GENETRONICS BIOMEDICAL CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended June 30, 2003

OR

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

For the transition period from to

Commission File No. 0-29608

GENETRONICS BIOMEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware		33-0969592
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11199 SORRENTO VALLEY ROAD

SAN DIEGO, CALIFORNIA 92121-1334

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

(858) 597-6006

(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the 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 ý No o

The number of shares outstanding of the Company’s Common Stock, par value $ 0.001 per share, was 51,445,770 as of July 31, 2003.

GENETRONICS BIOMEDICAL CORPORATION

FORM 10-Q

For the Quarter Ended June 30, 2003

INDEX

Part I. Financial Information

	Item 1.	Financial Statements

	a)	Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002

	b)	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2003 and 2002 (Unaudited)

	c)	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (Unaudited)

	d)	Notes to Consolidated Financial Statements

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	Item 4.	Controls and Procedures

Part II. Other Information

	Item 4.	Submission of Matters to a Vote of Security Holders

	Item 6.	Exhibits and Reports on Form 8-K

Signatures

Part I. Financial Information

Item 1. Financial Statements

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	(Unaudited)
ASSETS
Current
Cash and cash equivalents	$	924,199		$	875,444
Receivables, net	3,200			75,588
Prepaid expenses and other	165,167			229,384
Assets of discontinued operations	—			1,517,496
Total current assets	1,092,566			2,697,912
Fixed assets, net	218,247			295,321
Patents and other assets, net	2,342,223			2,425,992
Total assets	$	3,653,036		$	5,419,225

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Accounts payable and accrued expenses	$	560,392		$	1,032,939
Current portion of obligations under capital leases	151			20,642
Deferred revenue	195,712			202,654
Liabilities of discontinued operations	—			401,769
Total current liabilities	756,255			1,658,004
Deferred rent	29,705			35,851
Total liabilities	785,960			1,693,855

Stockholders’ equity
Common stock, $ 0.001 par value	50,744			50,398
Additional paid in capital	57,362,069			57,137,202
Receivables from executive/stockholder	—			(33,445		)
Accumulated comprehensive income	—			(102,238		)
Accumulated deficit	(54,545,737		)	(53,326,547		)
Total stockholders’ equity	2,867,076			3,725,370
Total liabilities and stockholders’ equity	$	3,653,036		$	5,419,225

See accompanying notes

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
REVENUE

License fee and milestone payments	$	1,471		$	1,471		$	2,942		$	2,941
Revenues under collaborative research and development arrangements	7,533			39,500			17,199			42,500
Total Revenue	9,004			40,971			20,141			45,441

EXPENSES
Research and development	429,235			633,735			904,969			1,257,720
General and administrative	979,560			930,433			2,243,023			1,808,311
Interest (income) expense, net	(2,553		)	(9,507		)	14,677			(13,463		)
Total Expenses	1,406,242			1,554,661			3,162,669			3,052,568

Loss from continuing operations	(1,397,238		)	(1,513,690		)	(3,142,528		)	(3,007,127		)

Discontinued operations:

Gain on disposal	—			—			2,034,078			—
(Loss) income from operations	—			(23,617		)	(110,740		)	8,004
Net Loss	$	(1,397,238	)	$	(1,537,307	)	$	(1,219,190	)	$	(2,999,123	)
Amounts per common share – basic and diluted:
Loss from continuing operations	$	(0.03	)	$	(0.04	)	$	(0.06	)	$	(0.08	)
Income from discontinued operations	—			—			0.04			—

Net Loss per common share	$	(0.03	)	$	(0.04	)	$	(0.02	)	$	(0.08	)
Weighted average number of common shares	50,497,772			39,683,651			50,452,441			36,578,421

See accompanying notes

GENETRONICS BIOMEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF
CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2003			2002

OPERATING ACTIVITIES
Loss from continuing operations	$	(3,142,528	)	$	(3,007,127	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Compensation for services paid in stock options	53,976			58,509
Valuation of warrants issued in connection with debt	19,800			—
Recovery of uncollectible accounts	(6,058		)	—
Depreciation and amortization	285,186			309,523
Provision for inventory obsolescence	—			48,103
Gain (loss) on disposal of fixed assets	—			705
Deferred rent	(6,146		)	(8,005		)
Realized loss on foreign currency translation adjustment	102,236			—
Deferred revenue	(6,942		)	25,558
Changes in non-cash working capital items:
Accounts receivable	37,814			109,327
Inventories	—			(48,103		)
Prepaid expenses and other	104,849			(15,616		)
Accounts payable and accrued expenses	(472,547		)	(69,060		)
Cash used in operating activities	(3,030,360		)	(2,596,186		)

INVESTING ACTIVITIES
Purchase of short term investments	—			(1,989,241		)
Disposal of capital assets	—			4,421
Increase in other assets	(124,341		)	(130,123		)
Cash provided by (used in) investing activities	(124,341		)	(2,114,943		)

FINANCING ACTIVITIES
Proceeds from issuance of bridge loan	1,000,000			—
Repayment of bridge loan	(1,000,000		)	—
Payments on obligations under capital leases	(20,491		)	(16,712		)
Proceeds from issuance of common shares – net	184,882			4,628,252
Cash provided by financing activities	164,391			4,611,540

Net cash provided by (used in) discontinued operations	3,039,065			(284,223		)

Increase (decrease) in cash and cash equivalents	48,755			(383,812		)
Cash and cash equivalents, beginning of period	875,444			1,813,100
Cash and cash equivalents, end of period	$	924,199		$	1,429,288

See accompanying notes

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, 2003, consolidated statements of operations for the three months and six months ended June 30, 2003 and 2002 and the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002 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 six months ended June 30, 2003 shown herein are not necessarily indicative of the results that may be expected for the year ended December 31, 2003 or for any other period. For more complete information, these financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

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’s independent auditors issued a report on our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002 that includes an explanatory paragraph regarding our ability to continue as a going concern. The Company had net loss of $1,397,238 and $1,219,190 for the three and six months ended June 30, 2003, respectively, has working capital of $336,311 and an accumulated deficit of $54,545,737 at June 30, 2003. On January 31, 2003, we completed the sale of substantially all of the properties and assets that are primarily used in our BTX Division. Genetronics Biomedical’s stockholders, in a Special Stockholder’s Meeting held on January 31, 2003, voted to approve the proposed sale to Harvard Bioscience, Inc. The terms of the sale were $3.7 million in cash and royalties on net sales of BTX products above certain sales targets for a period of four years. The net gain on the sale of the BTX Division was $2,034,078. The Company incurred a net loss from continuing operations of $1,397,238 and $3,142,528 for the three and six months ended June 30, 2003, respectively. On July 16, 2003, the Company announced it had raised an aggregate of $15.67 million through the sale of $8.17 million of its Series A Cumulative Convertible Preferred Stock and $7.50 million of its Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. Proceeds from the sale of Series A Cumulative Convertible Preferred Stock were received on July 16, 2003. Proceeds from the sale of Series B Cumulative Convertible Preferred Stock are payable upon certain milestones. Including the cash proceeds received from the July 2003 financing, the exercises of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through November

2004. The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and to obtain additional capital. 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, pre-clinical studies and clinical trials, and general and administrative activities and may not be able to continue in business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should the Company be unable to continue in business.

Certain reclassifications have been made to the financial statements for the three months and six months ended June 30, 2002 to conform to the three months and six months ended June 30, 2003 presentation.

2. Principles of Consolidation

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

3. Stockholders’ Equity

Authorized and Issued Stock as of June 30, 2003:

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

Issued: 50,743,931 shares of common stock with a par value of $50,744. No shares of preferred stock had been issued as of June 30, 2003.

Stock Options

The 2000 Stock Option Plan, effective July 31, 2000 (the “2000 Plan”), was approved by the shareholders on August 7, 2000, pursuant to which 10,000,000 shares of common stock are reserved for issuance. The 2000 Plan supercedes all previous stock option plans. As of June 30, 2003, 1,895,651 shares of common stock were available for grant under the 2000 Plan. At December 31, 2002, there were 1,817,151 stock options available for grant under the 2000 Plan.

During the six months ended June 30, 2003, the Company granted 825,000 stock options with a weighted average exercise price of $0.30.

At June 30, 2003, 6,639,650 stock options remain outstanding at exercise prices ranging from $0.18 to $5.50 with a weighted average remaining life of 6.8 years, of which 4,621,317 are vested as of June 30, 2003.

Warrants

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

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 $306,708. In October 2002, these special warrants were converted into 10,225,891 shares of common stock and 3,557,976 common stock purchase warrants. On June 9, 2003, the Board of Directors of the Company approved an extension of the expiration date from June 6, 2003 until July 7, 2003 for the exercise of each of the $0.65 warrants and the $0.70 warrants that were issued in June 2002. In June 2003, 159,129 warrants were exercised totaling $111,124 in gross proceeds. Subsequent to June 30, 2003, an additional 619,964 warrants were exercised totaling $428,698 in gross proceeds. All remaining warrants, expired on July 7, 2003.

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. These warrants expired on May 30, 2003, and no warrants were exercised. 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 $834,596. 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 March 2003, the loan was paid in full with proceeds from the executive officer’s 2002 bonus.

4. Net Loss Per Share

Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128 “Earnings per Share”. Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock by application of the treasury stock method.

Since the effect of the assumed exercise of common stock options and other convertible securities was anti-dilutive, the number of shares used in calculation of basic and diluted loss per share are the same for both periods.

5. Discontinued Operations

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

Operating results of the Company’s discontinued operations are shown separately as a single line item in the accompanying consolidated statements of operations. The BTX Division did not have any sales due to the division being sold in January 2003 for the three months ended June 30, 2003 and had $976,686 in sales for the three months ended June 30, 2002. Sales of $162,060 and $1,763,749 were recorded for the six months ended June 30, 2003 and 2002, respectively. These amounts are not included in sales in the accompanying unaudited consolidated statements of operations.

6. Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective August 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company has not determined the impact of the adoption of SFAS No. 150 on its results of operations or financial condition.

7. 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 year ended December 31, 2002.

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

	Three Months Ended June 30,							Six Months Ended June 30,
	(Unaudited)							(Unaudited)
	2003				2002			2003			2002
Net loss for the period, U.S. GAAP	$	(1,397,238		)	$	(1,537,307	)	$	(1,219,190	)	$	(2,999,123	)
Adjustment for stock based compensation – non-employees	31,807				11,668			53,976			58,509
Net loss for the period, Canadian GAAP	$		(1,365,431	)	$	(1,525,639	)	$	(1,165,214	)	$	(2,940,614	)
Net loss per common share, Canadian GAAP – basic and diluted	$		(0.03	)	$	(0.04	)	$	(0.02	)	$	(0.08	)
Weighted average number of common shares, Canadian GAAP	50,497,772				39,683,651			50,452,441			36,578,421

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

	June 30, 2003			December 31, 2002
	(Unaudited)
Additional paid in capital	$	54,278,954		$	54,108,063
Accumulated deficit	$	(51,462,622	)	$	(50,297,408	)

8. Stock-based compensation

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

Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes pricing model.

The Black Scholes options valuation model was developed for use in estimating the fair value of trade options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in

management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	(Unaudited)						(Unaudited)
	2003			2002			2003			2002
Pro forma net income (loss)	$	(1,752,714	)	$	(1,648,475	)	$	(1,697,177	)	$	(3,190,504	)
Pro forma basic and diluted net income (loss) per common share	$	(0.03	)	$	(0.04	)	$	(0.03	)	$	(0.09	)

9. Subsequent Events

On July 16, 2003 the Company closed a preferred share private placement and raised an aggregate of $15.67 million, through the sale of $8.17 million of its Series A Cumulative Convertible Preferred Stock and $7.50 million of its Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. The terms of the two series of preferred stock differ slightly. The Series A Preferred Stock is convertible into the Company’s common stock at a conversion price of $0.60 per share, and there is no escrow provision. The Series B Preferred Stock is convertible into the Company’s common stock at a conversion price of $0.70 per share, and the proceeds from the sale of the Series B Preferred Stock will remain in escrow to be released to the Company upon the achievement of specific milestones. Upon conversion, Preferred Stock will convert into 24,330,953 shares of the Company’s common stock. The Company will pay the holders of Series A and Series B Preferred Stock an annual coupon of 6%, in shares of common stock or cash payable quarterly, and each holder received 40% warrant coverage at an exercise price of $0.75 per share exercisable through July 13, 2008. Warrants granted to Preferred Stock holders entitle investors the right to acquire 9,732,381 shares of the Company’s common stock. The placement agents for the Series A and B Preferred Stock were also granted warrants entitling the agents to acquire 1,944,428 shares of common stock of the Company. Each placement agent’s warrant entitles the holder to acquire one share of common stock at a price between $0.60 and $0.75 per share, exercisable through July 13, 2008.

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

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including those statements related to development plans, intentions to seek licensing partners and additional sources of capital, intended inventory levels, expectations concerning the adequacy of existing cash resources and anticipated sources of future revenues, and other financial, clinical, business environment and

trend projections. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, without limitation, potential changes in strategy and focus of potential collaborative partners, competitive conditions and demand for its products, the current stage of development of both us and our products, the timing and uncertainty of results of both research and regulatory processes, the extensive government regulation applicable to our business, the unproven safety and efficacy of our device products, our significant additional financing requirements, the volatility of our stock price, the uncertainty of future capital funding, our potential exposure to product liability or recall, uncertainties relating to patents and other intellectual property, including whether we will obtain sufficient protection or competitive advantage therefrom, our dependence upon a limited number of key personnel and consultants and our significant reliance upon our collaborative partners for achieving our goals, and other factors detailed in our Annual Report on Form 10-K for the year ended December 31, 2002.

General

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

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

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

Due to the expenses incurred in the development of the drug and gene delivery systems, we have been unprofitable in the last eight years. As of June 30, 2003, we have an accumulated deficit of $54,545,737. We expect 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, we completed a change in our 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 in the financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United Sates.

Critical Accounting Policies

There have been no changes in our critical accounting policies as discussed in our annual report on Form 10-K for the year ended December 31, 2002.

Revenue recognition

We have adopted a strategy of co-developing or licensing our gene delivery technology for specific genes or specific medical indications. Accordingly, we have entered into collaborative research and development agreements. 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 revelant agreement and provided collectibility is reasonably assured.

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

Patent and license costs

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

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

Long-lived assets

We assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we reduce the carrying value of the asset to fair value. While our current and historical operating and cash flow losses are potential indicators of impairment, we believe the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value, and accordingly, we have not recognized any impairment losses through June 30, 2003.

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.

Results of Operations

Revenues

We had total revenues of $9,004 and $20,141 for the three months and six months ended June 30, 2003, respectively, compared to $40,971 and $45,441 for the three months and six months ended June 30, 2002, respectively. Total revenues decreased $31,967, or 78%, and decreased by $25,300, or 56%, for the three months and six months ended June 30, 2003, respectively, as compared to the same period 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 months and six months ended June 30, 2003 were $1,471 and $2,942, respectively, compared to $1,471 and $2,941, respectively, for the three months and six months ended June 30, 2002. The licenses fees which were recorded for the three months and six months ended June 30, 2003 and 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. We will receive further payments, in the form of cash and stock of Valentis, if certain milestones are achieved under the agreement. In October 2002, we received an upfront milestone payment of $100,000. We are currently seeking a new licensing partner for the use of electroporation for the delivery of drugs in the treatment of cancer and delivery of genes into cells. Until a new strategic alliance is in place with a new partner and we achieve the milestones specified in the new agreement, or product sales commence under the new agreement, we 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 months and six months ended June 30, 2003 and 2002. All active grants have expired, but we continue to pursue additional grants; however, no assurance can be given that any such awards will be realized.

During the three months and six months ended June 30, 2003, we recorded revenues under collaborative research and development arrangements in the amounts of $7,533 and $17,199, respectively, compared to $39,500 and $42,500, respectively, for the three months and six months ended June 30, 2002, respectively. Research and development collaborative revenues decreased $31,967, or 81%, and $25,300, or 60%, for the three and six months ended June 30, 2003, as compared to the same periods in the prior year. The decrease was primarily due to the absence of additional collaborative research agreements.

Research and Development

Research and development expenses, which include clinical trial costs, for the three months and six months ended June 30, 2003, were $429,235 and $904,969, respectively, compared to $633,735 and $1,257,720, for the three months and six months ended June 30, 2002, respectively.

Research and development expenses decreased by $204,500, or 32%, for the three months ended June 30, 2003 as compared to the same periods the prior year. For the six months ended June 30, 2003, expenses decreased by $352,751, or 28%, as compared to the six months ended June 30, 2002. The decrease in research and development expenses for the three months and six months ended June 30, 2003, reflects a reduction in research and development activities due to limited financial resources, lower clinical/regulatory expenses and the reduction of the use of outside consultants to more effectively manage existing resources. We are currently planning to enter additional Phase III clinical trials, which is subject to the approval by the FDA. Clinical/regulatory expenses will increase substantially if a Phase III clinical trial is initiated.

General and Administrative Expenses

General and administrative expenses, which consist of business development expenses, and general administrative expenses, for the three months and six months ended June 30, 2003, were $979,560 and $2,243,023, respectively, compared to $930,433 and $1,808,311 for the three months and six months ended June 30, 2002, respectively. General and administrative expenses increased by $49,127, or 5%, from $930,433 to $979,560 for the three months ended June 30, 2002 as compared to the same period in the prior year. For the six months ended June 30, 2003, general and administrative expense increased by $434,712, or 19%, from $1,808,311 to $2,243,023 as compared to the same period in the prior year. The increase in general and administrative expenses for the three months and six months ended June 30, 2003, as compared to the same period in the prior year, mainly reflects increased severance cost resulting from the sale of our BTX division, an increased corporate insurance cost, the absorption of certain BTX fixed costs, and increased business development efforts. In addition, during the first quarter of 2003, we recorded a realized loss of $102,238, associated with a foreign currency translation adjustment.

Interest Income, Net

Interest income, net for the three months ended June 30, 2003 and June 30, 2002, were $2,553 and $9,507, respectively. Interest income, net for the six months ended June 30, 2003 and June 30, 2002 decreased from a net interest income amount of $13,463 at June 30, 2002 to a net interest expense amount at June 30, 2003 of $14,677. This decrease for the six months ended June 30, 2003, was due to a charge to interest expense of $19,800 related to a bridge loan in the first quarter of 2003. In addition, the decrease in interest income for the three months and six months ended June 30, 2003 and June 30, 2002, resulted primarily from the diminishing availability of investment funds due to the continuing operating losses as well as an overall decline in interest rates.

Net Income (Loss)

We reported net loss of $1,397,238 and $1,219,190 for the three months and six months ended June 30, 2003, respectively, compared to net loss of $1,537,307 and $2,999,123 for the three months and six months ended June 30, 2002. The increased net loss for the three months ended June 30, 2003, as compared to the same period in the prior year, was the result of lower revenues under collaborative research and development agreements and increased general and administrative expense. The decreased net loss for the six months ended June 30, 2003, as compared to the same period in the prior year, was the result of a gain recorded in January 2003 of $2,034,078, from the sale of the BTX division.

Liquidity and Capital Resources

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

As of June 30, 2003, we had working capital of $336,311 as compared to $1,039,908 as of December 31, 2002. The change was primarily a result of an improvement in working capital resulting from the sale of the BTX Division, offset by diminishing funds used to support continuing operations.

On January 21, 2003, we entered into a $1,000,000 bridge loan with a major stockholder. In February 2003, the bridge loan was paid in full with proceeds from the sale of the BTX Division. Warrants to purchase 60,000 shares of our common stock at $0.01 per share were granted in lieu of interest being charged on the loan. The warrants expire in January 2005.

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

On June 6, 2002, we 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 our common stock and a warrant for the purchase of one-third of one share of our common stock. Each such warrant is exercisable for 12 months to purchase one share of our common stock at $0.70. The total number of warrants exercisable at $0.70 per share is 2,661,851 which shall expire on June 6, 2003. Each $0.47 special warrant is exercisable, without additional payment, into one share of our common stock and a warrant for the purchase of 40% of one share of our common stock. Each such warrant is exercisable for 12 months to purchase one share of our common stock at $0.65. The total number of warrants exercisable at $0.65 per share is 896,125, which expire on June 6, 2003. The gross proceeds of this financing were reduced by issuance costs including the placement agent’s commission of 6.0% of the gross proceeds of $264,413 and other issue costs of $306,708. In October 2002, these special warrants were converted into 10,225,891 shares of common stock and warrants to purchase 3,557,976 shares of our common stock exercisable at $0.65 or $0.70 per share. On June 9, 2003, our Board of Directors approved an extension of the expiration date from June 6, 2003 until July 7, 2003 for the exercise of each of the warrants exercisable at $0.65 or $0.70 that were issued in June 2002. In June 2003, 159,129 warrants were exercised totaling $111,124 in gross proceeds. Subsequent to June 30, 2003, an additional 619,964 warrants were exercised totaling $428,698 in gross proceeds. All remaining warrants expired on July 7, 2003.

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

On November 30, 2001, we closed a private placement of 5,212,494 special warrants at a purchase price of $0.45 per special warrant for gross proceeds of $2,345,622. Each special warrant entitled the holder to acquire one share our common stock as well as a warrant to purchase one-half of a share of our 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 our common stock and 2,606,247 warrants, each of which entitles the holder to purchase one share of our common stock at a price of $0.75. These warrants expired on May 30, 2003, and none of the warrants were exercised. 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 $420,763. The placement agent was also granted Series A special warrants entitling the placement agent to acquire 100,000 shares of our common stock, without payment of further consideration, as well as Series B special warrants entitling the placement agent to acquire 521,249 warrants, each of which entitles the holder to purchase one share of our common stock at a price of $0.45 per share, which were exercisable through May 30, 2003. In May 2002, the Series A special warrants were converted into 100,000 shares of our common stock.

On July 16, 2003, we issued a press release announcing that we had raised an aggregate of $15.67 million, through the sale of $8.17 million of our Series A Cumulative Convertible Preferred Stock and $7.50 million of our Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. All proceeds from the sale of Series A Cumulative Convertible Preferred Stock were received. The proceeds from the sale of the Series B Preferred Stock will remain is escrow to be released to the Company upon the achievement of specific milestones.

As of June 30, 2003, we had an accumulated deficit of $54,545,737. We have operated at a loss since 1994, and we expect this to continue for some time. The amount of the accumulated deficit will continue to grow, as it will be expensive to continue clinical, research and development efforts. If these activities are successful and if we receive approval from the FDA to market equipment, then additional funding will be required to market and sell the equipment.

We will continue to rely on outside sources of financing to meet our capital needs beyond next year. The outcome of these matters cannot be predicted at this time. Further, there can be no assurance, assuming we successfully raise additional funds, that we will achieve positive cash flow. Including the cash proceeds received from the July 2003 financing, the exercises of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through November, 2004. If we are not able to secure additional funding, we will be required to further scale back our research and development programs, preclinical studies and clinical trials, and selling, general, and administrative activities, and we may not be able to continue in business.

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

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

• The time involved in obtaining regulatory approvals;

• The cost involved in filing and maintaining patent claims;

• Competitor and market conditions;

• The ability to establish and maintain collaborative arrangements;

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

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

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

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

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

• The ability to maintain existing collaborative arrangements.

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

Certain Risk Factors Related To Our 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, 2003, we had a deficit of $54,545,737. 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.

The cash we have received during the fiscal year beginning January 1, 2003, came from the sale of our BTX Division, exercise of employee stock options and investor warrants, and the sale of

preferred stock. Other funds came from collaborative research arrangements, and interest income on our investments. Because we did not have access to sufficient committed capital to meet our projected operating needs at December 31, 2002, our auditor has included in their report on the financial statements for the year ended December 31, 2002, an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern. On July 16, 2003, we issued a press release announcing that had raised an aggregate of $15.67 million, through the sale of $8.17 million of our Series A Cumulative Convertible Preferred Stock and $7.50 million of our Series B Cumulative Convertible Preferred Stock, to institutional and accredited investors. All proceeds from the sale of Series A Cumulative Convertible Preferred Stock were received. The proceeds from the sale of the Series B Preferred Stock will remain is escrow to be released to us upon the achievement of specific milestones. Including the cash proceeds received from the July 2003 financing, the exercises of employee stock options and investor warrants, and the sale of the BTX Division, we believe we have sufficient funds to fund operations through November, 2004

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;

• 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 these transactions will provide enough money to meet our needs.

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

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

If We Do Not Have Enough Money To Fund Operations, Then We Will Have To Cut Costs 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.

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.

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.

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

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

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

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

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

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

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

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

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

The production and marketing of our human-use equipment and the ongoing research, development, preclinical testing, and clinical trial activities are subject to extensive regulation. Numerous governmental agencies in the United States and internationally, including the FDA, must review our applications and decide whether to grant approval. All of our human-use equipment must go through an approval process, in some instances for each indication in which we want to label it for use (such as, use for dermatology, use for transfer of a certain gene to a certain tissue, or use for administering a certain drug to a certain tumor type in a patient having certain characteristics). These regulatory processes are extensive and involve substantial costs and time.

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;

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

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

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

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

Our partners and collaborators fund a portion of our research and development expenses and assist us in the research and development of our human-use equipment. These collaborations and partnerships can help pay the salaries and other overhead expenses related to research. Our largest partner at this time is Valentis, Inc. In November 2001, we entered into a non-exclusive license and supply agreement with Valentis, whereby Valentis obtained rights to use our electroporation technology in the development of certain Genemedicine products. We received an upfront cash payments of $100,000 from Valentis in the first quarter of 2002 and fourth 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. Because this partnership was terminated, we did not receive significant milestone payments which we had expected and were forced to delay some clinical trials as well as some product development. The Valentis partnership is not of the same size and scope and termination of the Valentis partnership would not present operational difficulties.

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. If it becomes necessary or desirable to include bleomycin in our package, and this relationship with Abbott should be terminated, then we would have to form a relationship with another provider of this generic drug before any product could be launched.

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

Nevertheless, there is always risk that:

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

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

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

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

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

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

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.

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

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

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

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

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

Our Ability To Achieve Significant Revenue From Sales Or Leases Of Human-Use Equipment Will Depend On Establishing Effective Sales, Marketing And Distribution Capabilities Or Relationships And We Lack Substantial Experience In These Areas.

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

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

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 will affect the stock price.

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

• Adverse clinical trial results;

• Our inability to obtain additional capital;

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

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

• Cancellation of important corporate partnerships or agreements;

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

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

• Adverse research and development results;

• A decreasing cash-on-hand balance to fund operations, or other signs of apparent financial uncertainty; and

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

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

Successful approval, marketing, and sales of our human-use equipment are critical to the financial future of our company. Our 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 Products 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 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 Dr. 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.

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

• general economic and business conditions;

• industry trends;

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

• our actual funding requirements; and

• availability, terms and deployment of capital.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income that we can earn on our cash equivalents and on the increase or decrease in the amount of interest expense that we must pay with respect to our capital lease obligations. We are subject to interest rate risk on our capital lease arrangements which carry an average fixed annual rate of approximately 17% and on our cash equivalents which at June 30, 2003 had an average interest rate of approximately 1.4%. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments. Declines in interest rates over time will, however, reduce the interest income while increases in interest rates over time will increase the interest expense.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under Rule 13a — 14 of the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. Within 90 days prior to the date of filing of this report (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed with the FDIC under the Exchange Act.

Changes in Internal Controls

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

Part II. Other Information

Items 1, 2, 3, and 5 are not applicable and have been omitted.

Item 4. Submission of Matters to a Vote of Security Holders

On May 22, 2003, the registrant held its annual meeting of stockholders. At the stockholders meeting, the following matters were submitted to stockholders for vote: Proposal No. 1 – Election of directors, Proposal No. 2 – Approval of an extension of the registrant’s Shareholder Rights Plan, that was to expire on May 22, 2003 and Proposal No. 3 – Ratification of appointment of independent accountants. The results of the voting on these proposals are as follows:

1. Proposal No. 1 - Each of the below individuals were elected to serve until the next annual meeting of the stockholders or until his or her successor is duly elected or appointed, subject to earlier resignation or removal.

Name	Votes For	Votes Against/Withhold	Votes Abstained	Not Voted
Avtar Dhillon	26,648,270	35	30,152	2,749,346
Tazdin Esmail	26,647,920	385	30,152	2,749,346
James L. Heppell	26,647,920	24,385	30,152	2,725,346
Gordon J. Politeski	26,629,120	19,185	30,152	2,749,346
Felix Theeuwes	26,648,270	35	1,000	2,749,346

2. Proposal No. 2 - The Shareholders approved the extension of the existing shareholder rights plan, which expired on May 22, 2003 and was originally approved by stockholders of the registrant on July 28, 1997. This proposal was approved by the majority vote of the stockholders. The total number of votes cast for, against, and abstained was 10,550,897, 40,352, and 15,626 respectively. The number of broker non-votes was 18,820,928. Broker non-votes count in determining if a quorum present but do not count towards the for, against or abstained vote tabulation.

3. Proposal No. 3 - The shareholders approved the appointment of Ernst & Young LLP as the registrant’s independent auditors for the fiscal year ending December 31, 2003. This proposal was approved by the majority vote of the stockholders. The total number of votes cast for, against, and abstained was 26,667,191, 5,250, and 6,016, respectively. The number of shares not voted was 2,749,346.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Description of Document
31.1		Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
31.2		Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

During the three-month period ending June 30, 2003, the registrant filed one current report on Form 8-K.

On June 10, 2003 under Item 5 – Other Events. Regarding approval by the registrant’s Board of Directors of an extension of the expiration date from June 6, 2003 until July 7, 2003 for the exercise of each of the $0.65 Warrants and the $0.70 Warrants that were issued in June 2002. The registrant has outstanding $0.65 Warrants to purchase up to 896,126 shares of its common stock at a purchase price of $0.65 per share. The registrant has outstanding $0.70 Warrants to purchase up to 2,661,858 shares of its common stock at a purchase price of $0.70 per share. Other than the extension of the expiration date, no other terms or conditions of the $0.65 Warrants or the $0.70 Warrants were changed.

GENETRONICS BIOMEDICAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Genetronics Biomedical Corporation


Date: August 12, 2003	By:	/s/ Peter Kies
		Peter Kies, Chief Financial Officer