- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission File No. 0-20111
ARONEX PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0196535
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8707 Technology Forest Place, The Woodlands, Texas 77381-1191
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (281) 367-1666
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at March 31, 1998
Common Stock, $.001 par value 15,467,281 shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ARONEX PHARMACEUTICALS, INC.
Quarterly Period March 31, 1998
INDEX
Page
Factors Affecting Forward Looking Statements.................................. 3
PART I. Financial Information
Item 1 Financial Statements................................................. 3
Balance Sheets - December 31, 1997 and March 31, 1998
(unaudited).................................. ....................... 4
Statements of Operations:
Three Months Ended March 31, 1997 and March 31, 1998
(unaudited) and for the Period from Inception
(June 13, 1986) through March 31, 1998 (unaudited)................. 5
Statements of Cash Flows:
Three Months Ended March 31, 1997 and March 31, 1998
(unaudited) and for the Period from Inception
(June 13, 1986) through March 31, 1998 (unaudited)................. 6
Notes to Financial Statements - March 31, 1998....................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 9
PART II. Other Information
Item 6 Exhibits and Reports on Form 8-K.................................... 11
SIGNATURES ........................................................... 12
- 2-
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
Factors Affecting Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "expect," "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
believed, expected, estimated or projected. For additional discussion of such
risks, uncertainties and assumptions, see "Item 1. Business - Manufacturing," "-
Sales and Marketing," "Patents, Proprietary Rights and Licenses," "- Government
Regulation," "- Competition" and "- Additional Business Risks" included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "- Liquidity and Capital Resources" included elsewhere in
this report.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made herein are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the financial statements for the year ended December 31,
1997 included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
The information presented in the accompanying financial statements is
unaudited, but in the opinion of management, reflects all adjustments (which
include only normal recurring adjustments) necessary to present fairly such
information.
- 3-
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
BALANCE SHEETS
(All amounts in thousands, except share data)
ASSETS
March 31,
December 31, (Unaudited)
1997 1998
---- ----
Current Assets:
Cash and cash equivalents...................... $ 2,029 $ 3,306
Short-term investments......................... 17,783 17,235
Accounts receivable............................ 100 --
Prepaid expenses and other assets.............. 474 825
---------- ---------
Total current assets...................... 20,386 21,366
Long-term investments............................. 10,142 5,111
Furniture, equipment and leasehold improvements,
net.......................................... 1,107 2,099
Deposits.......................................... 490 --
---------- ---------
Total assets.............................. $ 32,125 $ 28,576
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......... $ 1,977 $ 3,135
Accrued payroll................................ 554 743
Advance from Genzyme........................... 2,000 2,000
Current portion of notes payable............... 191 95
Current portion of obligations under capital
leases................... 18 18
---------- ---------
Total current liabilities................. 4,740 5,991
Long-term liabilities:
Obligations under capital leases, net of
current portion.............................. 6 3
---------- ---------
Total long-term liabilities............... 6 3
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000
shares authorized, none issued and
outstanding.................................. -- --
Common stock $.001 par value, 30,000,000 shares
authorized, 15,459,166 and 15,467,281 shares
issued and outstanding, respectively......... 15 15
Additional paid-in capital..................... 96,606 96,609
Common stock warrants.......................... 967 967
Treasury stock................................. (11) (11)
Deferred compensation.......................... (907) (796)
Unrealized loss on investments................. (87) (87)
Deficit accumulated during development stage... (69,204) (74,115)
-------- ---------
Total stockholders' equity................ 27,379 22,582
-------- ---------
Total liabilities and stockholders' equity..... $ 32,125 $ 28,576
======== =========
The accompanying notes are an integral part of these
financial statements.
- 4-
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
(All amounts in thousands, except loss per share data)
(Unaudited)
Period from
Inception
(June 13,
Three Months Ended 1986)
March 31, through
March 31,
1997 1998 1998
------------ ------------ -----------
Revenues:
Interest income.......................................... $ 592 $ 417 $ 5,998
Research and development grants and contracts............ 286 103 5,153
------------ ------------ -----------
Total revenues...................................... 878 520 11,151
------------ ------------ -----------
Expenses:
Research and development................................. 3,485 4,522 57,657
Purchase of in-process research and development.......... -- -- 11,625
General and administrative............................... 456 904 14,708
Interest expense and other............................... 30 5 1,276
------------ ------------ -----------
Total expenses...................................... 3,971 5,431 85,266
------------ ------------ -----------
Net loss.................................................... $ (3,093) $ (4,911) $ (74,115)
============ ============ ===========
Basic and diluted loss per share............................ $ (0.21) $ (0.32)
============ ============
Weighted average shares used in computing basic and
diluted loss per share................................... 14,620 15,461
The accompanying notes are an integral part of these
financial statements.
- 5-
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Period from
Inception
(June 13, 1986)
Three Months Ended through
March 31, March 31,
1997 1998 1998
------------ ------------ -------------
Cash flows from operating activities:
Net loss. . . . . . ................................................ $ (3,093) $ (4,911) $ (74,115)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization.................................. 259 169 4,195
Loss (gain) on disposal of assets.............................. -- (2) 198
Compensation expense related to stock and stock options........ 193 111 3,347
Charge for purchase of in-process research and development..... -- -- 11,547
Unrealized loss on investment.................................. (31) -- (87)
Acquisition costs, net of cash received........................ -- -- (270)
Loss in affiliate.............................................. -- -- 500
Changes in assets and liabilities:
Increase in prepaid expenses and other assets............... (587) (351) (640)
Decrease in accounts receivable............................. 78 100 --
Increase in accounts payable and accrued expenses........... 249 1,347 3,805
Increase in deferred revenue................................ -- -- (353)
Accrued interest payable converted to stock.................... -- -- 97
------------ ------------ ------------
Net cash used in operating activities................ (2,932) (3,537) (51,776)
Cash flows from investing activities:
Net sales (purchases) of investments................................ 1,876 5,579 (16,611)
Purchase of furniture, equipment and leasehold improvements......... (93) (1,165) (5,286)
Proceeds from sale of assets........................................ -- 6 60
Deposits ......................................................... -- 490 --
Investment in affiliate............................................. -- -- (500)
------------ ------------ ------------
Net cash provided by (used in) investing activities.. 1,783 4,910 (22,337)
Cash flows from financing activities:
Proceeds from notes payable......................................... -- -- 4,672
Repayment of notes payable and principal payments under capital
lease obligations................................................. (63) (99) (2,557)
Purchase of treasury stock.......................................... -- -- (11)
Proceeds from issuance of stock..................................... 80 3 75,317
------------ ------------ ------------
Net cash provided by (used in) financing activities.. 17 (96) 77,419
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................... (1,132) 1,277 3,306
Cash and cash equivalents at beginning of period....................... 4,179 2,029 --
------------ ------------ ------------
Cash and cash equivalents at end of period............................. $ 3,047 $ 3,306 $ 3,306
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............................ $ 20 $ 5 $ 544
Supplemental schedule of noncash financing activities:
Conversion of notes payable and accrued interest to common stock $ -- $ -- $ 3,043
The accompanying notes are an integral part of these financial
statements.
- 6-
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Organization and Basis of Presentation
Aronex Pharmaceuticals, Inc. ("Aronex Pharmaceuticals" or the "Company")
was incorporated in Delaware on June 13, 1986 and merged with Triplex
Pharmaceutical Corporation ("Triplex") and Oncologix, Inc. ("Oncologix")
effective September 11, 1995 (the "Mergers"). Aronex Pharmaceuticals is a
development stage company which has devoted substantially all of its efforts to
research and product development and has not yet generated any significant
revenues, nor is there any assurance of significant future revenues. In
addition, the Company expects to continue to incur losses for the foreseeable
future and there can be no assurance that the Company will complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, the need for additional
financing, attracting and retaining key personnel and consultants, and
successfully developing manufacturing, sales and marketing operations. The
Company's ability to develop these operations may be impacted by uncertainties
related to patents and proprietary technologies, technological change and
obsolescence, product development, competition, government regulations and
approvals, health care reform, third-party reimbursement and product liability
exposure. Additionally, the Company is reliant upon collaborative arrangements
for research, contractual agreements with corporate partners, and its exclusive
license agreements with M.D. Anderson Cancer Center ("MD Anderson"). Further,
during the period required to develop these products, the Company will require
additional funds which may not be available to it. The Company expects that its
existing cash resources will be sufficient to fund its cash requirements through
mid-1999. Accordingly, there can be no assurance of the Company's future
success.
The balance sheet at March 31, 1998 and the related statements of
operations and cash flows for the three month periods ending March 31, 1998 and
1997 and the period from inception (June 13, 1986) through March 31, 1998 are
unaudited. These interim financial statements should be read in conjunction with
the December 31, 1997 financial statements and related notes. The unaudited
interim financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the interim periods
presented and all such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year.
2. Accounting Policies
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), Reporting Comprehensive Income. SFAS 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. Comprehensive income (loss) was
$(3,124,000) and $(4,911,000) for the three months ended March 31, 1997 and
1998, respectively.
3. Cash, Cash Equivalents and Investments
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. At March 31, 1998, all
short-term investments are held to maturity securities consisting of high-grade
commercial paper and U.S. Government backed securities with a carrying value of
$17,235,000, which approximates fair market value and cost. Long-term
investments include (i) held to maturity securities consisting of high-grade
commercial paper that mature over one to two years with a carrying value of
$3,500,000, which approximates fair market value and cost, and (ii) available
for sale securities which are U.S. mortgage backed securities with various
maturity dates over the next several years that have an amortized cost of
$1,698,000, a fair market value of $1,611,000 and a gross unrealized loss of
$87,000 at March 31, 1998. The Company currently has no trading securities.
4. Federal Income Taxes
At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $79.0 million.
The Tax Reform Act of 1986 provided a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. As a result of
the merger with Triplex and Oncologix, a change in control as defined by federal
income tax law occurred, causing the use of these carryforwards to be limited
and possibly eliminated. Additionally because United States tax laws limit the
time during which NOLs and the tax credit carryforwards may be applied against
future taxable income and tax liabilities, the Company may not be able to take
full advantage of its NOLs and tax credit carryforwards for federal income tax
purposes. The carryforwards will begin to expire in 2001 if not otherwise used.
Due to the possibility of not reaching a level of profitability that will allow
for the utilization of the Company's deferred tax assets, a valuation allowance
has been established to offset these tax assets. The Company has not made any
federal income tax payments since inception.
- 8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Overview
Since its inception in 1986, Aronex Pharmaceuticals, Inc. ("Aronex
Pharmaceuticals" or the "Company") has primarily devoted its resources to fund
research, drug identification and development. The Company has been unprofitable
to date and expects to incur operating losses for the next several years as it
expends its resources for product research and development, preclinical and
clinical testing and regulatory compliance. The Company has sustained net losses
of approximately $74.1 million from inception through March 31, 1998. The
Company has primarily financed its research and development activities and
operations through public and private offerings of securities. The Company's
operating results have fluctuated significantly during each quarter, and the
Company anticipates that such fluctuations, largely attributable to varying
commitments and expenditures for clinical trials and research and development,
will continue for the next several years.
Three Month Periods Ended March 31, 1997 and 1998
Interest income on cash, cash equivalents and investments was $417,000 and
$592,000 for the three months ended March 31, 1998 and 1997, respectively. The
decrease of $175,000 was primarily due to a decrease of funds available for
investment in 1998.
Revenues from research and development grants and contracts were $103,000
and $286,000 for the three months ended March 31, 1998 and 1997, respectively, a
decrease of $183,000. In the first quarter of 1997, research and development
revenue was composed of (i) $150,000 in revenue from the initiation of a license
agreement with Boehringer Mannheim GmbH and (ii) $136,000 in development revenue
from Targeted Genetics, Incorporated ("Targeted"). The three year agreement with
Targeted ended in the second quarter of 1997. Research and development revenue
for the first quarter of 1998 represents Small Business Innovative Research
("SBIR") grant revenue relating to Zintevir(TM).
Research and development expenses were $4,522,000 in the first quarter of
1998 compared to $3,485,000 in the first quarter of 1997. The increase of
$1,037,000 was primarily due to (i) an increase of $1,094,000 in clinical
investigation cost, the majority of which relates to the Company's lead product
NYOTRAN(TM) and (ii) an increase of $318,000 in medical affairs salaries and
payroll costs as the number of personnel in this department increased
significantly. These increases were partially offset by a decrease of
approximately $400,000 in research expenses in the first quarter of 1998.
General and administrative expenses were $904,000 in the first quarter of
1998 and $456,000 in the first quarter of 1997, an increase of $448,000. This
increase was primarily due to (i) an increase of $384,000 in salary and payroll
costs and (ii) an increase of $40,000 in business travel relating mainly to
business development activities. Several new positions have been added since the
first quarter of 1997, including a Vice President of Marketing and Business
Development in the third quarter of 1997 and a Chief Executive Officer in the
fourth quarter of 1997. Additionally, the Company's President, who resigned in
January 1998, is entitled to certain severance payments in accordance with a
termination and severance agreement with the Company. These severance payments,
which continue through January 1999, were recorded as compensation expense in
the first quarter of 1998.
Interest expense was $5,000 and $30,000 for the three months ended March
31, 1998 and 1997, respectively. The $25,000 decrease in interest expense
resulted primarily from a decrease in the balance of notes payable and capital
leases which were obtained to finance furniture and equipment.
Net loss for the first quarter of 1998 increased by $1,818,000 to
$4,911,000 in the first quarter of 1998, compared to $3,093,000 for the first
quarter of 1997, due mainly to the increase in research and development
expenses. The majority of research and development expenses related to advancing
the Company's two lead products, NYOTRAN(TM) and ATRAGEN(R) .
- 9-
Liquidity and Capital Resources
Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted primarily of sales of equity
securities. The Company has raised an aggregate of approximately $75 million
from the sale of equity securities from its inception through March 31, 1998. In
July 1992, the Company raised net proceeds of approximately $10.7 million in the
initial public offering of its Common Stock. In September 1993, the Company
entered into a collaborative agreement with Genzyme relating to the development
and commercialization of ATRAGEN(R) , in connection with which the Company
received net proceeds of approximately $4.5 million from the sale of Common
Stock to Genzyme. In November 1993 and May 1996, the Company raised net proceeds
of approximately $11.5 and $32.1 million, respectively, in public offerings of
Common Stock. From October 1995 through March 31, 1998, the Company received
aggregate net proceeds of approximately $6.5 million from the exercise of
certain warrants issued in its 1995 merger with Oncologix. Prior to the Mergers,
Triplex had raised $22.0 million from sales of equity securities and $7.5
million from collaborative agreements and SBIR grants, of which $6.7 million
remained as cash, cash-equivalents and investments at the effective time of the
Mergers. From its inception until March 31, 1998, the Company also received an
aggregate of $4.8 million cash from collaborative arrangements and SBIR grants.
The Company's primary use of cash to date has been in operating activities
to fund research and development, including preclinical studies and clinical
trials, and general and administrative expenses. Cash of $2.9 million and $3.5
million was used in operating activities during the first quarter of 1997 and
1998, respectively. The Company had cash, cash-equivalents and short-term and
long-term investments of $25.7 million as of March 31, 1998, consisting
primarily of cash and money market accounts and U.S. government securities and
investment grade corporate bonds.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
Federal Drug Administration and other regulatory approvals are obtained. The
Company expects that its existing capital resources will be sufficient to fund
its capital requirements through mid-1999. Thereafter, the Company will need to
raise substantial additional capital to fund its operations. The Company's
capital requirements will depend on many factors, including the problems,
delays, expenses and complications frequently encountered by development stage
companies; the progress of the Company's research, development and clinical
trial programs; the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; costs of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions in the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to the Company's products can be conducted at projected
costs. There can be no assurance that changes in the Company's research and
development plans, acquisitions, or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no assurance
that any such funding will be available to the Company on favorable terms or at
all. If adequate funds are not available, the Company may be required to curtail
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.
- 10-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Termination and Severance Agreement dated January
15, 1998, between the Company and James. M. Chubb.
10.2 Consulting Agreement dated January 1, 1998, between the
Company and Gabriel Lopez- Berestein.
10.3 Consulting Agreement dated April 1, 1998, between the Company
and Roman Perez-Solar.
11.1 Statement regarding computation of per share earnings.
27.1 Financial data schedule.
(b) Reports on Form 8-K
None
- 11-
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.
ARONEX PHARMACEUTICALS, INC.
Dated: May 11, 1998 By:/S/GEOFFREY F. COX
------------------
Geoffrey F. Cox, Ph.D.
Chief Executive Officer
Dated: May 11, 1998 By:/S/TERANCE A. MURNANE
---------------------
Terance A. Murnane
Controller
(Principal Financial and Accounting Officer)
- 12-