares pursuant to the exercise and conversion of 23,000 Special Warrants and on
June 16, 2000 the remaining 4,164,500 Special Warrants were exercised and
converted into common shares. During the year ended March 31, 2000, 988,542
common shares were issued upon exercise of options in the amount of $1,516,239.
In connection with the issuance of 4,187,500 Special Warrants, the
Company issued to the Agent 418,750 compensation warrants exercisable at a price
of $3.31 per share. During the year ended March 31, 2000, the Company issued
151,300 common shares pursuant to the exercise of 151,300 of these compensation
warrants for net proceeds to the Company in the amount of $500,803. During the
twelve months ended March 31, 2001 the Company issued 180,500 common shares
pursuant to the exercise of 180,500 of these compensation warrants for net
proceeds to the Company in the amount of $597,455. The remaining 86,950
compensation warrants expired unexercised on June 16, 2000.
On January 17, 2001 the Company completed a public offering of 6,267,500
common shares at a price of Canadian $1.35 per share for gross proceeds of
Canadian $8,461,125 (US $5,640,750) less expenses of Canadian $1,102,877 (US
$734,368). The Company has also issued to the Agent compensation warrants
exercisable until January 16, 2002 to purchase 500,000 common shares, at
Canadian $1.35 per common share. During the year ended March 31, 2001, 111,894
common shares were issued upon the exercise of stock options in the amount of
$249,332. 50,000 common shares were also issued as compensation for corporate
finance services.
As of March 31, 2001, the Company had working capital of $6,734,717,
compared to $9,508,012, as of March 31, 2000. The decrease is a result of the
$8,640,355 net loss for the year ended March 31, 2001, mainly offset by the net
proceeds of $5,798,169 from the issuance of common shares.
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Accounts receivable decreased by $216,924, or 19%, from $1,120,450 at
March 31, 2000 to $903,526 at March 31, 2001. The decrease was primarily a
result of the payment in the first quarter of 2000 of Ethicon receivables that
had been outstanding as of March 31, 2000. Receivables from Ethicon decreased
since no product for clinical trials was shipped in the twelve months ended
March 31, 2001.
Inventories increased from $611,642 at March 31, 2000 to $756,543 at
March 31, 2001, primarily as the result of a build-up of inventory in the BTX
Instrument Division. The Company built up finished goods inventory levels in
anticipation of substantial orders from Merck Eurolab, a European distributor.
As of March 31, 2001 these anticipated orders still had not been received at the
level expected as it has taken longer than planned to promote the distribution
to the nine divisions of Merck Eurolab situated in various countries in Europe.
In addition, the newly signed agreement with Fisher Scientific Company requires
the Company to meet delivery schedules, which necessitated increased inventory
levels. Also, in order to eliminate backorders, the Company increased safety
stock levels, which resulted in a higher overall inventory level.
Current liabilities decreased from $2,105,847 at March 31, 2000 to $
1,512,545 at March 31, 2001. A part of the year-end accruals as of March 31,
2000 consisted of $288,042 accrued restructuring charges which, except for
$10,891, were paid during the year ended March 31, 2001. Also, deferred revenues
decreased from $268,665 as of March 31, 2000 to $50,029 as of March 31, 2001.
The reason for the decrease is that a large up-front cash payment was received
towards the end of the year ended March 31, 2000 from one of the Company's
collaborative research partners was initially booked as deferred revenue and
then recognized as revenues during the year ended March 31, 2001.
Our cash requirements are dependent upon a number of factors, including
the achievement and timing of regulatory approvals, the timing and expense of
preclinical and clinical studies, sales and marketing of our BTX and
MedPulser(R) products, new technological innovations, market acceptance of our
products and potential products, grant funding and the establishment of new
collaborative research and development arrangements. We believe we have
sufficient funds to support our planned operations at least through the next
twelve months.
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;
Our ability to establish and maintain collaborative arrangements;
Our 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
Our 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:
Our ability to raise funds in the future through public or
private financings, collaborative arrangements, grant awards or from
other sources;
The potential for our company 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 our company; and
Our ability to maintain our existing collaborative arrangements.
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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
our research and development programs, preclinical studies and clinical trials,
and selling, general, and administrative activities, or otherwise reduce or
cease operations and its business and financial results and condition would be
materially adversely affected.
ITEM 7A QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is subject to interest rate risk on its capital lease
arrangements which carry an average fixed annual rate of approximately 17% and
on its cash equivalents and short term investments which at March 31, 2001 had
an average interest rate of approximately 5.4%.
FOREIGN CURRENCY RISK
Foreign exchange risk arises as approximately $500,000 CDN of expenses
for the year ended March 31, 2001 were incurred in Canadian dollars. A 10%
increase in the Canadian dollar relative to the U.S. dollar would result in an
increase in loss and cash outflow of approximately $33,250 for the year ended
March 31, 2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
All directors serve a one year term until the next Annual Meeting in
2001. Our executive officers and directors, the positions held by them and their
ages as of March 31, 2001 are as follows:
NAME AGE TITLE
---- --- -----
Martin Nash (5) ............ 54 Director, President and Chief Executive
Officer
Grant W. Denison,
Jr.(1)(3)(6) ............... 51 Director
Mervyn J. McCulloch ........ 57 Chief Financial Officer
Terry Gibson ............... 60 Chief Operating Officer
William K. Dix ............. 45 General Counsel and Secretary
George M. Gill ............. 68 Vice President, Clinical Research and
Regulatory Affairs
Babak Nemati ............... 34 Vice President, Corporate Development
James L. Heppell (1)(3) .... 45 Director, Chairman of the Board
Suzanne L. Wood (2)(3) ..... 44 Director
Gordon J.
Politeski (1)(2)(3) ........ 57 Director
Felix Theeuwes (2)(3) ...... 63 Director
Gordon Blankstein (1)(3) ... 50 Director
Tazdin Esmail (1)(3)(4) .... 53 Director
----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of Nomination and Corporate Governance Committee
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(4) Mr. Esmail was appointed to the Board on August 7, 2000.
(5) Mr. Nash's service as President and Chief Executive Officer concluded on
May 14, 2001.
(6) Mr. Denison was appointed President and Chief Executive Officer on May 14,
2001. He resigned as a member of the Compensation and Nomination and
Corporate Governance Committees on the same date.
GRANT W. DENISON, JR. has been a director of our company and
Genetronics, Inc. since May 2000. On May 14, 2001, he was appointed President
and Chief Executive Officer. He is co-founder, Chairman and Chief Executive
Officer of BioMarin Pharmaceutical Inc., Novato, California, with 25 years
experience in pharmaceutical management. Prior to his present position, he
served as President, Consumer Products, and as Corporate Senior Vice President,
Business Development, for Searle, responsible for the general management of
Searle's consumer products business and all pharmaceutical, diagnostics and
consumer licensing and development. He also served as Vice President, Corporate
Planning for Searle's parent company, Monsanto Company, during a period of major
restructuring and portfolio realignment, and as President of Searle's United
States operations during a period of significant sales and earnings growth in
the late 1980s. Prior to joining Searle, Mr. Denison was Vice President,
International Operations for Squibb Medical Systems. He also held various
management positions at Pfizer, Inc. including Vice President, Pharmaceutical
Planning and Business Development, and was responsible for the formation of
numerous licensing, acquisition and strategic alliances. Mr. Denison previously
served on the board of Genetronics, Inc. from May 1996 to August 1998. He also
serves as director of several companies including York Medical, Inc., Nastech
Pharmaceutical, Dentalview and Clubb BioCapital. Mr. Denison holds an M.B.A.
from Harvard Graduate School of Business Administration and an A.B. in
Mathematical Economics from Colgate University.
MERVYN J. MCCULLOCH joined our company as Chief Financial Officer in
November 2000. Prior to joining our company, Mr. McCulloch was since July 2000
Interim Chief Financial Officer of Advanced Tissue Sciences Inc. From June 1999
to June 2000, he was Executive Vice President and Chief Financial Officer of
Fairlight Inc., a digital audio and video post production software technology
company. From October 1996 to June 1999, he was Chief Financial Officer of
Global Diamond Resources Inc, a public company. From February 1996 to September
1999, he served as Chief Operating Officer and Chief Financial Officer of Santa
Fe Ventures, a high technology venture fund. From 1990 to January 1995, Mr.
McCulloch was Executive Vice President and Chief Financial Officer of Armor All
Products Corporation, a public company listed on NASDAQ. From 1972 to 1990, he
was an Audit Partner of Deloitte & Touche. Mr. McCulloch received his Accounting
Degree in 1966 from the University of South Africa, his Chartered Accountant
(SA) designation from the South African Institute of Chartered Accountants (SA)
in 1967 and his Certified Public Accountant designation in 1985 from the
American Institute of Certified Public Accountants. He has also studied at the
University of Witwatersrand Graduate Business School, Executive Development
Program.
TERRY GIBSON joined our company in September 2000 as Chief Operating
Officer. From 1992 to 2000, Mr. Gibson was Vice-President of Operations at
Advanced Tissue Sciences, Inc., a NASDAQ listed company based in La Jolla,
California, where he was responsible for the operating functions of
manufacturing, materials management, distribution, facilities, engineering and
process development. He also coordinated business planning and alliance
management for Advanced Tissue. Mr. Gibson has a Bachelor of Science degree in
medicinal chemistry, a Bachelor of Science degree in pharmacy, and a Masters of
Science degree in bionucleonics from Purdue University. He also attended the
executive MBA program at Lake Forest College.
WILLIAM K. DIX joined our company in February 2001 as General Counsel.
In March, he was appointed Secretary. In May 2001, he was appointed Vice
President, Legal Affairs. Mr. Dix was formerly Vice President and General
Counsel for Metabolife International, Inc. a nutritional supplement company from
October 1999 through October 2000. From May 1996 to October 1999, Mr. Dix was
Vice President and General Counsel of Jenny Craig, Inc., (NYSE). From March 1994
to May 1996, Mr. Dix was Assistant Vice President and Senior Counsel for Aetna
Health Plans (NYSE) and from March 1989 to March 1994, Mr. Dix was Counsel for
Science Applications International Corporation, the largest employee-owned
research and development company in the United States. Mr. Dix is a 1986
graduate of the Georgetown University Law Center.
GEORGE M. GILL, M.D. joined our company in December 1999 as Vice
President, Clinical Research and Regulatory Affairs. From 1968 to 1984, Dr. Gill
served in various capacities such as research physician, director and chairman
with Hofman-La Roche, Inc. From 1984 to 1990, Dr. Gill held the positions of
group director, executive director and vice president of Bristol-Myers Company,
Pharmaceutical Research and Development Division. From 1990 to 1992, he was
director of clinical research and senior director of ICI Pharmaceuticals Group
(now AstraZeneca). From September 1992 to December 1999, Dr. Gill served as Vice
President, Clinical Research and Development and Vice President, Medical Affairs
for Ligand Pharmaceuticals, Inc. Dr. Gill has had numerous hospital,
institutional and academic appointments in the United States throughout his
lengthy career and has published more than two dozen medical books and
abstracts. He received his Bachelor of Science from Dickinson College,
Pennsylvania and his M.D. from the University of Pennsylvania, Philadelphia.
BABAK NEMATI, Ph.D. joined our company in August 2000 as Vice President,
Corporate Development. Since 1997, Dr. Nemati served in various capacities for
Johnson & Johnson as Director, Surgical Oncology, Program Director, Oncology
Products, Manager, New Business Development. From May 1996 to October 1997, he
was Senior Manager, New Product Development for Candela Corporation. From June
1995 to May 1996, Dr. Nemati was Director, Technology Commercialization of Soma
Research Corporation. Dr. Nemati studied at the University of Texas at Austin
where
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he received his Doctor of Philosophy in electrical engineering, Master of
Science in electrical engineering, Bachelor of Arts in Physics and Bachelor of
Science in Mathematics.
JAMES L. HEPPELL, L.L.B. has been a director of our company and
Genetronics, Inc. since September 1994, Interim Chairman of the Board since
September 1999 and Chairman of the Board since March 2001. Mr. Heppell is a
founding partner at Catalyst Corporate Finance Lawyers in British Columbia. Mr.
Heppell provides corporate finance legal services to technology issuers. His
expertise lies in representing biotechnology companies, instructing and carrying
out cross-border financings and in dealing with the requirements of all major
Canadian exchanges, as well as NASDAQ. Mr. Heppell is also director of Duran
Ventures Inc., Secretary of Nucleus BioScience Inc., director and Secretary of
Pheromone Sciences Corp., Secretary of Forbes Medi-Tech Inc. and director of
Harmony Integrated Solutions, Inc. In addition to his LL.B., Mr. Heppell has a
Bachelor of Science degree in Microbiology from the University of British
Columbia.
SUZANNE L. WOOD has been a director of our company and Genetronics, Inc.
since June 1989. Ms. Wood is a principal of Wood & Associates, a financial and
management consulting firm servicing public and private companies since 1982.
She is currently President and director of MicroAccel, Inc., President and
director of Blue Lagoon Ventures Inc., and a director of Visa Gold Explorations
Inc. Her experience in financial and corporate management include positions as
past President and director of The Neptune Society, Inc., director of Envoy
Communications Group Ltd., controller and director of the Mitek Group of
Companies and Vice President and director of Barrington Petroleum Inc. Ms. Wood
received her Bachelor of Arts from the University of British Columbia, where she
also attained three years of post-graduate training. During her employment with
Revenue Canada Taxation in the Business Audit Division, she completed four
levels of the Certified General Accountants Program.
GORDON J. POLITESKI has been a director of our company and Genetronics,
Inc. since May 1997. Mr. Politeski is currently retired. From August 1997 to
June 1998, he was President and Chief Executive Officer of Harley Street
Software, involved in ambulatory ECG monitoring, and from April 1992 to March
1997, he was President and Chief Executive Officer of Nortran Pharmaceuticals,
Inc. where he took the company's first drug candidate successfully through a
Phase I clinical trial. As founding President and Chief Executive Officer of
Biomira, Inc., a cancer diagnostics and therapy company, Mr. Politeski took
Biomira from the former Alberta Stock Exchange to the TSE and subsequently to
the NASDAQ. He has also served as President and General Manager for Allergan
Pharmaceuticals in ophthalmology. Mr. Politeski is currently the Chairman and a
director of Pheromone Sciences Corp. (formerly Sabertooth Holdings, Inc.), a
director of BCY Ventures, Inc., a director of Brisbane Capital Corp and a former
director of Daybreak Resources Corporation (formerly Empress Capital Corp.). Mr.
Politeski is a graduate of the University of Saskatchewan and the Amos Tuck
Executive Program at Dartmouth University.
FELIX THEEUWES, Ph.D. has been a director of our company and
Genetronics, Inc. since August, 1999. From 1970 to June 1999 Dr. Theeuwes held
various positions within Alza Corporation, directing research, technology
development and product development for a variety of controlled drug delivery
systems. Dr. Theeuwes co-founded Durect Corporation where he is presently the
Chairman and Chief Scientific Officer. Durect Corporation spun out from Alza
Corporation focusing on the development of Pharmaceutical Systems starting with
applications of the DUROS(TM) system technology. Dr. Theeuwes' work at Alza led
to the product introduction of the Alzet(R) mini osmotic pump series for animal
research, and the OROS(R) systems series of products. He directed research in
transdermal research and development, initiated the electrotransport/
ionphoresis program, and initiated the DUROS(TM) osmotic implant program. Dr.
Theeuwes holds more than 210 United States patents covering these systems and
has published more than 80 articles and chapters of books. Dr. Theeuwes is a
member of the board of directors of Vinifera Inc., Tibotec Group N.V. and Durect
Corporation and a member of the scientific advisory board at Antigenics. In
1993, Dr. Theeuwes completed the Stanford Executive Program at Palo Alto,
California.
W. GORDON BLANKSTEIN has been a director of our Company and Genetronics,
Inc. since September 1999. He is the Chairman of the Board since October 1996
and Chief Executive Officer since November 1999 of Global Light
Telecommunications Inc., a telecommunications company listed on AMEX. He also
serves as a director of certain other telecommunications companies, including
Bestel, S.A. de C.V. and NeTrue Communications Inc. and as the Chairman of the
Board of New World Networks Holding, Ltd. Mr. Blankstein was a member of the
Policy Advisory Committee of the VSE. He holds a bachelor's degree and a M.B.A.
from the University of British Columbia.
TAZDIN ESMAIL has been a director of our company and Genetronics, Inc.
since August 2000. Mr. Esmail is the Chairman of the Board of Directors,
President, Chief Executive Officer and a director of Forbes Medi-Tech Inc., a
company listed on the TSE and NASDAQ. He has been with Forbes Medi-Tech Inc.
since March 1992. Mr. Esmail has over 20 years experience in the biomedical and
pharmaceutical fields. Mr. Esmail was formerly Vice President, Medical
Operations of QLT PhotoTherapeutics Inc., formerly Quadra Logic Technologies
Inc., a Vancouver-based biotechnology company. In this role, he was responsible
for both operations and strategic development. Prior to Quadra Logic, he was
with Cyanamid Canada Inc., a subsidiary of American Cyanamid Company, in its
Lederle multinational pharmaceutical division where he held several progressive
senior management positions in areas such as strategic planning, sales and
marketing, new product development, marketing research and management training.
MARTIN NASH served as the President and Chief Executive Officer of our
company from September 1999 to May 14, 2001. He has been a director since July
1997. From June 1999 to November 2000, he was our Chief Financial Officer. From
April 1996 to September 1999 he was our Senior Vice President. He has also
served as Senior Vice President of our subsidiary, Genetronics, Inc. since June
1994 and a director of Genetronics, Inc. since April 1996. Prior to joining
Genetronics, Inc. in 1994, Mr. Nash was co-founder, Chief Executive Officer and
Chief Financial Officer of Cypros Pharmaceutical Corporation (NASDAQ),
co-founder of Corvas International, Inc. (NASDAQ), and Vice President of
Corporate Development at
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Synbiotics (NASDAQ). He was also President of Molecular Biosystems, Inc. (NYSE)
and held a variety of marketing and business development management positions at
Ortho Diagnostics Systems, Inc., a division of Johnson & Johnson, Inc., and at
Becton Dickinson & Company. In 1990 Mr. Nash was President of the Association of
Biotechnology Companies. Mr. Nash received a Bachelor of Arts and Sciences from
Boston College.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee meets with our independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the auditors' comments (out of the presence of
management) as to adequacy of staff and management performance and procedures in
connection with the audit. The Audit Committee is composed of three directors:
Suzanne L. Wood (Chair), Gordon J. Politeski and Felix Theeuwes.
The Compensation Committee makes recommendations based upon management's
suggestions regarding the salaries and incentive compensation for officers and
key employees and performs such other functions regarding compensation as the
Board may delegate. The Compensation Committee is composed of James L. Heppell
(Chair), Gordon J. Politeski, Gordon Blankstein and Tazdin Esmail.
The Nomination and Corporate Governance Committee identifies and
recommends candidates for election to the Board of Directors. It advises the
Board of Directors on all matters relating to directorship practices, including
the criteria for selecting directors, policies relating to tenure and retirement
of directors and compensation and benefit programs for non-employee directors.
The Nomination and Corporate Governance Committee also makes recommendations
relating to the duties and membership of committees of the Board of Directors,
recommends processes to evaluate the performance and contributions of individual
directors and the Board of Directors as a whole and approves procedures designed
to provide that adequate orientation and training are provided to new members of
the Board of Directors and consults with the Chief Executive Officer in the
process of recruiting new directors and assists in locating senior management
personnel and selecting members for the scientific advisory board. The
Nomination and Corporate Governance Committee has developed a policy to govern
our approach to corporate governance issues and provides a forum for concerns of
individual directors about matters not easily or readily discussed in a full
board meeting, e.g., the performance of management. The Nomination and Corporate
Governance Committee is composed of Gordon J. Politeski (Chair), James L.
Heppell, Suzanne L. Wood, Felix Theeuwes, Gordon Blankstein and Tazdin Esmail.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Since we were a foreign private issuer during the entire fiscal year,
our directors, officers and owners of more than 10% of our common shares were
exempt from the reporting requirements contained in Section 16(a) of the
Securities Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The compensation programs of our company are designed to reward
performance and to be competitive with the compensation agreements of other
biomedical companies. The Compensation Committee of the Board of Directors of
our company evaluates each executive officer position to establish skill
requirements and levels of responsibility. The Compensation Committee, after
referring to information from other corporations and public data, determines the
compensation for the executive officers.
OBJECTIVES
The primary objectives of our executive compensation program are to
enable us to attract, motivate and retain qualified individuals and to align
their success with that of our stockholders through the achievement of strategic
corporate objectives and the creation of stockholder value. The level of
compensation paid to each executive is based on the executive's overall
experience, responsibility and performance. Executive officer compensation is
composed of salary, bonuses and the opportunity to receive options granted under
our Stock Option Plan.
SALARY
Salary ranges are determined following a review of the market data for
similar positions in corporations of a comparable size and type of operations to
our company. The salary for each executive officer is largely determined by the
terms of the officer's employment agreement with us.
BONUSES
Our company may provide annual incentive compensation to the executive
officers through bonus arrangements. Awards are contingent upon the achievement
of corporate and individual objectives determined by our Compensation Committee.
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STOCK OPTION PLAN
The executive officers may be granted incentive stock options or
non-incentive stock options under our 2000 Stock Option Plan. In previous years
stock options or non-incentive stock options were granted under the 1995 and
1997 Stock Option Plans, which we discussed in Note 11 to the consolidated
financial statements.
COMPENSATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
The Committee considers with particular care the compensation of our Chief
Executive Officer, and recommends such compensation for Board approval. Mr. Nash
was appointed our President and Chief Executive Officer on September 7, 1999.
His base salary was increased on November 12, 1999, from $165,000 to $220,000,
retroactive to September 7, 1999, as a result of his evaluated performance and
promotion. The Committee granted Mr. Nash a 5% cost of living increase effective
April 1, 2000. On May 14, 2001, Martin Nash concluded his service as President
and Chief Executive Officer.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of Martin Nash, Terry
Gibson, George M. Gill and James C. Lierman for the last three completed fiscal
years.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(1) COMPENSATION(2)
--------------------------- --------- --------- ------------- --------------- ---------------
Martin Nash ......................... 2001 230,789 --0-- 102,000(3) 12,566
Director, Former President and 2000 201,808 --0-- 300,000 17,347
Chief Executive Officer(4) ......... 1999 140,573 27,200 127,200 7,520
--------- --------- --------- --------- ---------
Terry Gibson ........................ 2001 113,077 21,000 100,000 1,939
Chief Operating Officer 2000 --0-- --0-- --0-- --0--
1999 --0-- --0-- --0-- --0--
--------- --------- --------- --------- ---------
George M. Gill ...................... 2001 150,000 --0-- 2,000 1,038
Vice President, Clinical Research 2000 47,885 --0-- 160,000 --0--
and Regulatory Affairs 1999 --0-- --0-- --0-- --0--
--------- --------- --------- --------- ---------
James C. Lierman .................... 2001 99,094 4,167 --0-- 118,008(6)
Former Executive Vice President(5) 2000 155,769 20,834 50,000 3,798
1999 136,500 200,000 127,000 3,072
--------- --------- --------- --------- ---------
----------
(1) We do not have Stock Appreciation Rights. All noted securities are options.
(2) The noted Other Compensation includes cash contributions made by us to
purchase, on the open market, our shares of common stock for the named
executives' 401(k) accounts. Also included for Mr. Nash, Mr. Gibson, and
Mr. Lierman are that portion of automobile leases attributed to personal
use. Additional Compensation for Mr. Nash also includes reimbursement for
certain personal travel expenses authorized by the Board of Directors.
(3) An additional grant of 50,000 options, the vesting of which was contingent
upon the achievement of certain performance objectives, was cancelled
before the end of the fiscal year since the performance objectives were not
met. This grant is not included in the Summary Compensation Table.
(4) On June 10, 1999 Martin Nash was appointed Chief Financial Officer and
retained his position as Senior Vice President. On September 7, 1999 he was
appointed President and Chief Executive Officer and resigned as Senior Vice
President. On November 10, 2000, he resigned as Chief Financial Officer and
retained his position as President and Chief Executive Officer. On May 14,
2001, Mr. Nash concluded his service as President and Chief Executive
Officer.
(5) On September 7, 1999, Mr. Lierman was promoted to Chief Operating Officer.
On June 28, 2000, Mr. Lierman's position with our company was changed to
Executive Vice President and he resigned as Chief Operating Officer. On
September 30, 2000, Mr. Lierman resigned as Executive Vice President.
(6) Includes $111,501 of severance and other termination benefits paid to, or
for the benefit of, Mr. Lierman in the fiscal year ended March 31, 2001
after his employment by the Company ended. The payments were made pursuant
to a Separation Agreement.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In January 1995, we entered into an employment agreement with Martin
Nash, our then Senior Vice President. Mr. Nash was appointed our President and
Chief Executive Officer on September 7, 1999. Mr. Nash's employment agreement
has a one year term with automatic renewal unless 60 days prior notice is
provided. Such agreement was amended on January 9, 1996, March 1, 1997 and
January 15, 1999 and pursuant to a Board resolution
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as of September 7, 1999, Mr. Nash receives an annual salary of $220,000. A 5%
increase in cost of living was granted to Mr. Nash by the Board effective April
1, 2000. Mr. Nash is also eligible to receive an annual bonus of up to 20% of
his annual salary, based on meeting certain performance objectives, payable
within 90 days of the end of our fiscal year.
Pursuant to the employment agreements, upon termination of Mr. Nash's
employment for the following reasons: (i) we decide not to renew the employment
agreement; (ii) we terminate the employee; or (iii) if without written consent
of the employee, we change the employee's duties or responsibilities and the
employee terminates his employment with 6 months written notice, then we must
pay to the employee two months of his annual salary for each full year of
service under the agreement, such payment to be for no shorter time period than
for six months and the employee shall be entitled to all other benefits that he
would have been entitled to as an employee. In addition, pursuant to the terms
of the employment agreement between us and Mr. Nash, in recognition of the fact
that the employee requires the use of a car in the performance of his duties, we
pay the lease payment, the insurance, maintenance, and repair costs for his car.
That portion of costs associated with personal usage of his car is considered
compensation to Mr. Nash.
On May 14, 2001, Mr. Nash concluded his service as President and Chief
Executive Officer.
REPRICING OF OPTIONS/SARS
The Company did not adjust or amend the exercise price of stock options
or SARs previously awarded to the named executive officers at any time during
the last completed fiscal year. The Company does not have SARs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining the
compensation of the executive officers of our company. The members of the
Compensation Committee for the fiscal year ended March 31, 2001 were James L.
Heppell (Chair), Gordon J. Politeski, and Gordon Blankstein, Grant W. Denison,
Jr., and Tazdin Esmail. No member of the Compensation Committee is a former or
current officer or employee of the Company. No officers of the Company serve or
have ever served on the board of directors or compensation committees of
entities at which board members of the Company's board or Compensation Committee
serve or have served as officers.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation programs of our company are designed to reward
performance and to be competitive with the compensation agreements of other
biomedical companies. The Compensation Committee of the Board of Directors of
our company evaluates each executive officer position to establish skill
requirements and levels of responsibility The Compensation Committee, after
referring to information from other corporations and public data, determines the
compensation for the executive officers.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets out stock options and stock appreciation rights
granted to each named Executive Officer during the fiscal year ended March 31,
2001:
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE AT ASSUMED
UNDERLYING OPTIONS/SARS ANNUAL RATES OF STOCK
OPTIONS/SARS GRANTED TO EXERCISE OR PRICE APPRECIATION
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM
NAME (#)(1) FISCAL YEAR(2) (U.S.$/SECURITY) DATE 5%($) 10%($)
---------------------- ------------- -------------- ---------------- ---------- ---------- ----------
Martin Nash(3) ....... 2,000(4) * 1.50 08/24/2010 1,887 4,781
100,000(5) 9.5% 1.25 11/09/2010 78,612 199,218
Terry Gibson ......... 100,000(6) 9.5% 1.44 08/14/2010 90,561 229,499
George M. Gill ....... 2,000(4) * 1.50 08/24/2010 1,887 4,781
James C. Lierman ..... --0-- -- -- -- -- --
----------
* less than 1%
(1) We do not have Stock Appreciation Rights. All noted securities are options.
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(2) We granted a total of 1,055,000 options to our employees in the fiscal year
ended March 31, 2001.
(3) An additional grant of 50,000 options, the vesting of which was contingent
upon the achievement of certain performance objectives, was cancelled
before the end of the fiscal year since the performance objectives were not
met. This grant is not included in the table. Mr. Nash concluded his
service as President and Chief Executive Officer on May 14, 2001.
(4) 100% of such options vested upon the date of grant.
(5) 50% of such options vested upon the date of grant with the remainder
vesting equally on the first and second anniversary of the date of grant.
(6) 25% of such options vested in the year of grant with the remainder vesting
equally on each of the first, second, and third anniversary of the date of
grant.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
stock options or tandem SARs and freestanding SARs during the last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options and SARs, provided on an aggregated basis:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
SECURITIES VALUE OPTIONS/SARS AT OPTIONS/SARS AT
NAME OF EXECUTIVE ACQUIRED ON REALIZED FISCAL YEAR END(1) FISCAL YEAR END($)
OFFICER EXERCISE ($) (#) EXERCISABLE (#)UNEXERCISABLE ($)EXERCISABLE ($)UNEXERCISABLE
----------------- ----------- -------- --------------- ---------------- -------------- ----------------
Martin Nash(7) ........ --0-- N/A 476,200(3) 175,000(3) (2) (2)
Terry Gibson .......... --0-- N/A 25,000(4) 75,000(4) (2) (2)
George M. Gill ........ --0-- N/A 91,995(5) 70,005(5) (2) (2)
James C. Lierman ...... --0-- N/A 426,975(6) 40,025(6) (2) (2)
----------
(1) We do not have Stock Appreciation Rights. All noted securities are options.
(2) The closing price of our shares of common stock on the AMEX was $.77 on
March 30, 2001. This price was used in the determination of the "Value of
Unexercised In-the-Money Options/SARs at Fiscal Year-end." No stock option
held by a named executive was "in the money" on March 31, 2001.
(3) 20,000 options with an exercise price of $1.33; 7,000 options with an
exercise price of $2.19; 25,000 options with an exercise price of $2.55;
45,000 options with an exercise price of $2.78; 25,000 options with an
exercise price of $1.76; 27,200 options with an exercise price of $2.25;
100,000 options with an exercise price of $2.69; 300,000 options with an
exercise price of $4.13; 2,000 options with an exercise price of $1.50; and
100,000 options with an exercise price of $1.25.
(4) 100,000 options with an exercise price of $1.44.
(5) 160,000 options with an exercise price of $2.94 and 2,000 options with an
exercise price of $1.50.
(7) 250,000 options with an exercise price of $1.12; 10,000 options with an
exercise price of $2.55; 10,000 options with an exercise price of $2.78;
20,000 options with an exercise price of $2.12; 27,000 options with an
exercise price of $2.25; 100,000 options with an exercise price of $2.69;
50,000 options with an exercise price of $2.94.
(8) Mr. Nash concluded his service as President and Chief Executive Officer on
May 14, 2001.
COMPENSATION OF DIRECTORS
Outside directors of the Company are paid a fee of $1,000 per day for
each board or committee meeting a director attends in person; a director
participating telephonically is paid $500 per day for each such meeting. In
addition, each of the outside directors may receive an annual grant of an option
to purchase the Company's common shares. In the last completed fiscal year, the
outside directors were granted options to purchase shares of the Company's
common stock in lieu of receiving the above fees. In addition grants were made
to new directors joining the board. Inside directors do not receive separate
compensation for their participation in board or committee meetings. The Company
pays all reasonable expenses associated with directors' attendance at, and
participation in, board and committee meetings, and other Company business to
which a director attends.
As described in Note 17 to the Consolidated Financial Statements, the
Company incurred legal fees charged by the law firm of Catalyst Corporate
Finance Lawyers in Vancouver, British Columbia, Canada, in the amount of
$239,225 in the year ended March 31, 2001. James L. Heppell, a partner of that
law firm, is the Chairman of the Board of Directors of the Company. The Company
also incurred accounting and administrative fees charged by Wood & Associates of
Vancouver, British Columbia, Canada, in the amount of $28,780 in the year ended
March 31, 2001. Suzanne Wood, the Principal of Wood & Associates, is a Director
of the Company.
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PERFORMANCE GRAPHS
TSE 300 COMPOSITE INDEX
The following graph compares the monthly relative returns a shareholder
of common shares of the Company would have versus the TSE 300 Composite Index,
assuming a $100 investment was made on December 31, 1995. The TSE 300 Index
represents 300 of the largest traded companies in Canada.
[PERFORMANCE GRAPH]
-----------------------------------------------------------------------------------------------------
December 31 1995 1996 1997 1998 1999 2000
-----------------------------------------------------------------------------------------------------
Company 100 190.91 140.91 229.55 204.55 59.09
-----------------------------------------------------------------------------------------------------
TSE 300 Index 100 125.74 142.13 137.60 178.50 189.53
-----------------------------------------------------------------------------------------------------
AMEX COMPOSITE INDEX
The following graph compares the monthly relative returns a shareholder
of the Company would have versus the AMEX Composite Index, assuming a $100
investment was made on December 31, 1995. The AMEX Index represents all
AMEX-listed companies. The AMEX Composite Index started on December 29, 1995.
[PERFORMANCE GRAPH]
-----------------------------------------------------------------------------------------------------
December 31 1995 1996 1997 1998 1999 2000
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-----------------------------------------------------------------------------------------------------
Company 100.00 190.91 140.91 229.55 204.55 59.09
-----------------------------------------------------------------------------------------------------
AMEX Index 100.00 104.51 130.47 141.13 169.07 179.52
-----------------------------------------------------------------------------------------------------
RUSSELL 2000 INDEX
The following graph compares the monthly relative returns a shareholder
of common shares of the Company would have versus the Russell 2000 Index,
assuming a $100 investment was made on December 31, 1995. The Russell Index is
comprised of the 2,000 smallest companies listed on the Chicago Board of
Exchange.
[PERFORMANCE GRAPH]
-----------------------------------------------------------------------------------------------------
December 31 1995 1996 1997 1998 1999 2000
-----------------------------------------------------------------------------------------------------
Company 100 190.91 140.91 229.55 204.55 59.09
-----------------------------------------------------------------------------------------------------
Russell 2000 100 115.26 144.98 150.45 169.39 168.31
-----------------------------------------------------------------------------------------------------
S & P SUPER CAP BIOTECHNOLOGY INDEX
The following graph compares the monthly relative returns a shareholder
of common shares of the Company would have versus the S & P Super Cap
Biotechnology Index, assuming a $100 investment was made on December 31, 1996.
The S & P Super Cap Biotechnology Index started on July 1, 1996 and is comprised
of 16 biotechnology firms culled from the S & P Super Cap Index.
[PERFORMANCE GRAPH]
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-----------------------------------------------------------------------------------------------------
December 31 1996 1997 1998 1999 2000
-----------------------------------------------------------------------------------------------------
Company 100.00 73.81 120.24 107.14 30.95
-----------------------------------------------------------------------------------------------------
S & P Super Cap Index 100.00 99.84 178.67 344.06 416.51
-----------------------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 10, 2001 with
respect to (i) each stockholder known to us to be the beneficial owner of more
than five percent (5%) of the outstanding shares of common stock of our company,
(ii) each director, (iii) each currently Named Executive Officer and (iv) all
directors and currently Named Executive Officers of our company as a group.
Except as set forth below, each of the named persons and members of the group
has sole voting and investment power with respect to the shares shown.
AMOUNT AND NATURE OF PERCENT OF CLASS OF
BENEFICIAL OWNERSHIP OF SHARES OF COMMON
BENEFICIAL OWNER OF SHARES OF COMMON STOCK(1) SHARES OF COMMON STOCK(2) STOCK(2)
--------------------------------------------- ------------------------- -------------------
Foreign & Colonial Bank ........................... 3,450,000 10.22%
The Exchange House
Primrose Street
London, EC2A2NY
Lois J. Crandell .................................. 3,243,788(3) 9.43%
Gunter A. Hofmann ................................. 3,243,788(4) 9.43%
Park Place Capital Limited ........................ 2,865,100 8.49%
25 St. James Street
London, England SW1A 1HA
Johnson & Johnson Development Corporation ......... 2,242,611 6.64%
One Johnson & Johnson
Plaza, New Brunswick, New Jersey
Smallcap World Fund Inc. .......................... 2,090,000 6.19%
333 South Hope Street
55th Floor
Los Angeles, CA 90071
Martin Nash ....................................... 913,661(5) 2.67%
James L. Heppell .................................. 130,500(6) *
Suzanne L. Wood ................................... 147,500(7) *
Gordon J. Politeski 135,000(8) *
Gordon Blankstein ................................. 60,000(9) *
Felix Theeuwes .................................... 157,000(10) *
Grant W. Denison, Jr. ............................. 25,000(11) *
Tazdin Esmail ..................................... 60,000(12) *
Mervyn J. McCulloch ............................... 18,750(13) *
Terry Gibson ...................................... 25,000(14) *
George M. Gill .................................... 105,327(15) *
37
40
Babak Nemati ...................................... 27,000(16) *
All Executive Officers and Directors as a group ... 1,804,738(17) 5.16%
(12 persons)
----------
* less than 1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders. Except as shown otherwise in the table, the address
of each stockholder listed is in care of our company at 11199 Sorrento
Valley Rd., San Diego, California 92121.
(2) Except as otherwise indicated in the footnotes of this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common
stock. Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options or warrants
exercisable within 60 days of May 10, 2001 are deemed outstanding for
computing the percentage of the person or entity holding such options or
warrants but are not deemed outstanding for computing the percentage of any
other person. Percentage of beneficial ownership is based upon 33,756,718
shares of our common stock outstanding as of May 10, 2001.
(3) Includes 309,825 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001. Also includes 2,453,899 shares
and options owned by Gunter A. Hofmann, Ms. Crandell's husband. Ms.
Crandell disclaims beneficial ownership of Dr. Hofmann's shares.
(4) Includes 337,200 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001. Also includes 788,889 shares
and options owned by Lois J. Crandell, Dr. Hofmann's wife. Dr. Hofmann
disclaims beneficial ownership of Ms. Crandell's shares.
(5) Includes 456,200 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001. Mr. Nash concluded his service
as President and Chief Executive Officer on May 14, 2001.
(6) Includes 110,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001, 1,000 shares owned by Free
Spirit Investment Ltd., which is owned 50% by Mr. Heppell and 50% by his
wife and 200 shares owned by Full Moon Law Corporation, which is also owned
50% by Mr. Heppell and 50% by his wife.
(7) Includes 120,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(8) Includes 135,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(9) Includes 60,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(10) Includes 85,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(11) Includes 25,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(12) Includes 60,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(13) Includes 18,750 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(14) Includes 25,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(15) Includes 105,327 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001
(16) Includes 27,000 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
(17) Includes 1,227,277 shares of common stock issuable pursuant to options
exercisable within 60 days of May 10, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Note 17 to the Financial Statements, the Company
incurred legal fees charged by the law firm of Catalyst Corporate Finance
Lawyers in Vancouver, British Columbia, Canada, in the amount of $239,225 in the
year ended March 31, 2001. James L. Heppell, a partner of that law firm, is the
Chairman of the Board of Directors of the Company.
The Company also incurred accounting and administrative fees charged by
Wood & Associates of Vancouver, British Columbia, Canada, in the amount of
$28,780 in the year ended March 31, 2001. Suzanne Wood, the Principal of Wood &
Associates, is a Director of the Company.
On December 6, 1999, the Company entered into Separation Agreements with
each of Gunter Hofmann, Ph.D., the former Chief Scientific Officer and Chairman
of the Board, and Lois Crandell, the former President and Chief Executive
Officer. Pursuant to the terms of the Separation Agreement with Dr. Hofmann,
during the fiscal year ended March 31, 2001, the Company paid $170,445 of
severance and other termination payments to, or on behalf of,
38
41
Dr. Hofmann. Pursuant to the terms of the Separation Agreement with Ms.
Crandell, during the fiscal year ended March 31, 2001, the Company paid $115,935
of severance and other termination payments to, or on behalf of, Ms. Crandell.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this Annual Report on
Form 10-K.
(a)(2) Index to Financial Statement Schedules
Apart from the schedule below, all schedules are omitted because they
are not required, are not applicable, or the information is included in the
Financial Statements or Notes thereto appearing elsewhere in this Annual Report
on Form 10-K.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
GENETRONICS BIOMEDICAL LTD
Additions
--------------------------------------------
Balance at Charged Charged to Balance at
Beginning of to Costs Other Accounts Deductions End of
Description Period and Expenses (Describe) (Describe) Period
----------- ----------- ------------ -------------- ---------- ----------
YEAR ENDED MARCH 31, 2001
Reserves and allowances deducted
from asset Accounts:
Allowance for uncollectible accounts $ 54,925 $ (12,888) -- -- $ 42,037
Allowance for obsolescence $ 88,437 $ 108,522 -- -- $ 196,959
--
YEAR ENDED MARCH 31, 2000
Reserves and allowances deducted from
asset Accounts:
Allowance for uncollectible accounts $ 19,685 $ 43,149 -- $7,909(1) $ 54,925
Allowance for obsolescence $ 22,817 $ 65,620 -- -- $ 88,437
YEAR ENDED MARCH 31, 1999
Reserves and allowances deducted from
asset Accounts:
Allowance for uncollectible accounts $ 36,500 $ 7,472 -- $24,287(1) $ 19,685
Allowance for obsolescence $ 39,923 $ 10,976 -- $28,082(2) $ 22,817
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory Scrapped.
(a)(3) Index to Exhibits See Index to Exhibits beginning below.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
The following management compensatory plans and arrangements are
required to be filed as exhibits to this Report on Form 10-K pursuant to Item
14(c):
Exhibit Index
39
42
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2.1 Plan of Reorganization(13)
3.1 Articles of Incorporation(1)
3.2 Memorandum of the Registrant, as altered by Special
Resolution filed August 4, 1999(2)
4.3 Shareholders Rights Agreement dated June 20, 1997 by and
between the Registrant and Montreal Trust Company of Canada,
as amended on August 21, 1997(2)
10.1 1995 Stock Option Plan, as amended(3)
10.2 Forms of Incentive and Nonstatutory Stock Option Agreements
used in connection with the 1995 Stock Option Plan(3)
10.3 Amended 1997 Stock Option Plan(3)
10.4 Forms of Incentive and Nonstatutory Stock Option Agreements
used in connection with the 1997 Stock Option Plan(3)
10.5 Form of Stock Option Agreement used in connection with an
option grant outside of either of the stock option plans(3)
10.6 2000 Stock Option Plan(12)
10.7 Forms of Incentive and Nonstatutory Stock Option Agreements
used in connection with the 2000 Stock Option Plan(12)
10.8 Employment Agreement dated January 9, 1995, Amendment No. 1
dated January 9, 1996 and Amendment No. 2 dated March 1,
1997 between the Registrant and Martin Nash(1)
10.9 Amendment Number 3 dated January 15, 1999 to Employment
Agreement dated January 9, 1995, as amended, between the
Registrant and Martin Nash(4)
10.10 Lease Agreement by and between the Registrant and Nexus
Sorrento Glen LLC dated August 26, 1999(6)
10.11 Stock Purchase Agreement dated October 6, 1998 by and
between the Registrant and Johnson & Johnson Development
Corporation(4)
10.12 Agency Agreement -- Special Warrant Private Placement dated
June 8, 1999 by and between the Registrant and Canaccord
International Corporation(5)
10.13 Research and Option Agreement dated November 2, 1999 by and
between the Registrant and Boehringer Ingelheim
International GMBH(7)
10.14 Termination of Employment Agreement dated December 6, 1999
by and between the Registrant and Lois J. Crandell(7)
10.15 Consulting Services Agreement dated December 6, 1999 by and
between the Registrant and Lois J. Crandell(7)
10.16 Termination of Employment Agreement dated December 6, 1999
by and between the Registrant and Gunter A. Hofmann(7)
10.17 Consulting Services Agreement dated December 6, 1999 by and
between the Registrant and Gunter A. Hofmann(7)
10.18 First Amendment to Agreement Concerning Termination of
Employment of Lois J. Crandell dated May 24, 2000 by and
between the Registrant and Lois J. Crandell(8)
10.19 First Amendment to Consulting Services Agreement dated May
24, 2000 by and between the Registrant and Lois J.
Crandell(8)
10.20 First Amendment to Agreement Concerning Termination of
Employment of Gunter A. Hofmann dated May 24, 2000 by and
between the Registrant and Gunter A. Hofmann(8)
10.21 First Amendment to Consulting Services Agreement dated May
24, 2000 by and between the Registrant and Gunter A.
Hofmann(8)
10.22 Distribution Agreement Effective April 1, 2000 by and
between the Company and Merck Eurolab GMBH(9)+
10.23 Agreement Concerning Termination of Employment of James
Lierman dated September 11, 2000
40
43
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
by and between the Registrant and James Lierman(10)+
10.24 License Agreement dated September 20, 2000 by and between
the Registrant and the University of South Florida Research
Foundation, Inc.(10)+
10.25 Warrant to Purchase Common Stock, dated September 15, 2000
by and between the Registrant and the University of South
Florida Research Foundation(10)+
10.26 Warrant to Purchase Common Stock, dated September 15, 2000
by and between the Registrant and Dr. Richard Gilbert(10)+
10.27 Warrant to Purchase Common Stock, dated September 15, 2000
by and between the Registrant and Dr. Richard Heller(10)+
10.28 Warrant to Purchase Common Stock, dated September 15, 2000
by and between the Registrant and Dr. Mark Jaroszeski(10)+
10.29 Distributorship Agreement dated December 1, 2000 by and
between the Registrant and Fisher Scientific Company LLC(11)+
21.1 Subsidiaries of the Registrant(8)
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney. Reference is made to page headed
"Signatures"
+ Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(1) Filed as an exhibit to Registrant's Form 20-F for the year ended February
28, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Form S-1 on October 4, 1999 and
incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Form S-8 on September 1, 1999 and
incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 10-K for the period ended March
31, 1999 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended June
30, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended
December 31, 1999 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Form 10-K for the year ended March 31,
2000 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended June
30, 2000 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended
December 31, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Form S-8 on April 2, 2001 and
incorporated herein by reference.
(13) Filed as an exhibit to Registrant's Form S-4 on April 9, 2001 and
incorporated herein by reference.
41
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on the 14th day of May , 2001.
Genetronics Biomedical Ltd.
By: /s/ Grant W. Denison, Jr.
--------------------------------------
Grant W. Denison, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Grant W. Denison, Jr.. and Mervyn McCulloch, or
any of them, his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Grant W. Denison, Jr. President, Chief Executive Officer, Director May 14, 2001
--------------------------------------- (Principal Executive Officer)
Grant Denison, Jr.
/s/ Mervyn J. McCulloch Chief Financial Officer (Principal May 14, 2001
--------------------------------------- Financial and Accounting Officer)
Mervyn J. McCulloch
/s/ James L. Heppell Director May 14, 2001
---------------------------------------
James L. Heppell
/s/ Gordon J. Politeski Director May 14, 2001
---------------------------------------
Gordon J. Politeski
/s/ Gordon Blankstein Director May 14, 2001
---------------------------------------
Gordon Blankstein
/s/ Tazdin Esmail Director May 14, 2001
---------------------------------------
Tazdin Esmail
42
45
GENETRONICS BIOMEDICAL LTD.
(in United States dollars)
Index to Financial Statements
The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-2 of this Annual Report on Form 10-K.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets as of March 31, 2001 and March 31, 2000...... F-3
Consolidated Statements of Loss and Deficit for the years ended
March 31, 2001, March 31, 2000 and March 31, 1999........................ F-4
Consolidated Statements of Cash Flows for the years ended March 31,
2001, March 31, 2000, and March 31, 1999................................. F-5
Notes to Consolidated Financial Statements............................... F-6
F-1
46
AUDITORS' REPORT
To the Shareholders of
GENETRONICS BIOMEDICAL LTD.
We have audited the consolidated balance sheets of GENETRONICS BIOMEDICAL LTD.
as at March 31, 2001 and 2000 and the consolidated statements of loss and
deficit and cash flows for each of the years in the three year period ended
March 31, 2001. Our audits also included the information as at and for each of
the years in the three year period ended March 31, 2001 included in the
financial statement schedule listed in the Index at Item 14[a]. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years in the three year period ended March 31, 2001 in accordance with Canadian
generally accepted accounting principles. As required by the Company Act
(British Columbia), we report that, in our opinion, these principles have been
applied, except for the change in the method of accounting for income taxes, as
explained in note 4 to the consolidated financial statements, on a basis
consistent with that of the prior years. Also, in our opinion, the information
as at and for each of the years in the three year period ended March 31, 2001,
included in the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Vancouver, Canada,
May 4, 2001 (except as to note 20
which is as of May 14, 2001). /s/ Ernst & Young LLP
Chartered Accountants
F-2
47
GENETRONICS BIOMEDICAL LTD.
Incorporated under the laws of British Columbia
CONSOLIDATED BALANCE SHEETS
As at March 31, (Expressed in U.S. dollars)
2001 2000
$ $
------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents [note 5] 3,721,326 9,742,344
Short-term investments [note 5] 2,804,468 --
Accounts receivable, net of allowance for uncollectible
accounts of $42,037 [2000 - $54,925] [note 6] 903,526 1,120,450
Inventories [note 7] 756,543 611,642
Prepaid expenses and other 61,399 139,423
------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,247,262 11,613,859
------------------------------------------------------------------------------------------------
Fixed assets, net [note 8] 904,026 1,014,811
Other assets, net [note 9] 2,332,826 1,383,634
------------------------------------------------------------------------------------------------
11,484,114 14,012,304
------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued expenses [notes 10, 12 and 17] 1,393,585 1,784,084
Current portion of obligations under capital leases [note 13] 68,931 53,098
Deferred revenue 50,029 268,665
------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,512,545 2,105,847
------------------------------------------------------------------------------------------------
Obligations under capital leases [note 13] 48,532 65,286
Deferred rent 34,901 9,972
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,595,978 2,181,105
------------------------------------------------------------------------------------------------
Commitments and contingencies [note 13]
SHAREHOLDERS' EQUITY
Share capital [note 11[b]] 47,639,454 30,491,793
Additional paid in capital [note 11[b]] 589,718 35,768
Special warrants [note 11[c]] -- 11,002,992
Cumulative translation adjustment (102,238) (100,911)
Deficit (38,238,798) (29,598,443)
------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,888,136 11,831,199
------------------------------------------------------------------------------------------------
11,484,114 14,012,304
------------------------------------------------------------------------------------------------
See accompanying notes
On behalf of the Board:
Director Director
F-3
48
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF
LOSS AND DEFICIT
(Expressed in U.S. dollars)
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
----------------------------------------------------------------------------------------------------
REVENUE
Net sales [note 6] 4,452,939 4,134,436 3,434,105
License fee and milestone payments [note 6] 83,333 416,667 4,500,000
Government grants 101,086 334,901 354,135
Revenues under collaborative research
and development arrangements 459,711 191,335 33,048
Interest income 443,629 556,193 300,911
----------------------------------------------------------------------------------------------------
5,540,698 5,633,532 8,622,199
----------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 1,925,118 2,023,899 1,638,635
Research and development 6,436,377 6,977,220 8,086,959
Selling, general and administrative 5,732,725 5,610,830 5,481,051
Restructuring charges [note 12] -- 597,183 --
Interest expense 20,380 24,342 19,391
Foreign exchange loss 66,453 -- --
----------------------------------------------------------------------------------------------------
14,181,053 15,233,474 15,226,036
----------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR (8,640,355) (9,599,942) (6,603,837)
Deficit, beginning of year (29,598,443) (19,998,501) (13,394,664)
----------------------------------------------------------------------------------------------------
DEFICIT, END OF YEAR (38,238,798) (29,598,443) (19,998,501)
----------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE - BASIC AND FULLY DILUTED (0.31) (0.43) (0.33)
----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 27,648,854 22,107,190 20,272,801
----------------------------------------------------------------------------------------------------
See accompanying notes
F-4
49
GENETRONICS BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the year (8,640,355) (9,599,942) (6,603,837)
Items not involving cash:
Depreciation and amortization 655,497 566,358 410,268
Provision for (recovery of) uncollectible accounts (12,888) 43,149 7,472
Provision for inventory obsolescence 108,522 65,620 10,976
Write-down of fixed assets 17,156 -- --
Loss on disposal of fixed assets -- -- 18,986
Write-down of other assets 31,360 -- --
Deferred rent 24,929 408 (14,345)
Deferred revenue (218,636) 268,665 --
Changes in non-cash working capital items:
Accounts receivable 229,812 (386,951) (280,393)
Inventories (253,423) (21,356) (271,792)
Prepaid expenses and other 78,024 (133,328) (1,141)
Accounts payable and accrued expenses (390,499) 406,641 404,906
----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (8,370,501) (8,790,736) (6,318,900)
----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of short-term investments (2,804,468) -- --
Purchase of fixed assets (263,970) (289,511) (414,186)
Increase in other assets (320,587) (495,581) (287,771)
----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (3,389,025) (785,092) (701,957)
----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments on obligations under capital leases (58,334) (45,892) (24,016)
Proceeds from issuance of Special Warrants, net of issue costs -- 11,155,648 --
Proceeds from issuance of common shares, net of issue costs 5,798,169 2,017,042 6,795,461
----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,739,835 13,126,798 6,771,445
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,327) 2,090 (83,294)
----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,021,018) 3,553,060 (332,706)
Cash and cash equivalents, beginning of year 9,742,344 6,189,284 6,521,990
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 3,721,326 9,742,344 6,189,284
----------------------------------------------------------------------------------------------------------------------
See accompanying notes
F-5
50
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
1. NATURE OF BUSINESS
Genetronics Biomedical Ltd. ("Company") was incorporated on August 8, 1979 under
the laws of British Columbia. The Company carries out its business through its
United States wholly-owned subsidiary, Genetronics, Inc., that was incorporated
in California on June 29, 1983. Through its BTX Instrument Division, the Company
develops, manufactures, and markets electroporation instrumentation and
accessories used by scientists and researchers to perform genetic engineering
techniques, such as cell fusion, gene transfer, cell membrane research and
genetic mapping in research laboratories worldwide. Through its Drug and Gene
Delivery Division, the Company is developing drug delivery systems which are
designed to use electroporation to enhance drug or gene delivery in the areas of
oncology, dermatology, gene therapy, cardiology and transdermal drug delivery.
The Company sells the majority of its BTX products to customers in the United
States, Europe, and East Asia.
The Company has financed its cash requirements primarily from share issuances,
payments from collaborators and government grants. The Company's ability to
realize the carrying value of its assets is dependent on successfully bringing
its technologies to the market and achieving future profitable operations, the
outcome of which cannot be predicted at this time. It will be necessary for the
Company to raise additional funds for the continuing development of its
technologies.
2. ACCOUNTING POLICIES
The Company prepares its accounts in accordance with Canadian generally accepted
accounting principles. A reconciliation of amounts presented in accordance with
United States generally accepted accounting principles is detailed in note 19.
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements.
CONSOLIDATION
These consolidated financial statements include the accounts of Genetronics
Biomedical Ltd. and its wholly-owned subsidiary, Genetronics, Inc., a private
company incorporated in the state of California, USA. Effective May 2000,
Genetronics Inc. closed the operations of its wholly owned subsidiary
Genetronics SA, a company incorporated in France and subsequently sold its
investment in Genetronics SA for nominal consideration to Geser SA, a company
owned by the former General Manager of Genetronics SA. Significant intercompany
accounts and transactions have been eliminated on consolidation.
F-6
51
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
2. ACCOUNTING POLICIES (CONT'D.)
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts recorded in the consolidated financial
statements. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Through December 31, 2000, the functional currency of the Company was the
Canadian dollar, while the reporting currency in the consolidated financial
statements was the U.S. dollar. Assets and liabilities were translated into U.S.
dollars using current exchange rates in effect at the balance sheet date.
Revenue and expense accounts were translated using the weighted average exchange
rate during the year. Gains and losses resulting from this process were recorded
in shareholders' equity as an adjustment to the cumulative translation
adjustment account.
Effective January 1, 2001, due to a change in circumstances, the functional
currency of the Company changed to the U.S. dollar. Accordingly, non-U.S.
monetary assets and liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Revenue and expenses are translated
at the average exchange rate for the year. Gains or losses arising on this
foreign currency translation are recorded in net loss.
The accounts of the Company's French subsidiary, an integrated entity to the
Company's U.S. subsidiary, were recorded in French francs and translated into
U.S. dollars using the temporal method. Under this method, monetary assets and
liabilities were translated at the year-end exchange rates. Non-monetary assets
and liabilities were translated using historical rates of exchange. Revenues and
expenses were translated at the rates of exchange prevailing on the dates such
items are recognized in earnings. Exchange gains and losses were included in
income for the year. The effect on the statement of loss of transaction gains
and losses was insignificant.
F-7
52
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
2. ACCOUNTING POLICIES (CONT'D.)
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of 90 days
or less, when purchased, to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments are considered available for sale and are carried at the
lower of cost or market. In the event there has been a decline in value that is
other than temporary, the investment will be written down to recognize the loss.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) and
replacement cost for raw materials and net realizable value for finished goods
and work in process. Cost includes materials, direct labor and applicable
overhead.
FIXED ASSETS
Fixed assets are stated at cost and depreciated over the estimated useful lives
of the assets (five to seven years) using the straight-line method. Leasehold
improvements and equipment under capital leases are being depreciated over the
shorter of the estimated useful lives of the assets or the term of the lease.
Depreciation of leased assets is included in depreciation and amortization.
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.
F-8
53
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
2. ACCOUNTING POLICIES (CONT'D.)
FUTURE INCOME TAXES
The Company accounts for income taxes using the liability method of tax
allocation. Future income taxes are recognized for the future income tax
consequences attributable to differences between the carrying values of assets
and liabilities and their respective income tax bases. Future income tax assets
and liabilities are measured using substantively enacted income tax rates
expected to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The effect on future income tax assets
and liabilities of a change in rates is included in earnings in the period that
includes the enactment date. Future income tax assets are recorded in the
consolidated financial statements if realization is considered more likely than
not.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the year
ended March 31, 2001 was $198,329 [2000 - $225,035; 1999 - $173,600].
GOVERNMENT GRANTS
The Company receives non-refundable grants under available government programs.
Government grants towards current expenditures are recorded as revenue when
there is reasonable assurance that the Company has complied with all conditions
necessary to receive the grants and collectibility is reasonably assured.
REVENUE RECOGNITION
Sales are recognized upon shipment of products to its distributors if a signed
contract exists, the sales price is fixed and determinable, collection of the
resulting receivables is probable and any uncertainties with regard to customer
acceptance are insignificant. Sales are recorded net of discounts and sales
returns. A provision for the estimated warranty expense is established by a
charge against operations at the time the product is sold.
Milestone payments are recognized according to the terms of the contract as the
milestones are achieved, to the extent that no performance obligations remain.
Initial fees and license fees are recognized when the Company has fulfilled the
obligation in accordance with the provisions of the contractual arrangement.
F-9
54
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
2. ACCOUNTING POLICIES (CONT'D.)
Revenues under collaborative research and development arrangements which are
nonrefundable are recorded as revenue as the related research expenses are
incurred pursuant to the terms of the agreement and provided collectibility is
reasonably assured.
Funds received under contractual arrangements in advance of meeting the criteria
for revenue recognition are deferred upon receipt and recognized as revenue over
the term of the contract, as they are earned.
SHIPPING AND HANDLING COSTS
Costs incurred to ship the Company's goods to the buyer are charged to cost of
sales as incurred. Amounts billed to the customer as a reimbursement for
shipping and handling costs are recorded in net sales as the related revenue is
recognized.
LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing the net loss for the year by
the weighted average number of common shares outstanding during the year. Fully
diluted loss per common share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted to common stock. Since the effect of the assumed exercise of common
stock options and other convertible securities was anti-dilutive, basic and
fully diluted loss per common share are the same.
RESEARCH AND DEVELOPMENT
Research costs are expensed in the period incurred. Development costs are
expensed in the period incurred unless the Company believes a development
project meets generally accepted accounting criteria for deferral and
amortization.
LEASES
Leases have been classified as either capital or operating leases. Leases which
transfer substantially all of the benefits and risks incidental to the ownership
of assets are accounted for as if there was an acquisition of an asset and
incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are expensed as
incurred.
F-10
55
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
2. ACCOUNTING POLICIES (CONT'D.)
STOCK BASED COMPENSATION
The Company grants stock options to executive officers, directors, employees and
consultants pursuant to stock option plans as described in note 11. No
compensation is recognized for these plans when common shares or stock options
are issued. Any consideration received on exercise of stock options or the
purchase of stock is credited to share capital. If common shares are
repurchased, the excess or deficiency of the consideration paid over the
carrying amount of the common shares canceled is charged or credited to
additional paid in capital or retained earnings.
3. FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments including cash equivalents,
short-term investments, accounts receivable and accounts payable and accrued
expenses the carrying values approximate fair value due to their short term
nature. The obligations under capital lease bear rates which in management's
opinion approximate the current interest rate and therefore approximate fair
value.
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective April 1, 2000, the Company adopted the new recommendations of The
Canadian Institute of Chartered Accountants with respect to accounting for
income taxes. The change has been applied retroactively, and as permitted, the
comparative consolidated financial statements have not been restated. The change
in accounting policy did not result in any adjustment in the year ended March
31, 2001 and as at April 1, 2000. Before the adoption of the new
recommendations, income tax expense was determined using the deferral method of
tax allocation.
F-11
56
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
5. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents include approximately $3,018,819 [2000 - $9,100,768] of
commercial papers and term deposits with an average interest rate of 5.44% at
March 31, 2001 [2000 - 6.08%]. In addition, cash equivalents include amounts
denominated in Cdn dollars aggregating $591,038 (U.S. $374,955) [2000 - Cdn
$103,876 (U.S. $71,119)].
Short-term investments comprise mainly commercial paper and term deposits with
an average interest rate of 5.39% at March 31, 2001 and maturities to June 15,
2001.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company relies on distributors for the sale of its products. For the year
ended March 31, 2001, approximately 39% of sales were through one distributor
[2000 - 28%; 1999 - 24%]. As at March 31, 2001, $316,356 is due from two
distributors which is included in accounts receivable [2000 - $597,330].
Credit is extended based on an evaluation of a customer's financial condition
and generally collateral is not required. To date, credit losses have not been
significant.
By an exclusive license and development agreement dated October 2, 1998, the
Company had granted the rights to its drug delivery technology to make, use and
sell oncology products as defined in the agreement. The agreement was to expire
at the expiration of certain patent rights covering the technology in 2016.
Pursuant to the agreement, during the year ended March 31, 2001, the Company
received license fee and milestone payments from the licensee in the amount of
$83,333 [2000 - $416,667; 1999 - $4,500,000]. On July 26, 2000 the Company
received notice from the licensee that it had elected to exercise its
discretionary right to terminate, without cause, the licensing and development
agreement and the supply agreement entered into with the Company. All rights
previously granted to the licensee were returned to the Company.
F-12
57
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
7. INVENTORIES
2001 2000
$ $
--------------------------------------------------------------------------
Raw materials 564,034 490,926
Work in process 85,006 79,683
Finished goods 304,462 129,470
--------------------------------------------------------------------------
953,502 700,079
Less: allowance for obsolescence (196,959) (88,437)
--------------------------------------------------------------------------
756,543 611,642
--------------------------------------------------------------------------
8. FIXED ASSETS
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------------------------------------------------------------------------------------
2001
Machinery, equipment and office furniture 1,767,009 1,018,103 748,906
Leasehold improvements 435,304 368,078 67,226
Equipment under capital leases 256,788 168,894 87,894
--------------------------------------------------------------------------------------
2,459,101 1,555,075 904,026
--------------------------------------------------------------------------------------
2000
Machinery, equipment and office furniture 1,567,415 765,065 802,350
Leasehold improvements 427,647 301,918 125,729
Equipment under capital leases 199,375 112,643 86,732
--------------------------------------------------------------------------------------
2,194,437 1,179,626 1,014,811
--------------------------------------------------------------------------------------
During the year ended March 31, 2001, the Company wrote off $17,156 of fixed
assets that had no future value [2000 - $nil; 1999 - $nil].
F-13
58
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
9. OTHER ASSETS
2001 2000
$ $
-----------------------------------------------------------------
Patent costs, net 1,471,590 1,350,174
License costs, net 834,792 --
Other 26,444 33,460
-----------------------------------------------------------------
2,332,826 1,383,634
-----------------------------------------------------------------
Patent costs are net of accumulated amortization of $531,015 at March 31, 2001
[2000 - $298,267]. License costs are net of accumulated amortization of $65,658
at March 31, 2001 [2000 - $nil].
During the year ended March 31, 2001, the Company wrote off patent costs of
$31,360 with respect to patents not directly related to the Company's current
focus [2000 - $nil; 1999 - $nil].
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2001 2000
$ $
-----------------------------------------------------------------
Trade accounts payable 907,584 875,646
Accrued compensation 303,615 717,416
Customer deposits 4,192 115,264
Accrued expenses 178,194 75,758
-----------------------------------------------------------------
1,393,585 1,784,084
-----------------------------------------------------------------
F-14
59
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL
[a] AUTHORIZED
100,000,000 common shares without par value
100,000,000 Class A preferred shares without par value
No Class A preferred shares have been issued as at March 31, 2001.
[b] ISSUED AND OUTSTANDING
COMMON SHARES AMOUNT
# $
-----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 19,070,130 21,562,402
For cash
Pursuant to private placement 2,242,611 6,000,000
Pursuant to exercise of stock options 61,525 90,423
Pursuant to exercise of warrants 292,000 830,985
Share issue costs -- (125,947)
-----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 21,666,266 28,357,863
For cash
Pursuant to exercise of stock options 988,542 1,516,239
Pursuant to exercise of Agent's Special Warrants 151,300 500,803
Issued for corporate finance services 30,000 91,890
Issued pursuant to exercise of Special Warrants 23,000 60,766
Cancelled escrow shares [iii] (26,784) (35,768)
-----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 22,832,324 30,491,793
For cash
Pursuant to private placement [i] 6,267,500 5,640,750
Pursuant to exercise of stock options 111,894 249,332
Pursuant to exercise of warrants [note 11[d]] 180,500 597,455
Issued for corporate finance services [i] 50,000 45,000
Issued pursuant to exercise of Special Warrants [note 11[c]] 4,164,500 11,002,992
Issued pursuant to license agreement [ii] 150,000 346,500
Share issue costs -- (734,368)
-----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2001 33,756,718 47,639,454
-----------------------------------------------------------------------------------------------
F-15
60
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL (CONT'D.)
[i] On January 17, 2001, the Company completed a public offering of 6,267,500
common shares at a price of Cdn $1.35 per share for gross proceeds of Cdn
$8,461,125 (U.S. $5,640,750) less expenses of Cdn $1,102,877 (U.S.
$734,368). The Company has also granted the Agent compensation warrants
exercisable until January 16, 2002 to purchase 500,000 common shares, at
Cdn $1.35 per common share. The Company has also issued to the Agent
50,000 common shares as compensation for corporate finance services.
[ii] On September 15, 2000, the Company entered into an exclusive license
agreement with the University of South Florida Research Foundation, Inc.
("USF"), whereby USF granted the Company an exclusive, worldwide license
to USF's rights in patents and patent applications generally related to
needle electrodes ("License Agreement"). These electrodes were jointly
developed by the Company and USF. Pursuant to the License Agreement, the
Company granted USF and its designees warrants to acquire 600,000 common
shares for $2.25 per share until September 14, 2010. Of the total warrants
granted, 300,000 vest at the date of grant and the remainder will vest
upon the achievement of certain milestones. The vested warrants were
valued at $553,950 using the Black-Scholes pricing model and were recorded
as other assets with a credit to additional paid in capital.
In addition, pursuant to the above License Agreement, the Company issued a
total of 150,000 common shares with a fair market value of $346,500 to USF
and its designees for no additional consideration. The fair market value
of the common shares on September 15, 2000 was recorded as other assets
and a credit to share capital.
[iii] During the year ended March 31, 2000, the Company cancelled 26,784 common
shares held in escrow. Accordingly, the weighted average per common share
amount attributed to the cancelled shares of $35,768 has been allocated to
additional paid in capital.
F-16
61
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL (CONT'D.)
[c] SPECIAL WARRANTS
NUMBER OF
SPECIAL WARRANTS AMOUNT
# $
-------------------------------------------------------------------------------
Balance, March 31, 1998 and 1999 -- --
Issuance of Special Warrants 4,187,500 12,562,500
Share issue costs -- (1,498,742)
Converted into common shares (23,000) (60,766)
-------------------------------------------------------------------------------
Balance, March 31, 2000 4,164,500 11,002,992
Converted into common shares (4,164,500) (11,002,992)
-------------------------------------------------------------------------------
Balance, March 31, 2001 -- --
-------------------------------------------------------------------------------
Pursuant to an Agency Agreement dated June 16, 1999, the Company issued
4,187,500 Special Warrants at $3.00 each for total consideration of $12,562,500
(Cdn. $18,259,594) before deducting the agent's commission of $1,005,000 (Cdn.
$1,460,768) and other issue costs. Each Special Warrant entitles the holder to
receive, at no additional cost, one common share of the Company. During the year
ended March 31, 2001, the Company issued 4,164,500 [2000 - 23,000] common shares
pursuant to the exercise and conversion of these Special Warrants.
F-17
62
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL (CONT'D.)
[d] WARRANTS
In connection with the issuance of 1,955,000 common shares pursuant to an agency
agreement dated April 15, 1997, the Company granted the agent warrants to
acquire 200,000 common shares for Cdn. $4.30 per share until May 26, 1998.
During the year ended March 31, 1999, the Company amended the terms of the
warrants by increasing the exercise price to Cdn. $4.73 and extending the expiry
date to November 30, 1998. These warrants were exercised during the year ended
March 31, 1999.
In connection with the issuance of 4,187,500 Special Warrants pursuant to an
agency agreement dated June 16, 1999, the Company issued to the Agent's nominee
for no additional consideration, 30,000 common shares and 418,750 Special
Warrants exercisable, for no additional consideration, into 418,750 share
purchase warrants, which were exercisable into 418,750 common shares at a price
of $3.31 per share on or before June 16, 2000. During the year ended March 31,
2001, the Company issued 180,500 [2000 - 151,300] common shares pursuant to the
exercise of 180,500 [2000 - 151,300] of these share purchase warrants. The
unexercised balance of 86,950 share purchase warrants expired.
[e] STOCK OPTIONS
The Company has three stock option plans pursuant to which stock options are
granted to executive officers, directors, employees and consultants.
The 1995 stock option plan (the "1995 Plan") was approved by the shareholders in
1995 and subsequently amended in 1997. The 1995 Plan was suspended by the Board
of Directors in June 1997 and no further options will be granted pursuant to
this plan. As at March 31, 2001, there are 1,203,400 options outstanding
pursuant to the 1995 Plan.
The 1997 stock option plan (the "1997 Plan"), as amended in 1999, was approved
by the shareholders in July 1999. The 1997 Plan was suspended by the Board of
Directors in July 2000 and no further options will be granted pursuant to this
plan. As at March 31, 2001, there are 2,891,050 options outstanding pursuant to
the 1997 Plan.
F-18
63
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL (CONT'D.)
The 2000 Stock Option Plan (the "2000 Plan"), effective July 31, 2000, was
approved by the shareholders on August 7, 2000, pursuant to which 7,400,000
common shares are reserved for issuance to executive officers, directors,
employees and consultants of the Company. The 2000 Plan supercedes all previous
stock option plans. At March 31, 2001, 1,165,300 common shares are available for
future grants and 1,365,250 stock options are outstanding pursuant to the 2000
Plan. The options available for issuance under the 2000 Plan generally have a
term of ten years and vest over a period of three years. The Plan will terminate
on July 30, 2010.
During the year ended March 31, 2000, the Company amended the terms of certain
stock options to officers of the Company pursuant to the agreements in note 12,
by accelerating the remaining vesting period of 200,000 stock options at an
exercise price of $2.95 from 25% each year to 100% immediately.
The following table summarizes the stock options outstanding at March 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
NUMBER OF NUMBER OF
OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, REMAINING EXERCISE AT MARCH 31, EXERCISE
PRICES 2001 CONTRACTUAL LIFE PRICE 2001 PRICE
$ # (YEARS) $ # $
----------------------------------------------------------------------------------------------------
0.84 - 1.25 952,250 8.33 years 1.09 520,375 1.05
1.31 - 1.50 886,000 6.17 years 1.37 717,600 1.37
1.66 - 2.55 1,050,250 5.29 years 2.18 912,374 2.21
2.65 - 3.75 2,041,200 5.26 years 2.96 1,738,271 2.95
4.00 - 5.50 530,000 8.42 years 4.34 306,000 4.26
----------------------------------------------------------------------------------------------------
5,459,700 6.25 years 2.31 4,194,620 2.38
----------------------------------------------------------------------------------------------------
F-19
64
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
11. SHARE CAPITAL (CONT'D.)
Stock option transactions for the year and the number of stock options
outstanding are summarized as follows:
NO. OF COMMON WEIGHTED AVERAGE
SHARES ISSUABLE EXERCISE PRICE
# $
-----------------------------------------------------------------------------------------------------
Balance, March 31, 1998 3,067,050 1.90
Options granted 1,783,736 2.84
Options exercised (61,525) 1.47
Options forfeited (135,125) 2.39
-----------------------------------------------------------------------------------------------------
Balance, March 31, 1999 4,654,136 2.24
Options granted 1,048,200 3.57
Options exercised (988,542) 1.53
Options forfeited (198,250) 2.71
-----------------------------------------------------------------------------------------------------
Balance, March 31, 2000 4,515,544 2.63
Options granted 1,537,000 1.43
Options exercised (111,894) 2.23
Options forfeited (480,950) 2.56
-----------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2001 5,459,700 2.31
-----------------------------------------------------------------------------------------------------
During the year ended March 31, 2001, the Company granted 50,000 stock options
to one of its executive officers with an exercise price of $1.31, which were to
vest upon the achievement of certain performance-based milestones. These options
were forfeited in November 2000 as the milestones were not met.
At March 31, 2001, 147,500 stock options will vest based on the achievement of
various milestones.
SHAREHOLDER RIGHTS PLAN
In 1997, the shareholders approved the adoption of a Shareholder Rights Plan
(the "Rights Plan") to protect the Company's shareholders from unfair, abusive
or coercive take-over strategies. Under the Rights Plan, holders of common
shares are entitled to one share purchase right ("Right") for each common share
held. If any person or group makes a take-over bid, other than a bid permitted
under the plan or acquires 20% or more of the Company's outstanding common
shares without complying with the Rights Plan, each Right entitles the
registered holder thereof to purchase, in effect, $20 equivalent of common
shares of the Company at 50% of the prevailing market price.
F-20
65
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
12. RESTRUCTURING CHARGES
During the year ended March 31, 2000, the Company undertook a review of its
operating structure to identify opportunities to improve operating
effectiveness. As a result of this review, certain staffing changes occurred and
in December 1999, the Company entered into termination agreements with two of
its senior executives. In accordance with the staffing changes and the terms of
the termination agreements, the Company has accrued and recorded severance costs
and certain benefits amounting to $597,183 for the year ended March 31, 2000. As
at March 31, 2001, $10,591 [2000 - $288,042] was included in accounts payable
and accrued expenses relating to these restructuring charges.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
[a] The Company leases its facilities and certain motor vehicles under
operating lease agreements which expire up to 2006. The facilities lease
agreements require the Company to pay maintenance costs. Rent expense under
operating leases was as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------
Rentals 501,949 388,524 277,906
--------------------------------------------------------------------------------
At March 31, 2001, future minimum lease payments under non-cancellable
operating leases are as follows:
$
--------------------------------------------------------------------------------
2002 542,000
2003 545,000
2004 547,000
2005 411,000
2006 9,000
--------------------------------------------------------------------------------
2,054,000
--------------------------------------------------------------------------------
F-21
66
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
13. COMMITMENTS AND CONTINGENCIES (CONT'D.)
[b] The Company leases certain office equipment under capital lease
arrangements. At March 31, 2001 future minimum lease payments under
non-cancellable capital leases are as follows:
$
--------------------------------------------------------------------------------
2002 82,889
2003 34,495
2004 19,841
--------------------------------------------------------------------------------
Total minimum lease payments 137,225
Amounts representing interest (approximately 17%) (19,762)
--------------------------------------------------------------------------------
Present value of future minimum lease payments 117,463
Less: current portion of capital lease obligations 68,931
--------------------------------------------------------------------------------
Long-term portion of capital leases 48,532
--------------------------------------------------------------------------------
[c] In accordance with a consulting agreement dated February 10, 2000, the
Company may be required to issue 120,000 warrants to acquire common shares
and pay a fee based on a percentage of future funding upon the occurrence
of certain events as described in the agreement.
[d] Pursuant to the USF license agreement entered into during the year ended
March 31, 2001 [note 11], the Company is responsible for payment of
royalties, based on a percentage of revenue from the licensed product. As
at March 31, 2001, no royalties were payable.
CONTINGENCIES
The Company may, from time to time, be subject to claims and legal proceedings
brought against them in the normal course of business. Such matters are subject
to many uncertainties. Management believes that adequate provisions have been
made in the accounts where required and the ultimate resolution of such
contingencies will not have a material adverse effect on the financial position
of the Company.
F-22
67
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
14. INCOME TAXES
At March 31, 2001, the U.S. subsidiary has U.S. federal and California income
tax net operating loss carryforwards available to reduce taxable income of
future years. The difference between the U.S. federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% limitation
of California loss carryforwards. In addition, the U.S. subsidiary has U.S.
federal and California research tax credit carryforwards available to reduce
taxable income of future years. The California research tax credits of $421,000
may be carried forward indefinitely. The Company has non-capital losses for
Canadian income tax purposes which may be used to reduce future taxable income.
These loss carryforwards and tax credits expire as follows:
U.S. FEDERAL NON-CAPITAL
RESEARCH U.S. FEDERAL CALIFORNIA CANADIAN
TAX CREDITS LOSSES LOSSES LOSSES
$ $ $ $
---------------------------------------------------------------------------------------------------
Year ended March 31,
2002 -- -- 769,000 323,000
2003 -- -- 1,576,000 393,000
2004 -- -- 212,000 602,000
2005 2,000 -- 2,344,000 50,000
2006 6,000 -- 6,263,000 1,223,000
2007 7,000 -- -- 1,006,000
2008 14,000 46,000 -- 1,115,000
2009 14,000 -- -- --
2010 18,000 542,000 -- --
2011 15,000 1,816,000 -- --
2012 58,000 2,947,000 -- --
2013 152,000 6,901,000 -- --
2014 266,000 4,691,000 -- --
2015 -- 7,930,000 -- --
2020 155,000 -- -- --
2021 172,000 9,009,000 -- --
---------------------------------------------------------------------------------------------------
879,000 33,882,000 11,164,000 4,712,000
---------------------------------------------------------------------------------------------------
F-23
68
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
14. INCOME TAXES (CONT'D.)
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
subsidiary's net operating loss and credit carryforwards may be limited because
of a cumulative change in ownership of more than 50% which occurred during 1993
and as a result of the reverse takeover which occurred in 1995. However, the
Company does not believe such limitations will have a material impact upon the
utilization of these carryforwards.
Significant components of the Company's future tax assets as of March 31 are
shown below:
LIABILITY DEFERRAL
METHOD METHOD
2001 2000
$ $
--------------------------------------------------------------------------------
FUTURE TAX ASSETS:
Capitalized research expense 872,000 688,000
Net operating loss carryforwards 11,287,000 10,834,000
Research and development credits 1,177,000 1,042,000
Share issue costs 642,000 854,000
Other 213,000 262,000
--------------------------------------------------------------------------------
Total future tax assets 14,191,000 13,680,000
Valuation allowance (13,344,000) (13,238,000)
--------------------------------------------------------------------------------
Total future tax assets 847,000 442,000
--------------------------------------------------------------------------------
FUTURE TAX LIABILITIES:
Difference between book and tax basis
for patent and license costs (847,000) (442,000)
--------------------------------------------------------------------------------
Total future tax liabilities (847,000) (442,000)
--------------------------------------------------------------------------------
Net future tax assets -- --
--------------------------------------------------------------------------------
The potential income tax benefits relating to the future tax assets have been
recognized in the accounts to the extent their realization meets the
requirements of "more likely than not" under the liability method of tax
allocation. In prior periods the Company had concluded the realization of the
loss carryforwards and tax credits under the deferral method of tax allocation
did not meet the virtual certainty and reasonable assurance test.
F-24
69
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
14. INCOME TAXES (CONT'D.)
The reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense (recovery), using a 45.62% statutory
tax rate, at March 31, is:
2001 2000
$ $
--------------------------------------------------------------------------------------------------
Income taxes at statutory rates (3,942,000) (4,379,000)
Foreign rate differential 146,000 300,000
Losses not recognized (California) 243,000 145,000
Amortization in excess of capital cost allowance for tax (15,000) (137,000)
Research and development costs capitalized for tax 78,000 71,000
Revenue recognized in advance (deferred) for tax purposes (14,000) 154,000
Expenses deferred until paid (298,000) 168,000
Losses not recognized for tax purposes 4,072,000 4,103,000
Non-deductible share issue costs (335,000) (400,000)
Non-deductible expenses 38,000 --
Other 27,000 (25,000)
--------------------------------------------------------------------------------------------------
-- --
--------------------------------------------------------------------------------------------------
F-25
70
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
15. PENSION PLAN
In 1995, the U.S. subsidiary adopted a 401 (k) Profit Sharing Plan covering
substantially all of its employees in the United States. The defined
contribution plan allows the employees to contribute a percentage of their
compensation each year. The Company currently matches 50% of the employees
contribution, up to 6% of annual compensation which is recorded as expense in
the accompanying consolidated statements of loss as incurred. The Company's
contributions are invested in common shares of the Company which are included in
the calculation of loss per common share for the years presented. The pension
expense for the year ended March 31, 2001 was $60,761 [2000 - $87,104; 1999 -
$66,297].
16. SEGMENTED INFORMATION
The Company's reportable business segments include the BTX Instrument Division
and the Drug and Gene Delivery Division. The Company evaluates performance based
on many factors including net results from operations before certain unallocated
costs. The Company does not allocate interest income and expenses and general
and administrative costs to its reportable segments. In addition, total assets
are not allocated to each segment.
The accounting policies of the segments are the same as those described in note
2.
Substantially all of the Company's assets and operations are located in the
United States and predominantly all revenues are generated, based on the
location of origin, in the United States.
F-26
71
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
16. SEGMENTED INFORMATION (CONT'D.)
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
--------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2001
Reportable segment net sales 4,452,939 -- -- 4,452,939
Other reportable segment revenue -- 644,130 -- 644,130
Interest income -- -- 443,629 443,629
--------------------------------------------------------------------------------------------------
Total revenue 4,452,939 644,130 443,629 5,540,698
--------------------------------------------------------------------------------------------------
Reportable segment cost of sales (1,925,118) -- -- (1,925,118)
Other reportable segment expenses (1,856,918) (5,810,558) -- (7,667,476)
General and administrative -- -- (4,568,079) (4,568,079)
Interest expense -- -- (20,380) (20,380)
--------------------------------------------------------------------------------------------------
Net income (loss) 670,903 (5,166,428) (4,144,830) (8,640,355)
--------------------------------------------------------------------------------------------------
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
--------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000
Reportable segment net sales 3,827,537 306,899 -- 4,134,436
Other reportable segment revenue -- 942,903 -- 942,903
Interest income -- -- 556,193 556,193
--------------------------------------------------------------------------------------------------
Total revenue 3,827,537 1,249,802 556,193 5,633,532
--------------------------------------------------------------------------------------------------
Reportable segment cost of sales (1,781,972) (241,927) -- (2,023,899)
Restructuring charges (19,729) (577,454) -- (597,183)
Other reportable segment expenses (1,693,179) (6,504,088) -- (8,197,267)
General and administrative -- -- (4,390,783) (4,390,783)
Interest expense -- -- (24,342) (24,342)
--------------------------------------------------------------------------------------------------
Net income (loss) 332,657 (6,073,667) (3,858,932) (9,599,942)
--------------------------------------------------------------------------------------------------
F-27
72
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
16. SEGMENTED INFORMATION (CONT'D.)
BTX DRUG AND GENE
INSTRUMENT DELIVERY RECONCILING
DIVISION DIVISION ITEMS TOTAL
$ $ $ $
--------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999
Reportable segment net sales 3,434,105 -- -- 3,434,105
Other reportable segment revenue -- 4,887,183 -- 4,887,183
Interest income -- -- 300,911 300,911
--------------------------------------------------------------------------------------------------
Total revenue 3,434,105 4,887,183 300,911 8,622,199
--------------------------------------------------------------------------------------------------
Reportable segment cost of sales (1,638,635) -- -- (1,638,635)
Other reportable segment expenses (1,429,084) (7,745,526) -- (9,174,610)
General and administrative -- -- (4,393,400) (4,393,400)
Interest expense -- -- (19,391) (19,391)
--------------------------------------------------------------------------------------------------
Net income (loss) 366,386 (2,858,343) (4,111,880) (6,603,837)
--------------------------------------------------------------------------------------------------
During the year ended March 31, 2001, 35% of the Company's net sales were from
sales into non-U.S. countries [2000 - 30%; 1999 - 37%].
Net sales of the Company by customer location were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------------------------
United States 2,890,875 2,905,065 2,174,364
Australia 36,096 34,114 15,933
Canada 19,966 42,991 35,565
Europe 742,227 463,966 466,585
East Asia 683,379 621,670 557,064
Other 80,396 66,630 184,594
--------------------------------------------------------------------------------------------------
Total 4,452,939 4,134,436 3,434,105
--------------------------------------------------------------------------------------------------
F-28
73
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
17. RELATED PARTY TRANSACTIONS
[a] The payments to parties not at arm's length include the following:
- legal services provided by a law firm where one of the partners is a
director of the Company
- accounting and administration services provided by a company where
the principal is a director of the Company
- rent and administration fees paid to a company where one of the
principals was an officer of the Company's French subsidiary, as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------------------------
Legal services 239,225 161,042 93,778
Accounting and administration 28,780 29,055 26,735
Rent and administration -- 32,600 114,900
--------------------------------------------------------------------------------------------------
[b] Included in accounts payable and accrued expenses are the following
amounts owed to the parties identified in note 17[a] which are payable
under normal trade terms:
2001 2000
$ $
--------------------------------------------------------------------------------------------------
Legal services and accounting and
administration 66,916 6,130
--------------------------------------------------------------------------------------------------
[c] Total expenses paid to the parties identified in note 17[a] and included
in share issue costs were $95,263 [2000 - $129,300; 1999 - $18,573] for
the year ended March 31, 2001. All transactions are recorded at their
exchange amounts.
F-29
74
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------------------------
Interest paid during
the year 20,380 24,342 19,391
--------------------------------------------------------------------------------------------------
During the year ended March 31, 2001, the Company granted warrants and issued
common shares pursuant to a license agreement [note 11[b][ii]] aggregating
$900,450.
19. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
The Company prepares its consolidated financial statements in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"). In
addition, the Company provides supplementary descriptions of significant
differences between Canadian GAAP and those in the United States ("U.S. GAAP")
as follows:
[a] Under U.S. GAAP, dilutive loss per common share is calculated in accordance
with the treasury stock method and is based on the weighted average number
of common shares and dilutive common share equivalents outstanding.
[b] The Company has elected to follow 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. The Company considers non-employees those individuals who do
not meet the criteria of an employee as defined in APB25. Under U.S. GAAP,
stock based compensation to non-employees must be recorded at the fair
value of the options granted. This compensation, determined using a
Black-Scholes pricing model, is expensed over the vesting periods of each
option grant.
F-30
75
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
19. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
[c] In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS133), as amended by SFAS137 and
SFAS138. SFAS133, as amended, is effective for the Company's year
commencing April 1, 2002. The Company does not expect the adoption of
SFAS133 to have a material impact on the Company's operations or financial
position.
[d] For the purposes of reconciling to U.S. GAAP, during the fourth quarter
ended March 31, 2001, the Company changed its accounting policy for
upfront non-refundable license payments received in connection with
collaborative license arrangements in accordance with Staff Accounting
Bulletin No. 101 (SAB 101), as amended by SAB 101(A) and (B), issued by
the U. S. Securities and Exchange Commission.
The Company has recorded cumulative up-front payments of approximately
$4,000,000 received through April 1, 2000. In accordance with SAB 101, the
Company is required to record these fees over the life of the arrangement,
which was terminated in the year ended March 31, 2001. As a result of this
change, revenues in the year ended March 31, 2001 have increased by
$3,647,059 and the cumulative effect of this change in accounting
principle is a charge of $3,647,059 to net loss in the year ended March
31, 2001.
[e] U.S. GAAP requires disclosure of comprehensive loss which measures all
non-capital changes in shareholders' equity. Other accumulated
comprehensive loss for the Company relates to foreign exchange adjustments
of $102,238, and unrealized gains on short-term investments of $2,152 at
March 31, 2001.
[f] Under U.S. GAAP, short-term investments are classified as
available-for-sale and carried at market values with unrealized gains or
losses reflected as a component of other accumulated comprehensive loss.
F-31
76
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
19. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
The impact of significant variations to U.S. GAAP on the Consolidated Statements
of Loss are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------------------------------------
Loss for the year, Canadian GAAP (8,640,355) (9,599,942) (6,603,837)
Adjustment for stock based compensation (226,000) (1,103,888) (546,700)
Adjustment for revenue recognition 3,647,059 -- --
--------------------------------------------------------------------------------------------------------------
Loss for the year before cumulative
effect of a change in accounting policy
[note 19[d]], U.S. GAAP (5,219,296) (10,703,830) (7,150,537)
--------------------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting policy (3,647,059) -- --
--------------------------------------------------------------------------------------------------------------
LOSS FOR THE YEAR, U.S. GAAP (8,866,355) (10,703,830) (7,150,537)
Unrealized gains from short term investments 2,152 -- --
Unrealized gains (losses) on foreign currency translation (1,327) 2,090 (83,294)
--------------------------------------------------------------------------------------------------------------
Comprehensive loss for the year, U.S. GAAP (8,865,530) (10,701,740) (7,233,831)
--------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share, U.S. GAAP:
Loss before cumulative effect of a change
in accounting policy (0.19) (0.48) (0.35)
Cumulative effect of change in accounting policy (0.13) -- --
Basic and diluted loss per common share, U.S. GAAP (0.32) (0.48) (0.35)
--------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 27,648,854 22,107,190 20,272,801
--------------------------------------------------------------------------------------------------------------
Pro forma amounts assuming the accounting
change is applied retroactively:
Net loss (5,219,296) (10,468,536) (11,032,890)
--------------------------------------------------------------------------------------------------------------
Net loss per common share (0.19) (0.47) (0.54)
--------------------------------------------------------------------------------------------------------------
F-32
77
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
19. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation (SFAS123), which also requires that the information be determined
as if the Company has accounted for its employee stock options granted in fiscal
periods beginning subsequent to December 1994 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 for the year ended March 31, 2001: risk free interest rate of 5.6%
[2000 - 6.1%; 1999 - 5.2%]; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of 0.75 [2000 - 0.62; 1999 -
0.68]; and a weighted average expected life of the options of 9 years [2000 - 5;
1999 - 7 1/2].
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.
The weighted-average fair value of options granted during the year ended March
31, 2001 which were granted at fair market value on the date of grant was $1.51
[2000 - $2.56; 1999 - $3.19].
Supplemental disclosure of pro forma loss and loss per common share is as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
$ $ $
--------------------------------------------------------------------------------------------------
Pro forma loss, U.S. GAAP (10,636,154) (11,985,791) (9,169,837)
Pro forma loss per share, U.S. GAAP (0.38) (0.54) (0.45)
--------------------------------------------------------------------------------------------------
F-33
78
GENETRONICS BIOMEDICAL LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001 (Expressed in U.S. dollars)
19. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT'D.)
The impact of significant variations to U.S. GAAP on the Consolidated Balance
Sheet items are as follows:
2001 2000
$ $
--------------------------------------------------------------------------------
Short-term investments 2,806,620 --
Additional paid in capital 3,352,850 2,572,900
Deficit (41,001,930) (32,135,575)
Accumulated other comprehensive loss (100,086) (100,911)
--------------------------------------------------------------------------------
20. SUBSEQUENT EVENTS
[i] Pursuant to the terms of an employment agreement, an executive officer who
was terminated subsequent to March 31, 2001 is entitled to additional
remuneration of one year's salary which amounts to approximately $230,000
to be paid in bi-weekly installments.
[ii] The Company has called an Extraordinary General Meeting of its
shareholders for May 22, 2001 to consider the continuation of the Company
from British Columbia, Canada to Delaware, U.S.A. The continuation is
subject to the approval of the shareholders and subsequent to their
approval, is subject to the approval of the Board of Directors.
F-34