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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
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
of incorporation or organization) Identification No.)
3400 Research Forest Drive, The Woodlands, Texas 77381
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 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, 1996
----- -----------------------------
Common Stock, $.001 par value 21,695,449 shares
2
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, 1995 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, as
amended, 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)
A S S E T S
March 31,
December 31, 1996
1995 Unaudited)
---- ----------
Current assets:
Cash and cash equivalents .............................. $ 7,781 $10,170
Short-term investments ................................. 2,480 --
Accounts receivable - affiliates ....................... 345 180
Prepaid expenses and other assets ...................... 288 180
--- ---
Total current assets ................................. 10,894 10,530
Long-term investments ..................................... 1,754 1,704
Furniture, equipment and leasehold improvements, net ...... 2,832 2,626
Investment in affiliate ................................... 50 --
Total assets ....................................... $15,530 $14,860
======= =======
L I A B I L I T I E S A N D T O C K H O L D E R S ' E Q U I T Y
Current liabilities:
Accounts payable and accrued expenses .................... $ 1,478$ 746
Accrued payroll .......................................... 161 120
Current portion of notes payable - related party ......... 87 87
Current portion of other notes payable ................... 211 211
Current portion of obligations under capital leas......... 25 22
-- --
Total current liabilities .............................. 1,962 1,186
Long-term obligations:
Notes payable - related party, net of current portion .... 211 191
Other notes payable, net of current portion .............. 446 396
Obligations under capital leases, net of current portion.. 41 37
Deferred revenue ......................................... 876 926
--- ---
Total long-term obligations ............................ 1,574 1,550
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 10,000,000 shares authorized,
none issued and outstanding............................. -- --
Common stock $.001 par value, 75,000,000 shares autorized
20,760,112 and 21,695,449 shares issued and outstanding,
respectively 21 22
Additional paid-in capital ................................... 56,331 59,538
Common stock warrants ........................................ 1,488 1,364
Treasury stock ............................................... (11) (11)
Deferred compensation ........................................ (1,536) (2,367)
Unrealized loss on investments ............................... (116) (166)
Deficit accumulated during development stage ................ (44,183) (46,256)
------ ------
Total stockholders' equity ................................ 11,994 12,124
------ ------
Total liabilities and stockholders' equity ...................$ 15,530 $14,860
======= =======
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, 1986)
Three Months Ended through
March 31, March 31,
--------- ---------
1995 1996 1996
---- ---- ----
Revenues:
Research and development grants
and contracts............................ 85 $ 543 $ 2,082
Interest income............................ 118 142 1,972
--- --- -----
Total revenues......................... 203 685 4,054
--- --- -----
Expenses:
Research and development................. 1,780 2,322 31,107
Purchase of in-process research
and development........................ -- -- 8,383
General and administrative................ 380 395 9,938
Interest expense.......................... 52 41 882
-- -- ---
Total expenses........................ 2,212 2,758 50,310
----- ----- ------
Net loss..................................... $(2,009) $(2,073) $(46,256)
========== ======== ========
Net loss per share........................... $(0.19) $ (0.10)
========= =======
Weighted average shares used in computing net
loss per share............................ 10,443 21,295
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
Three Months (June 13, 1986)
Ended through
March 31, March 31,
1995 1996 1996
-------- -------- --------
Cash flows from operating activities:
Net loss ........................................ $ (2,009) $ (2.074) (46,256)
Adjustments to reconcile net loss to net cash
provided by(used in) operating activities-
Depreciation and amortization ................. 173 244 2,195
Compensation expense related to stock and
stock options ............................... 141 131 2,220
Charge for purchase of in-process research
and development ............................. -- -- 8,383
Changes in assets and liabilities-
Decrease (increase) in prepaid expenses
and other assets ......................... (47) 108 5
Increase (decrease) in accounts payable and
accrued expenses .......................... (209) (773) 793
Decrease (increase) in accounts receivable
- affiliates ............................. -- 165 (180)
Increase in deferred revenue................. -- 50 573
Accrued interest payable converted to stock ... -- -- 97
Net cash used in operating activities ...... (1,951) (2,148) (32,170)
Cash flows from investing activities:
Net sales of investments ........................... 3,013 2,530 4,031
Purchase of furniture, equipment and leasehold
improvements .................................... (72) (38) (3,551)
Unrealized loss on investment...................... -- (50) (166)
Acquisition costs, net of cash received of $947,000 -- -- (270)
Loss in affiliate ................................. 75 50 500
Investment in affiliate ........................... -- -- (500)
Increase in other assets .......................... (453) -- --
-- -- --
Net cash provided by (used in) investing
activities . ................................... 2,563 2,492 44
Cash flows from financing activities:
Proceeds from notes payable ........................ 64 -- 2,672
Repayment of notes payable ......................... (96) (77) (1,729)
Purchase of treasury stock .......................... - -- (11)
Proceeds from issuance of stock ..................... 12 2,122 41,364
Net cash provided by (used in) financing activities (20) 2,045 42,296
Net increase in cash and cash equivalents ............. 592 2,389 10,170
Cash and cash equivalents at beginning of period ...... 1,426 7,781 --
-- -- --
Cash and cash equivalents at end of period .......... $ 2,018 $10,170 $10,170
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ......... 52 41 $ 769
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, 1996
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Aronex Pharmaceuticals, Inc. ("Aronex" 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. Aronex 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 revenues in the future. 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 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"), and an affiliate of the Baylor College of Medicine ("Baylor").
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-1997. Accordingly, there can be no assurance
of the Company's future success.
The balance sheet at March 31, 1996 and the related statements of
operations and cash flows for the three month periods ending March 31, 1996
and 1995 and the period from inception (June 13, 1986) through March 31,
1996 are unaudited. These interim financial statements should be read in
conjunction with the December 31, 1995 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. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents include money market accounts and
investments with an original maturity of less than three months.
Available-for-sale securities are U. S. Government mortgage backed
securities with various maturity dates over the next several years and have
an amortized cost of $1,870,000, a carrying value of $1,704,000 and a gross
unrealized holding loss of $166,000 at March 31, 1996.
3. FEDERAL INCOME TAXES
At December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $57.1
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 its NOLs and tax credit
carryforwards to reduce future taxable income and tax liabilities may be
limited. As a result of the mergers 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 U.S. 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. The
Company has not made any income tax payments since inception.
7
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
4. CONTINGENCY
In August 1995, the Company was named as a defendant in a lawsuit
filed by certain common stockholders of Oncologix seeking damages as a
result of the merger with Oncologix. Plaintiffs contend that the provision
of the merger whereby common stockholders obtained no consideration is
contrary to law and damaging to them. Plaintiffs sought prior injunctive
relief to prevent consummation of the merger, but this relief was denied by
the District Court. The Company believes the above lawsuit will be resolved
without a material adverse effect on the accompanying financial statements.
5. SUBSEQUENT EVENT
In April 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed public offering
of 6,000,000 shares of Common Stock.
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" or
the "Company") has primarily devoted its resources to fund research, drug
discovery and development. The Company has been unprofitable to date and
expects to incur substantial 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
losses of approximately $46.3 million through March 31, 1996. The Company
has financed its research and development activities and operations
primarily 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. On September 11,
1995, Aronex acquired Oncologix, Inc. ("Oncologix") and Triplex
Pharmaceutical Corporation ("Triplex") in a three way merger (the
"Mergers"), which were accounted for under the purchase method of
accounting. The financial data prior to September 11, 1995 discussed below
represent the operations and balance sheet data of Aronex, while the
financial data from and after September 11, 1995 discussed below represent
the combined operations and balance sheet data of the merged companies.
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
Revenues from research and development grants and contracts were
$543,000 and $85,000 for the three months ended March 31, 1996 and 1995,
respectively. The increase of $458,000 was due to the following: an
increase in development revenue from RGene Therapeutics, Inc., an affiliate
of the Company, to $170,000 from $85,000 in 1995; and revenues of $300,000
from Hoechst Marion Roussel Inc. ("Hoechst") and $73,000 from Small
Business Innovative Research ("SBIR") grants. There was no Hoechst or SBIR
grant revenue in the first three months of 1995 because these revenues were
obtained as a result of the Mergers.
Interest income on cash, cash equivalents and investments was $142,000
and $118,000 for the three months ended March 31, 1996 and 1995,
respectively. The increase of $24,000 was primarily due to an increase of
funds available for investment in 1996 resulting from cash,
cash-equivalents and investments acquired in the Mergers and from the
exercise of warrants.
Research and development expenses were $2,322,000 in the first quarter
of 1996 compared to $1,780,000 in the first quarter of 1995. The increase
of $542,000 was primarily due to the addition of Triplex's research
programs following the Mergers.
General and administrative expenses were $395,000 in the first quarter
of 1996 and $380,000 in the first quarter of 1995.
Interest expense was $41,000 and $52,000 for the three months ended
March 31, 1996 and 1995, respectively. The $11,000 decrease in interest
expense resulted primarily from a decrease in the amount of laboratory
equipment obtained through leases and promissory notes payable.
Net loss for the first quarter of 1996 increased by $64,000 to
$2,073,000 compared to $2,009,000 for the first quarter of 1995, due mainly
to the increase in research expenses.
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 $41
million from the sale of equity securities from its inception through March
31, 1996. 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 TretinoinLF,
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,
the Company raised net proceeds of approximately $11.5 million in a public
offering of Common Stock. From October 1995 through March 31, 1996, the
Company received aggregate net proceeds of approximately $5.3 million from
the exercise of certain warrants issued in the Mergers. From its inception
until March 31, 1996, the Company also received an aggregate of $2.5
million cash from collaborative arrangements and SBIR grants. In September
1995, the Company's cash and securities held to maturity increased by
approximately $6.7 million as a result of its merger with Triplex. In April
1996, the Company filed a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of 6,000,000
shares of Common Stock.
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 $2.1
million and $2.0 million was used in operating activities during the first
quarter of 1996 and 1995, respectively. The Company had cash, cash-
equivalents and short-term investments of $11.9 million as of March 31,
1996, consisting primarily of cash in banks and money market accounts and
United States government securities.
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 FDA and other regulatory approvals are
obtained. The Company expects that its existing capital resources will be
sufficient to fund its capital requirements through mid-1997. If the
registration statement the Company has filed in April 1996 for a public
offering is successful, proceeds should add capital resources sufficient to
fund its capital requirements through mid-1998. 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 Company's ability to satisfy
certain milestones under its current collaborative arrangements with
Genzyme and Hoechst; 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 or
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
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, 1995, as amended, and "- Liquidity and Capital Resources"
included elsewhere in this report.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation. Exhibit 3.1 to the
Company's Registration Satement on Form S-1 (No. 33-47418) (the "1992
Registration Statement"), declared effective by the Commission on July
10, 1992, is incorporated herein by reference.
3.2 Restated Bylaws. Exhibit 3.2 to the 1992 Registration Statement is
incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock, par value $.001 per
share. Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, as amended, is incorporated herein by
reference.
11.1 Statement regarding computation of per share earnings.
27.1 Financial data schedule.
(b) Reports on Form 8-K
None
12
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 13, 1996 By:/S/JAMES M. CHUBB
James M. Chubb, Ph.D.
President and Chief Executive Officer
Dated: May 13, 1996 By:/S/TERANCE A. MURNANE
Terance A. Murnane
Controller
Exhibit 27.1
ARONEX PHARMACEUTICALS, INC.
FINANCIAL DATA SCHEDULE