Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
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 CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0969592 (I.R.S. Employer Identification No.)
11199 Sorrento Valley Road San Diego, California (Address of principal executive offices)		92121-1334 (Zip Code)

Company’s telephone number, including area code: (858) 597-6006

     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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

     The number of shares outstanding of the Company’s Common Stock, par value $ 0.001 per share, was 40,172,661 as of August 9, 2002.

Table of Contents

GENETRONICS BIOMEDICAL CORPORATION

FORM 10-Q

For the Quarter Ended June 30, 2002

INDEX

							Page
Part I. Financial Information
			Item 1. Financial Statements
				a)	Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001			1
				b)	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001 (Unaudited)			2
				c)	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited)			3
				d)	Notes to Consolidated Financial Statements (Unaudited)			4
			Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					10
			Item 3. Quantitative and Qualitative Disclosures About Market Risk					31
Part II. Other Information
			Item 2. Changes in Securities and Use of Proceeds					32
			Item 5. Other Information					32
			Item 6. Exhibits and Reports on Form 8-K					33
Signatures								35

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes

Table of Contents

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)

See accompanying notes

2

Table of Contents

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)

See accompanying notes

3

Table of Contents

GENETRONICS BIOMEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The accompanying unaudited consolidated financial statements of Genetronics Biomedical Corporation (“Company”, “we” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated balance sheet as of June 30, 2002, consolidated statements of operations for the three and six months ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 are unaudited, but include all adjustments (consisting of normal recurring adjustments) which Genetronics Biomedical Corporation considers necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2002 shown herein are not necessarily indicative of the results that may be expected for the year ended December 31, 2002 or for any other period. For more complete information, these financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the nine month period ended December 31, 2001 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

     On June 15, 2001, the Company completed a change in its jurisdiction of incorporation from British Columbia, Canada into the state of Delaware. The change was accomplished through a continuation of Genetronics Biomedical Ltd., a British Columbia Corporation, into Genetronics Biomedical Corporation, a Delaware corporation. At the same time the Company changed its fiscal year to December 31, 2001. Genetronics Biomedical Ltd., the British Columbia Corporation, prepared its financial statements in accordance with accounting principles generally accepted in Canada. All periods presented have been restated to financial statements prepared in accordance with accounting principles generally accepted in the United States. Otherwise, the accounting policies and methods of application adopted in these unaudited interim consolidated financial statements are the same as those of the annual consolidated financial statements for the nine month period ended December 31, 2001.

     The financial statements included herein have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future.

     The Company incurred a net loss of $1,537,307 and $2,999,123 for the three and six months ended June 30, 2002, has working capital of $3,930,305 and an accumulated deficit of $50,360,843 at June 30, 2002. The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and to obtain additional capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In October 2001, the Company reduced its operating expenses through a reorganization of its operations by reducing its

4

Table of Contents

headcount by approximately 20% as well as reducing facilities expenses, certain research and development expenses and certain outside consulting and contract costs. As the reduction of above expenses alone will not prevent future operating losses, the Company is aggressively seeking further funding in order to satisfy its projected cash needs for at least the next twelve months. The Company will continue to rely on outside sources of financing to meet its capital needs beyond next year. The outcome of these matters cannot be predicted at this time. Further, there can be no assurance, assuming the Company successfully raises additional funds, that the Company will achieve positive cash flow. If the Company is not able to secure additional funding, it will be required to further scale back its research and development programs, preclinical studies and clinical trials, and selling, general, and administrative activities and may not be able to continue in business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities which might be necessary should the Company be unable to continue in business.

2. Principles of Consolidation

     These consolidated financial statements include the accounts of Genetronics Biomedical Corporation and its wholly-owned subsidiary, Genetronics, Inc., a private company incorporated in the state of California.

3. Share Capital

     Authorized and Issued Stock as at June 30, 2002:

     The 2000 Stock Option Plan, effective July 31, 2000 (the “2000 Plan”), was approved by the shareholders on August 7, 2000, pursuant to which 10,000,000 shares of common stock are reserved for issuance. The 2000 Plan supercedes all previous stock option plans. As of June 30, 2002,

5

Table of Contents

2,248,451 shares of common stock were available for grant under the 2000 Plan. At December 31, 2001, there were 848,825 stock options available for grant under the 2000 Plan.

     Stock Options Outstanding as at June 30, 2002 (Unaudited):

     During the six months ended June 30, 2002, the Company granted 2,483,700 stock options with a weighted average exercise price of $0.46.

     At June 30, 2002 6,473,100 stock options remain outstanding at exercise prices ranging from $0.41 to $5.50 with a weighted average remaining life of 6.8 years, of which 3,905,975 are vested as at June 30, 2002.

     Issuance of Common Stock:

     Pursuant to a consulting agreement dated June 12, 2001, the Company agreed to issue 100,000 shares of common stock with a value of $55,000 based on the fair market value of the Company’s common stock on the completion date of the project in October 2001. The shares of common stock were issued on January 9, 2002.

     In January 2002, the Company reduced the exercise price of 500,000 Agent’s Compensation Warrants from Cdn $1.35 to Cdn $1.10 and extended the expiration date to January 31, 2002. On January 16, 2002, the Company issued 500,000 shares of common stock in respect of the exercise of these warrants for gross proceeds of Cdn $550,000 (US $337,506).

     In January 2002, the Company extended the expiration date of 499,199 consultant stock options from January 15, 2002 to January 31, 2002 and reduced the exercise price from between Cdn $1.25 and Cdn $4.13 to Cdn $1.15. On January 21, 2002 the Company issued 499,199 shares of common stock in respect of the exercise of these stock options for gross proceeds of Cdn $574,079 (US $361,287). As a result additional stock-based compensation was recorded in January 2002 of $39,936 at a fair value of $0.08 per option which was estimated by using the Black Scholes pricing model.

     Special Warrants

     On June 6, 2002, the Company closed a private placement of 10,225,891 special warrants. 7,985,574 special warrants were issued at a subscription price of $0.42 per special warrant and 2,240,317 special warrants were issued at a subscription price of $0.47 per special warrant, for gross proceeds of $4,406,890. Each $0.42 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of one-third of one share of common stock. Each full common stock purchase warrant is exercisable for 12 months to purchase a share of common stock at $0.70. Total warrants at $0.70 are 2,661,851 and expire on June 6, 2003. Each $0.47 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of forty percent of one share of common stock. Each full common stock purchase warrant is exercisable for 12 months to purchase one share of common stock at $0.65. A total of 896,125 such warrants are issuable and shall expire on June 6, 2003. The gross proceeds of this financing were reduced by issuance costs including the agent’s commission of 6.0% of the gross proceeds of $264,413 and other issue costs of $251,624 incurred as of June 30, 2002.

6

Table of Contents

     In connection with the issuance of the special warrants described in the preceding paragraph, the Company granted Series “A” special warrants to the placement agent to acquire 665,000 shares of common stock for $0.47 per share. These warrants expire on June 6, 2005.

     On November 30, 2001, the Company closed a private placement of 5,212,494 special warrants at a price of $0.45 per special warrant for gross proceeds of $2,345,622. Each special warrant entitled the holder to acquire one share of Company common stock as well as a warrant to purchase one-half of a share of common stock, without payment of further consideration, on the exercise or deemed exercise of the special warrant. In April 2002, these special warrants were converted into 5,212,494 shares of common stock and 2,606,247 common stock purchase warrants. Each warrant entitles the holder to purchase one share of common stock at a price of $0.75 through May 30, 2003. The gross proceeds of this financing were reduced by issuance costs including the agent’s commission of 7.5% of the gross proceeds of $175,922 and other issue costs of $815,000 incurred as of March 31, 2002. The placement agent was also granted Agent’s Series A Special Warrants entitling the agent to acquire 100,000 shares of common stock of the Company, without payment of further consideration as well as Agent’s Series B Special Warrants entitling the agent to acquire 521,249 Agent’s Share Purchase Warrants. Each Agent’s Share Purchase Warrant entitles the holder to acquire one share of common stock at a price of $0.45 per share, exercisable through May 30, 2003. In May 2002, the Series A Special Warrants were converted to 100,000 shares of common stock of the Company.

     In November 2001, the Company entered into a note receivable agreement with one of its executive officers in the amount of $65,000, to enable the executive to purchase 144,000 special warrants offered through the Company’s private placement. The loan plus accrued interest, at an interest rate of 5.0%, is payable on or before November 9, 2004. In March 2002 the Company received a partial repayment of the loan balance in the amount of $33,847. In June 2002, the Company had a receivable from one of its officers in the amount of $50,000. In July 2002, this amount was repaid in full.

4. Change in Accounting Principle

     During the fourth quarter ended March 31, 2001, the Company changed its accounting policy for up-front non-refundable license payments received in connection with collaborative license arrangements to be 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 as revenue 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 six months ended June 30, 2001 have increased to $3,470,590. The cumulative effect of this change in accounting principle is an increase of $3,647,059 to net loss for the year ended March 31, 2001.

7

Table of Contents

5. Earnings (Loss) Per Share

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

6. Discontinued Operations

     The Company’s Board of Directors has decided to focus the attention and resources of the Company on its Drug and Gene Delivery Division. In connection with this decision, on June 19, 2002, the Company signed an agreement to sell the assets of the BTX Instrument Division for up to $5,000,000, pending shareholder approval. The Company anticipates the closing of this transaction will occur by mid October 2002. The Company anticipates net proceeds from this transaction will be between $4.2 - 4.7 million. Accordingly, the BTX Instrument Division, which was previously classified as a separate segment, has been classified as discontinued operations for financial reporting purposes.

     Operating results of the Company’s discontinued operations are shown separately in the accompanying consolidated statements of operations. The BTX Instruments Division had sales of $976,686 and $784,543 for the three months ended June 30, 2002 and 2001, respectively, and $1,763,749 and $1,850,505 for the six months ended June 30, 2002 and 2001, respectively. These amounts are not included in sales in the accompanying unaudited consolidated statements of operations.

7. Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which supercedes APB 17, Intangible Assets, and eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets. Instead, goodwill and other intangibles with indefinite lives will be tested for impairment on at least an annual basis utilizing a test that begins with an estimate of the fair value of the reporting unit or intangible asset. Previous accounting principles utilized undiscounted cash flows to determine if an impairment had occurred. The adoption of SFAS No. 142 did not have an impact on our operations or financial condition.

     In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which will become effective for the Company beginning in fiscal 2003. This statement establishes a number of rules for the recognition, measurement and display of long-lived assets which are impaired and either held for sale or continuing use within the business. In addition, the Statement broadly expands the definition of a discontinued operation to individual reporting units or asset groupings for which identifiable cash flow exist. In accordance with SFAS 144, the assets and liabilities of the BTX Instrument division have been presented as discontinued operations (Note 6).

8

Table of Contents

8. Generally Accepted Accounting Principles in Canada

     These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial statements, which, in the case of the Company, conform in all material respects with those in Canada (Canadian GAAP), except as described in the Company’s consolidated financial statements for the nine-month fiscal year ended December 31, 2001.

     The impact of significant variations to Canadian GAAP on the consolidated statements of operations is as follows:

The impact of significant variations to Canadian GAAP on the consolidated balance sheet items is as follows:

9. Reclassification

     Certain reclassifications have been made to the three-month period ended June 30, 2001 to conform to the June 30, 2002 presentation.

9

Table of Contents

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

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including those statements related to the sale of the BTX Instrument Division, development plans, intentions to seek licensing partners and additional sources of capital, intended inventory levels, expectations concerning the adequacy of existing cash resources and anticipated sources of future revenues, and other financial, clinical, business environment and trend projections. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, without limitation, potential changes in strategy and focus of potential collaborative partners, competitive conditions and demand for its products, the current stage of development of both the Company and its products, the timing and uncertainty of results of both research and regulatory processes, the extensive government regulation applicable to its business, the unproven safety and efficacy of its device products, its significant additional financing requirements, the volatility of its stock price, the uncertainty of future capital funding, its potential exposure to product liability or recall, uncertainties relating to patents and other intellectual property, including whether the Company will obtain sufficient protection or competitive advantage therefrom, its dependence upon a limited number of key personnel and consultants and its significant reliance upon its collaborative partners for achieving its goals, and other factors detailed in its Annual Report on Form 10-K for the nine months ended December 31, 2001.

     General

     The Company formally conducted its operations through two separate divisions, the Drug and Gene Delivery Division and the BTX Instrument Division. The Company’s Board of Directors, however, has decided to focus the attention and resources of the Company on its Drug and Gene Delivery Division and to sell substantially all of the assets of the BTX Instrument Division. In connection with this decision, on June 19, 2002, the Company signed an agreement to sell the assets of the BTX Instrument Division pending shareholder approval.

     The Drug and Gene Delivery Division is developing drug and gene delivery systems based on electroporation to be used in the treatment of disease. We have classified the BTX Instrument Division as a discontinued operations for financial reporting purposes. BTX develops, manufactures and sells electroporation and electrofusion equipment to the research laboratory market. In the past the Company’s revenues primarily reflected product sales to the research market through the BTX Instrument Division and research grants through the Drug and Gene Delivery Division. From October 1998 to August 2000 the Company also received revenues from licensing fees and milestone payments. The Company has not received any significant licensing revenues since that time.

     The Company is currently seeking a new licensing partner for the use of electroporation for the delivery of drugs in the treatment of cancer. The Company will not receive any milestone or

10

Table of Contents

licensing payments for development or sale of its products until a new strategic alliance 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. There can be no assurance that the Company will be able to contract with such a partner or that the Company can achieve the milestones set out in a new agreement. The Company believes it has sufficient current resources to initiate a Phase III clinical study of the use of electroporation in the delivery of bleomycin in the treatment of late stage head and neck cancers.

     Until the commercialization of clinical products, the Company expects revenues to continue to be attributable to 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 seven years. As of June 30, 2002 the Company has an accumulated deficit of $50,360,843. 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 administrative activities.

     On June 15, 2001 the Company completed a change in its jurisdiction of incorporation from British Columbia, Canada into the state of Delaware. The change was accomplished through a continuation of Genetronics Biomedical Ltd., a British Columbia corporation, into Genetronics Biomedical Corporation, a Delaware corporation. All periods presented have been restated to financial statements prepared in accordance with accounting principles generally accepted in the United Sates.

Results of Operations

     Revenues

     The Company had total revenues of $40,971 and $45,441 for the three and six month periods ended June 30, 2002, respectively, compared to $53,179 and $3,673,064 for the three and six month periods ended June 30, 2001, respectively. Total revenues decreased $12,208 and $3,627,623 or 23% and 99% for the three and six month periods ended June 30, 2002, respectively, as compared to the same periods last year. Revenues consist of license fees, milestone payments and amounts received from collaborative research and development arrangements. Revenues under license fees and milestone payments for the three month period ended June 30, 2002 were $1,470. No license fees and milestone payments were recorded for the three month period ended June 30, 2001. The $1,471 licenses fees which were recorded for the three month period ended June 30, 2002, resulted from the amortization of a $100,000 up-front license fee received according to a non-exclusive license and supply agreement entered into with Valentis, Inc. The Company may receive further payments, in the form of cash and stock of Valentis, if certain milestones are achieved under the agreement. License fees and milestone payments have decreased $3,467,649 or 99%, from $3,470,590 for the six month period ended June 30, 2001, compared to $2,941 for the six month period ending June 30, 2002. The decrease from the previous six month period was a result of the termination of the Licensing and Development Agreement with Ethicon Endo-Surgery, Inc. which allowed the Company, in March 2001, to recognize the unamortized portion of the up-front license fee of $4,000,000, received in October 1998. The Company is currently seeking a new licensing

11

Table of Contents

partner for the use of electroporation for the delivery of drugs in the treatment of cancer. Until a new strategic alliance 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 will not receive any significant milestone or licensing payments for development or sale of its products.

     There were no revenues from grant funding for the three month periods ended June 30, 2002 and 2001. There were no revenues from grant funding recorded for the six month period ended June 30, 2002, compared to $4,032 for the six month period ended June 30, 2001. This decrease was the result of the expiration of the Company’s grants. All active grants have expired, but the Company continues to pursue additional grants; however, no assurance can be given that any such awards will be realized.

     During the three and six month periods ended June 30, 2002 and 2001, the Company recorded revenues under collaborative research and development arrangements in the amount of $39,500 and $53,179 and $42,500 and $198,442, respectively. Research and development revenues decreased $13,679 or 26% and $155,942 or 79% for the three and six month periods ended June 30, 2002, as compared to the same periods of the previous year. This decrease was due to the fact that a collaborative research agreement in the gene therapy area entered into in late 1999 was completed in mid 2001.

     Research and Development

     Research and development expenses, which include clinical trial costs, for the three and six month periods ended June 30, 2002, were $633,735 and $1,257,720, respectively, compared to $781,673 and $2,412,622 for the three and six month periods ended June 2001, respectively. Research and development expenses decreased by $147,938, or 19%, from $781,673 for the three month period ended June 30, 2001, to $633,735 for the three month period ended June 30, 2002. For the six month period ended June 30, 2002, research and development expenses decreased by $1,154,902, or 48%, from $2,412,622 for the six month period ended June 30, 2001 to $1,257,720 for the six month period ended June 30, 2002. The decrease in research and development expenses for both the three and six month periods ended June 30, 2002, reflects a combination of lower clinical/regulatory expenses due to the completion of the Head and Neck Phase II clinical trials in the United States and Canada in the previous year and the fact that in October 2001, the Company reorganized to more effectively manage existing resources and to accommodate its stronger focus on oncology and gene therapy. The reorganization resulted in a reduction of the work force, which decreased research and development personnel expenses, as compared to the same period last year. Reduced expenses in the oncology research area also contributed to these lower expenses. The Company is currently planning to enter a Phase III clinical trial, which is subject to the approval by the FDA. Clinical/regulatory expenses will increase substantially when the phase III trial is in progress.

     General and Administrative Expenses

     General and administrative expenses, which consist of business development expenses, and general administrative expenses, for the three and six month periods ended June 30, 2002, were $930,433 and $1,808,311, respectively, compared to $1,518,649 and $2,661,204 for the three and

12

Table of Contents

six month periods ended June 2001, respectively. General and administrative expenses decreased by $588,216, or 39%, from $1,518,649 for the three month period ended June 30, 2001 to $930,433 for the three month period ended June 30, 2002. For the six month period ended June 30, 2002, general and administrative expenses decreased by $852,893, or 32%, from $2,661,204 for the six month period ended June 30, 2001 to $1,808,311 for the six month period ended June 30, 2002. The decrease in general and administrative expenses for both the three and six month periods ended June 30, 2002 was primarily the result of the Company’s reorganization in October 2001. The purpose of the reorganization was to more effectively manage existing resources and to accommodate a stronger focus on oncology and gene therapy. As a result of the reorganization, the Company’s work force was reduced by 16 employees, including the Chief Operating Officer and the Chief Financial Officer. The reduction in work force resulted in lower personnel expenses and related overhead expenses. In addition, effective March 1, 2002 rent expenses also decreased since the Company was able to return about 4,500 sq. ft. of its leased facilities to the landlord.

     Interest income for the three and six month periods ended June 30, 2002, were $10,849 and $16,854, respectively, compared to $61,344 and $164,925 for the three and six month periods ended June 2001, respectively. Interest income decreased by $50,495, or 82%, from $61,344 for the three month period ended June 30, 2001 to $10,491 for the three month period ended June 30, 2002. For the six month period ended June 30, 2002, interest income decreased by $148,081, or 90%, from $164,925 for the six month period ended June 30, 2001 to $16,854 for the six month period ended June 30, 2002. The decrease in interest income for both the three and six month periods ended June 30, 2002, resulted from the diminishing availability of investment funds due to the continuing operating losses.

     Net Loss

     The Company reported a net loss of $1,513,690 for the three month period ended June 30, 2002, compared to a net loss of $2,190,562 for the three month period ended June 30, 2001. The Company reported a net loss of $3,007,127 for the six month period ended June 30, 2002, compared to a net loss of $1,312,665 for the six month period ended June 30, 2001. The increased net loss for the three and six month periods ended June 30, 2002 was the result of lower license fee revenues associated with the termination of the Ethicon Endo-Surgery agreement.

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.

     As of June 30, 2002, Genetronics Biomedical had working capital of $3,930,305 compared with $2,077,124 as of December 31, 2001. The increase was primarily a result of the additional funds received in the three months ended June 30, 2002 from the issuance of equity securities. The current ratio increased from 2.24 as of December 31, 2001 to 4.32 as of June 30, 2002.

     On June 6, 2002, the Company closed a private placement of 10,225,891 special warrants. 7,985,574 special warrants were issued at a subscription price of $0.42 per special warrant and

13

Table of Contents

2,240,317 special warrants were issued at a subscription price of $0.47 per special warrant, for gross proceeds of $4,406,890. Each $0.42 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of one-third of one share of common stock. Each full common stock purchase warrant is exercisable for 12 months to purchase a share of common stock at $0.70. Total warrants at $0.70 are 2,661,851 and expire on June 6, 2003. Each $0.47 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of forty percent of one share of common stock. Each full common stock purchase warrant is exercisable for 12 months to purchase one share of common stock at $0.65. A total of 896,125 such warrants are issuable and shall expire on June 6, 2003. The gross proceeds of this financing were reduced by issuance costs including the agent’s commission of 6.0% of the gross proceeds of $264,413 and other issue costs of $251,624 incurred as of June 30, 2002.

     In connection with the issuance of the special warrants described in the preceding paragraph, the Company granted Series “A” special warrants to the placement agent to acquire 665,000 shares of common stock for $0.47 per share. These warrants expire on June 6, 2005.

     On November 30, 2001, the Company closed a private placement of 5,212,494 special warrants at a price of $0.45 per special warrant for gross proceeds of $2,345,622. Each special warrant entitled the holder to acquire one share of Company common stock as well as a warrant to purchase one-half of a share of common stock, without payment of further consideration, on the exercise or deemed exercise of the special warrant. In April 2002, these special warrants were converted into 5,212,494 shares of common stock and 2,606,247 common stock purchase warrants. Each warrant entitles the holder to purchase one share of common stock at a price of $0.75 through May 30, 2003. The gross proceeds of this financing were reduced by issuance costs including the agent’s commission of 7.5% of the gross proceeds of $175,922 and other issue costs of $815,000 incurred as of March 31, 2002. The placement agent was also granted Agent’s Series A Special Warrants entitling the agent to acquire 100,000 shares of common stock of the Company, without payment of further consideration as well as Agent’s Series B Special Warrants entitling the agent to acquire 521,249 Agent’s Share Purchase Warrants. Each Agent’s Share Purchase Warrant entitles the holder to acquire one share of common stock at a price of $0.45 per share, exercisable through May 30, 2003. In May 2002, the Series A Special Warrants were converted to 100,000 shares of common stock of the Company.

     As of June 30, 2002, the Company had an accumulated deficit of $50,360,843. The Company has operated at a loss since 1994, and it expects this to continue for some time. The amount of the accumulated deficit will continue to grow, as it will be expensive to continue clinical, research and development efforts. If these activities are successful and if the Company receives approval from the FDA to market equipment, then even more funding will be required to market and sell the equipment. As of the date of this filing, there is substantial doubt about the Company’s ability to continue as a going concern due to its historical negative cash flow and because the Company does not have access to sufficient committed capital to meet its projected operating needs for at least the next twelve months.

     The Company is aggressively seeking further equity funding in order to satisfy its projected cash needs for at least the next twelve months. In April 2002 the Company retained the services of an investment bank to assist in securing financing for the immediate cash needs of the Company.

14

Table of Contents

The Company is also evaluating the sale of non-core assets and exploring potential partnerships as additional ways to fund operations. However, the Company will continue to rely on outside sources of financing to meet its capital needs beyond next year. The outcome of these matters cannot be predicted at this time. Further, there can be no assurance, assuming the Company successfully raises additional funds, that the Company will achieve positive cash flow. If the Company is not able to secure additional funding, it will be required to further scale back its research and development programs, preclinical studies and clinical trials, and selling, general, and administrative activities and may not be able to continue in business.

     Current liabilities decreased from $1,605,087 as of December 31, 2001 to $1,183,296 as of June 30, 2002. About $100,000 of the $421,791 decrease was attributable to a higher accrual for payroll liability as of December 31, 2001 due to the timing of the bi-weekly pay dates. Also, severance accruals as of June 30, 2002 were significantly lower compared to December 31, 2001 since severance obligations as a result of the October 2001 lay-off have been paid off to a large extent during the six months ended June 30, 2002.

     The Company’s long term capital requirements will depend on numerous factors including:

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

     •     The time involved in obtaining regulatory approvals;

     •     The cost involved in filing and maintaining patent claims;

     •     Competitor and market conditions;

     •     The ability to establish and maintain collaborative arrangements;

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

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

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

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

     •     The potential for the 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 the Company; and

     •     The ability to maintain existing collaborative arrangements.

15

Table of Contents

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

Certain Risk Factors Related To The Company’s Business

We Have Operated At A Loss And We Expect To Continue To Accumulate A Deficit; Our Auditors Have Included In Their Report An Explanatory Paragraph Describing Conditions That Raise Substantial Doubt About Our Ability To Continue As A “Going Concern”.

     As of June 30, 2002, we had a deficit of $50,360,843. We have operated at a loss since 1994, and we expect this to continue for some time. The amount of our accumulated deficit will continue to grow, as it will be expensive to continue our clinical, research, and development efforts. 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 have received during the fiscal year beginning January 1, 2002 came from the sale and distribution of special warrants in June of 2002 and sales of BTX research-use equipment. Other funds came from collaborative research arrangements, interest income on our investments and the exercise of stock options. We do not expect to receive enough money from these sources to pay for future activities. There is substantial doubt about our ability to continue as a going concern due to our historical negative cash flow and because we do not have access to sufficient committed capital to meet our projected operating needs for at least the next twelve months. Our auditor has included in their report on the financial statements for the nine months ended December 31, 2001, an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern.

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 involve substantial costs. The extent of these costs will depend on many factors, including some of the following:

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

     •     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, maintaining, and defending them;

16

Table of Contents

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

     •     The cost of manufacturing our human-use equipment; and

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

     We plan to fund operations by several means. We will attempt to enter into contracts with partners that will fund either general operating expenses or specific programs or projects. Some funding also may be received through government grants. We cannot promise that we will enter into any such contracts or receive such grants, or, if we do, that our partners and the grants will provide enough 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 The Proposed Sale Of Substantially All Of The Assets Of The BTX Instrument Division Does Not Close As Expected, Then The Company Will Have Immediate Capital Needs That Will Have To Be Met Through Some Other Means.

     The Company’s Board of Directors, has decided to focus the attention and resources of the Company on its Drug and Gene Delivery Division and to sell substantially all of the assets of the BTX Instrument Division. In connection with this decision, the Company signed an agreement on June 19, 2002 to sell substantially all of the assets of the BTX Instrument Division, other than its cash and accounts receivable, to ICN Biomedicals, Inc. (“ICN”). ICN has agreed to pay $4,500,000 at the closing of the transaction and up to an additional $500,000 in early 2003 depending on the accomplishment of certain economic milestones. All proceeds from the sale will be used to further the ongoing business of the Company. The agreement with ICN contains numerous conditions to closing, including the requirement that a majority of the Company’s stockholders approve the transaction, and if one or more of these conditions is not satisfied or waived, the asset sale will not occur. If the sale of the BTX assets to ICN is not approved by the stockholders, or fails to close for any other reason, the Company will have to either (i) pursue an infusion of capital though the offering of additional securities, or (ii) attempt to sell the BTX assets to another purchaser on terms acceptable to the Board of Directors and the shareholders. If the Company is unable to sell additional securities or the BTX assets within a reasonable amount of time, the Company will most likely have to file for protection under the Federal Bankruptcy Code or state insolvency proceedings. The Company’s Board of Directors currently believes that if the sale of the BTX assets to ICN does not close, the most likely result will be that the Company will have to file for protection under the Federal Bankruptcy Code. Our monthly expenditures currently exceed our monthly revenues, and we will continue to incur expenses after the sale of the assets. Therefore, the

17

Table of Contents

longer the time period before the assets are sold, the more risk that we will run out of operating capital necessary for ongoing operations.

If The Asset Sale Does Close, The Amount Of Proceeds Received By The Company May Be Less Than Anticipated.

     The amount of cash that will be available as a result of the sale is uncertain. While we currently anticipate that we will receive net proceeds between $4.2-4.7 million in connection with the asset sale, the actual amount received could, in fact, be lower. A number of events or factors could affect the total amount of proceeds received. Even seemingly small variations from the current expectations could have a material impact on the amount of proceeds received by Genetronics. Factors that could cause a reduction in the amount of proceeds include: (i) higher than anticipated transaction costs, (ii) unforeseen delays in the asset sale, (iii) liabilities could be higher than currently anticipated, (iv) a decrease in the value of the BTX Division prior to closing.

If We Do Not Have Enough Money To Fund Operations, Then We Will Have To Cut Costs Or Raise More Money Or Change Strategic Direction.

     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 the above-listed actions, then we may have a lower valuation, which probably would be reflected in our stock price.

18

Table of Contents

If We Are Not Successful Developing Our Current Products, 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 products and programs that to us seem promising and that we could pursue. However, with limited resources, we may decide to change priorities and shift programs away from those that we had been pursuing, for the purpose of exploiting our core technology of electroporation. The choices we may make will be dependent upon numerous factors, which we cannot predict. We cannot assure you that our business model, as it currently exists or as it may evolve, will enable us to become profitable or to sustain operations. For example, we recently had to make a decision to forego commercial marketing opportunities in Europe given our financial condition.

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

Pre-Clinical And Clinical Trials Of Human-Use Equipment Are Unpredictable; If We Experience Unsuccessful Trial Results Our Business Will Suffer.

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

     Clinical trials are unpredictable, especially human-use trials. Results achieved in early stage clinical trials may not be repeated in later stage trials, or in trials with more patients. When early, positive results 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.

19

Table of Contents

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

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

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

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

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

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

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

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

Our Business Is Highly Dependent On Receiving Approvals From Various United States And International Government Agencies And Will Be Dramatically Affected If Approval To Manufacture And Sell Our Human-Use Equipment Is Not Granted Or Not Granted In A Timely Manner.

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

20

Table of Contents

administering a certain drug to a certain tumor type in a patient having certain characteristics). These regulatory processes are extensive and involve substantial costs and time.

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

     Any of the following events can occur and, if any did occur, any one could have a material adverse effect on us:

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

     •     There can be delays, sometimes long, in obtaining approval for our human-use devices, and indeed, we have experienced such delays in obtaining FDA approval of our clinical protocols. Specifically, the FDA requested additional detailed information regarding our Phase II clinical studies. Between the production of this information and the FDA’s subsequent review, we estimate that this request added at least six months to the approval process;

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

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

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

We Rely On Collaborative And Licensing Relationships To Fund A Portion Of Our Research And Development Expenses; If We Are Unable To Maintain Or Expand Existing Relationships, Or Initiate New Relationships, We Will Have To Defer Or Curtail Research And Development Activities In One Or More Areas.

     Our partners and collaborators fund a portion of our research and development expenses and assist us in the research and development of our human-use equipment. We have ten current partners and collaborators who fund roughly five percent of our research and development expenses. These collaborations and partnerships can help pay the salaries and other overhead expenses related to research. Our largest partner at this time is Valentis, Inc. In November 2001, we entered into a non-exclusive license and supply agreement with Valentis, whereby Valentis obtained rights to use our electroporation technology in the development of certain Genemedicine products. We received an upfront cash payment of $100,000 from Valentis in the first quarter of 2002, and we may receive additional revenues from this partnership depending on various regulatory approvals and other events outside of our control. In the past, we encountered operational difficulties after the termination of a similar agreement by a former partner, Ethicon, Inc., a Johnson & Johnson company. At the time of termination, proceeds from the Ethicon relationship funded roughly one-

21

Table of Contents

third of our research and development expenses. Because this partnership was terminated, we did not receive significant milestone payments which we had expected and were forced to delay some clinical trials as well as some product development. In order to obtain the funding necessary for these projects we pursued other licensing and development arrangements as well as private equity investments. Furthermore, the termination of this partnership damaged our reputation in the biotechnology community. While termination of, or any significant change in, any of our material collaborative relationships could adversely impact our business, the termination of the Ethicon partnership was the most significant to date. The Valentis partnership is not of the same size and scope as the Ethicon partnership and termination of the Valentis partnership would not, in and of itself, cause us to cease operations due to financial concerns. Termination of the Valentis partnership, however, would present operational difficulties as we would be required to reallocate existing and anticipated resources among various potential uses. We would likely have to defer or curtail our development activities in one or more areas because potential revenues available under the terms of the relationship would go unrealized.

     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

22

Table of Contents

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

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

We Could Be Substantially Damaged If Physicians And Hospitals Performing Our Clinical Trials Do Not Adhere To Protocols Or Promises Made In Clinical Trial Agreements.

     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.

     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. While these risks are ever present, to date our contracted physicians and clinics have been successful in collecting significant data regarding the clinical protocols under which they have operated, and we are unaware of any conflicts of interest or improprieties regarding our protocols.

23

Table of Contents

We Rely Heavily On Our Patents And Proprietary Rights To Attract Partnerships And Maintain Market Position.

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

     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, the costs of such defense could be substantial, and there is no guarantee of a successful outcome. In the event an important patent related to our drug delivery technology is found to be invalid, we may lose competitive position and may not be able to receive royalties for products covered in part or whole by that patent under license agreements.

     Risk of Being Charged With Infringement. Although we 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, and there can be no guarantee of a successful outcome. Biotechnology companies of roughly our size and financial position have gone out of business after fighting and losing an infringement battle. If we were prevented from using or selling our human-use equipment, then our business would be seriously affected.

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

24

Table of Contents

by competitors. If any of these events occurs, then we run the risk of losing control over valuable company information, which could negatively affect our competitive position.

We Run The Risk That Our Technology Will Become Obsolete Or Lose Its Competitive Advantage.

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

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

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

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

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

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

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

25

Table of Contents

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 substantial costs, training, and time. Alternatively, we may decide to rely on a company with a large distribution system and a large direct sales force to undertake the majority of these activities on our behalf. This route could result in less profit for us, but may permit us to reach market faster. In any event, we may not be able to undertake this effort on our own, or contract with another to do this at a reasonable cost. Regardless of the route we take, we may not be able to successfully commercialize any product.

The Market For Our Stock Is Volatile, Which Could Adversely Affect An Investment In Our Stock.

     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;

     •     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.

26

Table of Contents

Our Dependence Upon Non-Marketed Products, Lack Of Experience In Manufacturing And Marketing Human-Use Products, And Our Continuing Deficit May Result In Even Further Fluctuations In Our Trading Volume And Share Price.

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

There Is A Risk Of Product Liability With Human-Use Equipment

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

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

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

We Cannot Be Certain That We Will Be Able To Manufacture Our Human-Use In Sufficient Volumes At Commercially Reasonable Rates.

     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

27

Table of Contents

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

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

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

We Depend On The Continued Employment Of Qualified Personnel.

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

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

We May Not Meet Environmental Guidelines, And As A Result Could Be Subject To Civil And Criminal Penalties.

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

28

Table of Contents

A Majority Of Our Directors Are Canadian Citizens And Service And Enforcement Of Legal Process Upon Them May Be Difficult.

     A 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. We currently have five directors, four of whom are Canadian citizens.

Our Actual Results Could Differ Materially From Those Anticipated In Our Forward-Looking Statements.

     Any statements in this Form 10-K about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy,” “outlook” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from the results expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-K. 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 Form 10-K. 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 Form 10-K;

     •     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.

29

Table of Contents

Critical Accounting Policies

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

     Revenue recognition.

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

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

     Prior to the adoption of SAB 101, the Company initially recognized up-front non-refundable payments as revenue upon receipt, as these fees were non-refundable and the Company had transferred the technology and product rights upon the contract’s inception and incurred costs in excess of the up-front fees prior to the initiation of each arrangement. Upon the adoption of SAB 101, up-front non-refundable payments received which require the ongoing involvement of the Company are deferred and amortized into income on a straight-line basis over the term of the relevant license or related underlying product development period.

     Patent and license costs

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

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

     Long-lived assets

     We assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we reduce the carrying value of the asset to fair value. While our current

30

Table of Contents

and historical operating and cash flow losses are potential indicators if impairment, we believe the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value, and accordingly, we have not recognized any impairment losses through June 30, 2002.

     Research and Development Expenses

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company’s exposure to market risk for changes in interest rates related primarily to the increase or decrease in the amount of interest income the Company can earn on its cash equivalents and on the increase or decrease in the amount of interest expense the Company must pay with respect to its capital lease obligations. 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 which at June 30, 2002 had an average interest rate of approximately 1.4%. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company ensures the safety and preservation of its invested principal funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company’s interest sensitive financial instruments. Declines in interest rates over time will, however, reduce the interest income while increases in interest rates over time will increase the interest expense.

31

Table of Contents

Part II. Other Information

Items 1, 3, and 4 are not applicable and have been omitted.

Item 2. Changes in Securities and Use of Proceeds

c) During the three month period ended June 30, 2002, the Company issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

     On June 6, 2002, the Company closed a private placement of 10,225,891 special warrants. 7,985,574 special warrants were issued at a subscription price of $0.42 per special warrant and 2,240,317 special warrants were issued at a subscription price of $0.47 per special warrant, for gross proceeds of $4,406,890. Each $0.42 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of one-third of one share of common stock.. Each full common stock purchase warrant is exercisable for 12 months to purchase a share of common stock at $0.70. Total warrants at $0.70 are 2,661,851 and expire on June 6, 2003. Each $0.47 special warrant is exercisable, without additional payment, into one share of common stock and a warrant for the purchase of forty percent of one share of common stock. Each full common stock purchase warrant is exercisable for 12 months to purchase one share of common stock at $0.65. A total of 896,125 such warrants are issuable and shall expire on June 6, 2003. The gross proceeds of this financing were reduced by issuance costs including the agent’s commission of 6.0% of the gross proceeds of $264,413 and other issue costs of $251,624 incurred as of June 30, 2002. The Company relied on the exemption from registration available under Rule 506 of Regulation D of the Securities Act as all sales were made to accredited investors who purchased such securities for investment purposes. The Company is using the proceeds from the transactions to fund ongoing business operations.

Item 5. Other Information

     The employment of William K. Dix and Jack Snyder, each an executive vice president of the Company, ended on July 31, 2002 and July 12, 2002, respectively. On August 9, 2002 the Company entered into a Separation Agreement with Mr. Snyder.

32

Table of Contents

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

33

Table of Contents

(4)

Filed as an Exhibit to the Company’s Preliminary Proxy Statement filed on July 30, 2002 and incorporated herein by reference.

(b)           Reports on Form 8-K

	The following reports on Form 8-K were filed during the three months ended June 30, 2002:

	•		Our Form 8-K filed May 24, 2002
	•		Our Form 8-K filed June 14, 2002

34

Table of Contents

GENETRONICS BIOMEDICAL CORPORATION
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.

	Genetronics Biomedical Corporation
Date: August 14, 2002	By:	/s/ Avtar Dhillon
		Avtar Dhillon, Chief Executive Officer
Date: August 14, 2002	By:	/s/ Peter Kies
		Chief Financial Officer

35