1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
----------
Commission File Number: 000-31979
ARRAY BIOPHARMA INC.
(Exact name of registrant as specified in its charter)
----------
Delaware 84-1460811
----------------------- ----------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
1885 33rd Street
Boulder, Colorado 80301
(Address of principal executive offices)
Registrant's telephone number: (303) 381-6600
----------
Check 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
----- -----
The number of shares of the registrant's common stock, par value $0.001 per
share, outstanding as of May 7, 2001 was 23,145,724.
2
ARRAY BIOPHARMA INC.
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2001 (unaudited) and
June 30, 2000........................................................ 3
Condensed Statements of Operations - Three and Nine Months Ended
March 31, 2001 and 2000 (unaudited).................................. 4
Condensed Statements of Cash Flows - Nine Months Ended
March 31, 2001 and 2000 (unaudited).................................. 5
Notes to Condensed Financial Statements (unaudited).................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................ 14
Item 6. Exhibits and Reports on Form 8-K .................................... 15
SIGNATURES.................................................................... 16
2
3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ARRAY BIOPHARMA INC.
CONDENSED BALANCE SHEETS
March 31, June 30,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,043,529 $ 3,846,407
Marketable securities 33,219,286 1,937,099
Accounts receivable 1,069,931 885,522
Inventories 3,035,981 1,557,376
Prepaid expenses, advances and deposits 406,017 321,689
------------ ------------
Total current assets 60,774,744 8,548,093
Property, plant and equipment, net 13,302,813 6,910,757
Other assets 391,549 364,342
------------ ------------
Total assets $ 74,469,106 $ 15,823,192
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,273,504 $ 1,708,750
Advance payments from customers 3,776,871 1,940,433
Accrued compensation and benefits 987,712 359,871
Current portion of long-term debt 2,469,787 1,723,837
Other current liabilities 292,282 605,309
------------ ------------
Total current liabilities 8,800,156 6,338,200
Long-term debt, less current portion 2,411,184 2,832,423
Stockholders' equity:
Preferred stock -- 9,835
Common stock 23,110 3,370
Additional paid-in capital 90,153,483 21,168,078
Accumulated deficit (18,495,400) (9,489,113)
Notes receivable for common stock - related party (263,250) (393,750)
Unrealized gain on marketable securities 100,025 --
Deferred compensation (8,260,202) (4,645,851)
------------ ------------
Total stockholders' equity 63,257,766 6,652,569
------------ ------------
Total liabilities and stockholders' equity $ 74,469,106 $ 15,823,192
============ ============
See notes to condensed financial statements
3
4
ARRAY BIOPHARMA INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Collaboration service revenue $ 3,177,453 $ 1,212,192 $ 7,498,221 $ 2,705,977
Product revenue 1,322,925 613,184 3,435,692 1,820,063
License revenue 240,834 -- 401,389 --
------------ ------------ ------------ ------------
Total revenue 4,741,212 1,825,376 11,335,302 4,526,040
Cost of revenue* 3,415,493 1,173,509 9,114,860 2,791,706
------------ ------------ ------------ ------------
Gross profit 1,325,719 651,867 2,220,442 1,734,334
Expenses:
Research and development expenses* 2,159,962 1,020,144 5,976,721 2,636,096
Selling, general and administrative expenses* 1,539,306 887,554 6,188,185 2,420,512
------------ ------------ ------------ ------------
Total operating expenses 3,699,268 1,907,698 12,164,906 5,056,608
------------ ------------ ------------ ------------
Loss from operations (2,373,549) (1,255,831) (9,944,464) (3,322,274)
Interest expense (147,857) (86,708) (501,013) (257,648)
Interest income 832,250 125,967 1,439,190 236,840
------------ ------------ ------------ ------------
Net loss (1,689,156) (1,216,572) (9,006,287) (3,343,082)
Deemed dividend related to beneficial
conversion feature of preferred stock -- -- (5,000,001) --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,689,156) $ (1,216,572) $(14,006,288) $ (3,343,082)
============ ============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders $ (0.07) $ (0.40) $ (1.06) $ (1.11)
============ ============ ============ ============
Shares used in computing basic and diluted
net loss per share 23,021,566 3,047,337 13,198,483 3,005,176
============ ============ ============ ============
* Includes compensation related to option grants:
Cost of revenue $ 263,530 $ 5,000 $ 749,968 $ 5,000
Research and development expenses 175,686 4,000 478,018 4,000
Selling, general and administrative expenses 258,354 338,000 2,806,878 693,033
------------ ------------ ------------ ------------
Total $ 697,570 $ 347,000 $ 4,034,864 $ 702,033
============ ============ ============ ============
See notes to condensed financial statements
4
5
ARRAY BIOPHARMA INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
Operating activities:
Net loss $ (9,006,287) $ (3,343,082)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,864,107 653,203
Compensation related to stock option grants 4,034,864 702,033
Changes in operating assets, liabilities and other (21,773) 1,082,980
------------ ------------
Net cash used in operating activities (3,129,089) (904,866)
Investing activities:
Purchases of property, plant and equipment and long-term assets (8,280,324) (1,421,128)
Net purchases of marketable securities (31,182,162) (2,477,363)
------------ ------------
Net cash used in investing activities (39,462,486) (3,898,491)
Financing activities:
Proceeds from sale of preferred and common stock, net of
issuance costs 60,772,386 7,943,885
Proceeds from warrant and option exercises 718,708 46,362
Proceeds from the issuance of long-term debt 2,000,000 899,337
Payment on long-term debt (1,702,397) (658,028)
------------ ------------
Net cash provided by financing activities 61,788,697 8,231,556
Net increase in cash and cash equivalents 19,197,122 3,428,199
Cash and cash equivalents, beginning of period 3,846,407 2,185,915
------------ ------------
Cash and cash equivalents, end of period $ 23,043,529 $ 5,614,114
============ ============
See notes to condensed financial statements
5
6
ARRAY BIOPHARMA INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine-month periods
ending March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2001. For further information, refer to the
financial statements and footnotes thereto as of and for the year ended June 30,
2000 included in the Final Prospectus of Array BioPharma Inc. (the "Company" or
"Array") filed on November 17, 2000.
Note 2: Marketable Securities
Management has determined that certain marketable securities held by
the Company at March 31, 2001 and June 30, 2000 were classified as
available-for-sale securities for purposes of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Securities available-for-sale
are carried at fair value, with unrealized gains and losses reported as a
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on securities
available-for-sale are included in investment income. Interest and dividends on
securities available-for-sale are included in investment income. The cost of
securities sold is based on the specific identification method.
Note 3: Comprehensive Income
As of July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires the disclosure of comprehensive
income, which includes, in addition to net income, other comprehensive income
consisting of unrealized gains and losses, which are not previously included in
the traditional income statement. While the Company adopted SFAS No. 130 on July
1, 1998, it did not have any items of comprehensive income until the period
ended March 31, 2001, related to unrecognized gains on investment securities. A
reconciliation of net loss to comprehensive loss is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $ (1,689,156) $ (1,216,572) $ (9,006,287) $ (3,343,082)
Other comprehensive income 100,025 -- 100,025 --
------------ ------------ ------------ ------------
Total comprehensive loss $ (1,589,131) $ (1,216,572) $ (8,906,262) $ (3,343,082)
============ ============ ============ ============
6
7
Note 4: Common and Preferred Stock
On August 31, 2000, the Company issued 1,666,667 shares of its Series C
convertible preferred stock (the "Series C preferred") at $6.00 per share to
investors resulting in gross proceeds of $10.0 million. Subsequent to the
commencement of its initial public offering process, the Company reevaluated the
fair value of its Series C preferred stock as of August 31, 2000 and determined
it to be $9.00 per share. Accordingly, the incremental fair value of $5.0
million, or $3.00 per share, was deemed to be the equivalent of a dividend on
the Series C preferred. The Company recorded the deemed dividend at the date of
issuance by offsetting charges and credits to preferred stock, without any
effect on total stockholders' equity. The preferred stock dividend increases the
loss applicable to common stockholders in the calculation of basic net loss per
share for fiscal year 2001 and all related interim periods.
On November 17, 2000, the Company completed an initial public offering
(the "IPO") of 7,475,000 shares of its common stock, including 975,000 shares
for the exercise of the underwriters' over-allotment option. Concurrent with the
IPO, all of the 11,501,666 shares of convertible preferred stock outstanding
automatically converted into common stock at a one-to-one ratio. The Company
received net proceeds of $50.8 million from its IPO, net of $5.2 million in
expenses and underwriters' discount relating to the issuance and distribution of
the securities.
Note 5: Net Loss per Share
Basic net loss per share is computed by dividing net loss for the
period by the weighted average number of shares of common stock outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of shares of common stock and
potential common stock outstanding during the period, if their effect is
dilutive. Potential common stock includes incremental shares of common stock
issuable upon the exercise of stock options and warrants and upon the conversion
of convertible preferred stock. The potential shares of common stock have not
been included in the diluted net loss per share calculation because to do so
would be anti-dilutive. For the three and nine-month period ended March 31,
2001, the weighted average number of shares of common stock outstanding included
the 11,501,666 shares of preferred stock that converted to common stock on the
IPO only as of the closing of the IPO on November 17, 2000.
Note 6: Collaborative Agreements
In July 2000, the Company consolidated and expanded its lead
optimization agreements with ICOS Corporation into a drug discovery
collaboration agreement for lead optimization on undisclosed targets. Under the
agreement, ICOS has the exclusive worldwide right to develop and market any
products resulting from the collaboration. The Company is compensated based on
an annual rate for each full-time equivalent employee working on an ICOS project
and is entitled to milestone payments upon achievement of identified development
and commercialization goals for products resulting from the collaboration. The
agreement expires in July 2002 and may be terminated upon 90 days notice by ICOS
following the first anniversary of the agreement. In March 2001, the Company
expanded this lead optimization agreement and entered into a Compound Library
agreement with ICOS.
In September 2000, the Company expanded the initial agreement with
Merck & Co., Inc. for the exclusive synthesis, development and supply of custom
libraries of chemical compounds, whereby the Company will supply focused
compound libraries for Merck's drug discovery programs.
7
8
In August and September 2000, the Company entered into Compound Library
Agreements with DuPont and Immunex Corporation, respectively; both of which
expire in 2005. These agreements provide DuPont and Immunex with nonexclusive
access on a per-compound fee basis to compounds in the Company's Diversity
Library for their internal lead generation efforts. The agreements contain an
option to gain exclusive rights to compounds they intend to commercialize upon
payments of either a one-time activation fee or annual fees. The Company retains
all ownership of the intellectual property rights to the compounds and to the
Company's Diversity Library. These agreements are terminable only upon breach or
insolvency of a party.
In October 2000, the Company entered into a Research and License
Agreement with Amgen Inc. Under the terms of the agreement, the Company granted
Amgen an exclusive license to its existing program to address a target for
diabetes, called PTP1B and the Company initiated a joint research program in
November 2000 to identify, characterize and optimize potential drug candidates
targeting PTP-1B. Amgen has the exclusive worldwide right to develop and
commercialize any drugs that target PTP-1B developed under this collaboration.
The agreement provides for an initial up-front fee of $1.8 million, which was
received in November 2000, license fees, quarterly payments for each full-time
equivalent employee working on the PTP1B project, and milestone payments upon
achievement of identified research, development and commercialization goals for
products resulting from the collaboration. The initial term of the research
program is two years, and Amgen may terminate the research program with six
months' written notice during this term. The Company is recognizing the up-front
fee over the expected term of the agreement. Through March 31, 2001, the Company
has not received any milestone payments under this agreement.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve significant
risks and uncertainties, including those discussed below and those described
more fully in other reports filed by Array BioPharma with the Securities and
Exchange Commission, including our Final Prospectus as filed on November 17,
2000. Because these statements reflect our current expectations concerning
future events, our actual results could differ materially from those anticipated
in these forward-looking statements. The factors that could cause actual results
to differ from our expectations include, but are not limited to, our ability to
achieve and maintain profitability, the willingness of the pharmaceutical and
biotechnology industries to collaborate with third parties, particularly Array,
on their drug discovery activities, and our ability to attract and retain
experienced scientists and management. We are providing the information in this
quarterly report filed on Form 10-Q as of the date of this report. We undertake
no duty to update any forward-looking statements to reflect the effect on those
statements of subsequent events or changes in our expectations or assumptions.
OVERVIEW
We offer a broad range of products and services to pharmaceutical and
biotechnology companies to bridge the gap between the discovery of
disease-related proteins and the testing of potential drug candidates in animals
and humans. Our experienced scientists provide premium products and services to
create, evaluate and optimize potential drug candidates. In addition, we have
developed an information-driven technology platform to support our scientists in
making better decisions at each stage of the drug discovery process. We also
leverage our capabilities internally to develop proprietary drug candidates for
collaboration with our customers. We have incurred net losses since inception
and expect to incur losses in the near future as we expand our scientific staff
and continue the scale-up of our operations. To date, we have funded our
operations primarily through the issuance of equity securities, revenue from our
collaborators and borrowings. As of March 31, 2001, we had an accumulated
deficit of $18.5 million.
We generate revenue by researching, designing and synthesizing
medicinally relevant chemical compounds through the products and services we
offer to our collaborators. We report product and service revenue separately,
although the distinction between the two is periodically difficult to determine
because of co-mingled agreements. We report cost of goods sold and cost of
revenue from services as one line item titled cost of revenue in our statement
of operations. Although our current cost accounting system has the functional
capacity to segregate these costs, we have not yet implemented such
functionality, primarily because these costs are derived from similar processes
including research, design and synthesis activities. We anticipate further
implementing the cost segregation functionality of our cost accounting system
during calendar year 2001.
Our products include our Diversity Library and our Optimer building
blocks. Our Diversity Library is a collection of structurally related chemical
compounds that may have the potential to become drug candidates. We sell
compounds from our Diversity Library to our customers with a non-exclusive
license restricting use of these compounds to internal research, and we retain
all other rights to them, which permits us to sell the same compounds to other
customers. We sell our Optimer building blocks, which are the starting materials
used to create more complex chemical compounds in the drug discovery process,
without any restrictions on use.
9
10
Our services include lead optimization, custom synthesis, lead
generation and process research and development. We collaborate with our
customers in lead optimization to refine and optimize potential drug candidates.
We also design, synthesize and sell libraries of chemical compounds or single
compounds to our customers on a custom basis, with either an exclusive or
non-exclusive license to use the compounds. In addition, we provide lead
generation services, including screening compound libraries to discover
potential drug candidates for our collaborators. Finally, we assist customers in
process research and development, which involves developing the processes, and
synthesizing for delivery, larger quantities of chemical compounds required for
clinical testing.
In general, we sell our compounds, including our Optimer building
blocks and Diversity Library, on a per-compound basis. Some of our contracts
allow our customers to obtain exclusive rights to particular compounds upon the
payment of additional fees. We are typically paid for our services under our
collaboration agreements based on the number of full-time equivalent employees
contractually assigned to a project, at an annual full-time equivalent price,
plus certain expenses. Custom collections of chemical compounds we create and
custom chemical synthesis we perform under our service agreements are typically
charged on a per-delivered compound basis, plus a charge for research and
development. In addition, two of our collaboration agreements provide for
additional payments upon our achievement of certain milestones and one of our
collaboration agreements provides for license fees. Our future agreements may
also provide royalties. We have not yet generated any milestone or royalty
payments. In general, our collaborators may terminate their collaboration
agreement with us on 30 to 90 days' prior notice. During the nine months ended
March 31, 2001, ICOS Corporation, and Eli Lilly and Company accounted for 24%
and 25%, respectively, of our total revenue. During fiscal year 2000, ICOS
Corporation, Celltech Chiroscience Ltd., through its subsidiary Darwin Discovery
Limited, and Merck & Co., Inc. accounted for 48%, 11% and 10%, respectively, of
our total revenue. We will seek to generate revenue from new collaboration
agreements that, if obtained, will reduce our concentration of revenue.
We recognize revenue upon shipment of our products or upon performance
under our collaboration agreements. Revenue from our full-time equivalent
collaboration service agreements is recognized on a monthly or per diem basis as
work is performed. Revenue from our development, fixed-fee and fee-per-compound
collaboration service agreements is recognized either on a percentage of
completion basis or as compounds are shipped. Revenue from license fees and
up-front fees are recognized over the term of the particular license, or over
the expected term of the particular collaboration agreement.
Cost of revenue consists mainly of compensation, associated fringe
benefits and other product or service-related costs, including recruiting and
relocation, fine chemicals, supplies, small tools, facilities, depreciation and
other direct and indirect chemical handling and laboratory support costs,
excluding any costs related to research and development.
Research and development expenses consist of the same type of
scientific expenditures that comprise cost of revenue, except that the expenses
are related to the development of our early-stage intellectual property and
products where we have not yet proven technological feasibility. Costs of
routine or production related activities are charged to cost of revenue.
Selling, general and administrative expenses consist mainly of
compensation and associated fringe benefits and other management, business
development, accounting, information technology and administration costs,
including recruiting and relocation, consulting and professional services,
travel and meals, advertising, sales commissions, facilities, depreciation and
other office expenses.
10
11
We currently sell our products and services directly to pharmaceutical
and biotechnology companies, through our senior management and scientists and
through customer referrals. In addition, we sell our products and services in
Japan through an agent. International revenue represented 8% and 9% of our total
revenue during fiscal years 1999 and 2000, respectively, and 12% for the first
nine months of fiscal year 2001. The majority of our international revenue was
attributed to European sales in the prior fiscal year periods and to Japanese
sales in the nine months ended March 31, 2001. All of our collaboration
agreements and purchase orders are denominated in United States dollars.
We intend to grow our revenue with existing customers and to realize
new revenue streams through collaborations with a diversified group of
pharmaceutical and biotechnology companies. In addition, we expect to enter into
agreements that allow us to participate in the success of potential drug
candidates with our collaborators through milestone and/or royalty payments and
to participate in the success of our proprietary potential drug candidates
through a combination of licensing fees, milestone and/or royalty payments. We
expect our growth to require significant ongoing investment in facilities,
scientific personnel and business development resources.
STOCK COMPENSATION
During fiscal year 2000 and the nine months ended March 31, 2001, we
recorded deferred stock compensation totaling $13.4 million. We recorded
compensation expense related to stock option grants of approximately $1.1
million for fiscal year 2000 and approximately $4.0 million for the nine months
ended March 31, 2001. At March 31, 2001, we had a total of $8.3 million of
remaining deferred stock compensation to be amortized. We expect to amortize
deferred stock compensation recorded through March 31, 2001 as follows: $698,000
during the remainder of fiscal year 2001; $2.6 million in fiscal year 2002; $2.4
million in fiscal year 2003; $2.4 million in fiscal year 2004; and $186,000 in
fiscal year 2005. To date, we have granted our employees stock options as annual
incentive bonus awards. Any future annual incentive bonus awards may include a
partial cash component in addition to stock-based compensation.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK
On August 31, 2000, we issued 1,666,667 shares of our Series C
convertible preferred stock, which converted on a one-to-one basis into shares
of common stock upon the effectiveness of our initial public offering (the
"IPO"), at $6.00 per share to investors resulting in gross proceeds of $10.0
million. Subsequent to the commencement of the IPO process, we reevaluated the
fair value of our Series C preferred as of August 31, 2000 and determined it to
be $9.00 per share. Accordingly, the incremental fair value of $5.0 million, or
$3.00 per share, is deemed to be the equivalent of a dividend on the Series C
preferred. We recorded the deemed dividend at the date of issuance by offsetting
charges and credits to preferred stock, without any effect on total
stockholders' equity. The preferred stock dividend increases the loss applicable
to common stockholders in the calculation of basic net loss per share for fiscal
year 2001 and all related interim periods.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000
Revenue. Total revenue increased to $4.7 million for the three months
ended March 31, 2001, up 160% from $1.8 million in the same period in 2000.
Total revenue for the nine-month periods ended March 31, 2001 and 2000 was $11.3
million and $4.5 million, respectively, representing growth of 150%.
11
12
These increases were primarily the result of additional revenue generated from
sales of our lead optimization services and process chemistry services under our
collaborations with Eli Lilly and Company, ICOS Corporation, Amgen Inc. and
Merck & Co., Inc. as well as increased subscriptions to our Diversity Library.
During the three months ended March 31, 2001, we entered into a Diversity
Library agreement with a new Japanese customer, which resulted in $301,000 of
product revenue. Also, during the most recent three-month period, we recognized
license revenue of approximately $241,000. This amount is expected to recur on a
quarterly basis through September 30, 2003.
Cost of revenue. Cost of revenue increased to $3.4 million for the
three months ended March 31, 2001, from $1.2 million in the same period in 2000.
Cost of revenue was $9.1 million and $2.8 million for the nine months ended
March 31, 2001 and 2000, respectively. The cost increases during both periods
were primarily attributable to activities related to revenue growth, including
recruiting and relocating additional scientific staff and associated salaries
and benefits. Expenditures associated with equipping and commencing operations
in our new and expanded facilities also increased for the nine-month period.
Cost of revenue was 72% and 80% of revenue for the three-and nine-month periods
ended March 31, 2001, respectively, and includes non-cash compensation related
to option grants of $264,000 and $750,000, respectively.
Research and development expenses. Research and development expenses
increased to $2.2 million for the three months ended March 31, 2001 from $1.0
million in the same period in 2000. Research and development expenses were $6.0
million and $2.6 million for the nine months ended March 31, 2001 and 2000,
respectively. The increase in research and development expenses was primarily
attributable to expanded research efforts for our Diversity Library and custom
synthesis collaborations. These expanded research efforts required the
recruitment and relocation of additional scientific staff and associated
salaries and benefits. Expenditures associated with equipping and commencing
operations in our new and expanded facilities also increased research and
development costs for the nine-month period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.5 million for the three months ended
March 31, 2001, increasing from $888,000 in the same period in 2000. Selling,
general and administrative expenses were $6.2 million and $2.4 million for the
nine months ended March 31, 2001 and 2000, respectively. The increase in
selling, general and administrative expenses in fiscal year 2001 was primarily
attributable to non-cash compensation related to our stock option grants, our
increased staffing levels and expanded management.
Compensation related to stock option grants. Compensation expense
related to stock option grants was $698,000 for the three months ended March 31,
2001, up from $347,000 in the same period in 2000. These non-cash expenses were
$4.0 million and $702,000 for the nine months ended March 31, 2001 and 2000,
respectively. The increases are largely the result of options vesting upon the
closing of the IPO, and stock options granted subsequent to the periods ending
December 31, 1999.
Interest income or expense. We had net interest income of approximately
$684,000 for the three months ended March 31, 2001, increasing from a net
interest income of $39,000 in the same period in 2000. For the nine months ended
March 31, 2001, net interest income was $938,000, increasing from a net interest
expense of $21,000 in the same period in 2000. Increased net interest income in
the periods ended March 31, 2001 was attributable to our higher balances of
cash, cash equivalents and marketable securities resulting from the proceeds of
the IPO.
12
13
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, cash, cash equivalents and marketable securities
totaled $56.3 million compared to $5.8 million at June 30, 2000. Net proceeds
from the IPO of $50.8 million provided the majority of the increase. Net cash
used in operating activities was $3.1 million for the nine-month period ended
March 31, 2001 which included our net loss for the same period of $9.0 million,
reduced by non-cash charges of $5.9 million. For the same period ended March 31,
2000, net cash used in operating activities was $905,000 which included net loss
for the same period of $3.3 million, reduced by non-cash charges of $2.4
million. The increase in net cash used in operating activities was primarily a
result of the increased net loss and only a small change in net operating assets
and liabilities compared to $1.1 million positive change in net operating assets
and liabilities for the same period ended March 31, 2000. The increase in our
net loss for these nine-month periods was attributable to increased non-cash
charges, our rapid growth and the increased size of overall operations.
During the nine months ended March 31, 2001, we invested in capital
equipment and leasehold improvements totaling $8.3 million. Financing activities
provided $61.8 million consisting of $50.8 million in net proceeds from the IPO,
$10.0 million in gross proceeds from the sale of our Series C preferred stock,
$719,000 from stock option exercises and $2.0 million from borrowings under our
equipment loans, less the repayment of $1.7 million.
Our future capital requirements will depend on a number of factors,
including our success in increasing sales of both existing and new products and
services, expenses associated with unforeseen litigation, regulatory changes,
competition, technological developments and potential future merger and
acquisition activity. We believe that our existing cash, cash equivalents and
marketable securities and anticipated cash flow from existing collaboration will
be sufficient to support our current operating plan for at least the next 12
months. We have based this estimate on assumptions that may prove to be wrong.
Our forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary as a result of a number
of factors. Our future capital requirements will depend on many factors,
including:
o the progress of our research activities;
o the number and scope of our research programs;
o the progress of our pre-clinical and clinical development activities;
o the progress of the development efforts of our collaborators;
o our ability to establish and maintain current and new collaboration
agreements;
o the costs involved in enforcing patent claims and other intellectual
property rights;
o the costs and timing of regulatory approvals; and
o the costs of establishing business development and distribution
capabilities.
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least several years, we expect to finance future cash needs
through the sale of equity securities, strategic collaboration agreements and
debt financing as well as interest income earned on cash balances. We cannot
assure you that additional financing or collaboration agreements will be
available when needed or that, if available, this financing will be obtained on
terms favorable to us or our stockholders. Insufficient funds may require us to
delay, scale back or eliminate some or all of our research or development
programs or to relinquish greater or all rights to product candidates at an
earlier stage of development or on less favorable terms than we would otherwise
choose or may adversely affect our ability to operate as a going concern. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.
13
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-term investments. Our interest income is sensitive to changes in
the general level of United States interest rates, particularly since a
significant portion of our investments are and will be in short-term marketable
securities. Due to the nature and maturity of our short-term investments, we
have concluded that there is no material market risk exposure.
Foreign currency rate fluctuations. We have not taken any action to
reduce our exposure to changes in foreign currency exchange rates, such as
options or futures contracts, with respect to transactions with our worldwide
customers. All of our collaboration agreements and purchase orders are
denominated in United States dollars.
Inflation. We do not believe that inflation has had a material impact
on our business or operating results during the periods presented.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Registered Securities.
On November 22, 2000, the Company closed the sale of
6,500,000 shares of its common stock, par value
$0.001 per share (the "Common Stock"), in its initial
public offering (the "Offering"), and on December 4,
2000, the Company closed the sale of an additional
975,000 shares of its Common Stock pursuant to the
exercise by the underwriters of an over-allotment
option. The Registration Statement on Form S-1 (Reg.
No. 333-45922) (the "Registration Statement") filed
by the Company to register its Common Stock in the
Offering was declared effective by the Securities and
Exchange Commission on November 16, 2000. As of March
31, 2001, the Company had not used any of the
Offering proceeds and had invested the Offering
proceeds in investment-grade, interest-bearing
securities.
There has been no material change in the planned use
of proceeds as described in the Company's final
prospectus.
14
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Second Amendment to Lease Agreement by and between Registrant, as
Subtenant, and Amgen Inc., as Sublandlord, dated April 1, 2001.
10.2 Option Agreement by and between Registrant, as Subtenant, and Boulder
Headquarters LLC, as Landlord, dated April 1, 2001
10.3* Letter Agreement dated March 17, 2001 by and between Registrant and
ICOS Corporation amending the Drug Discovery Collaboration Agreement
dated July 31, 2000.
- ----------
* Confidential Treatment of redacted portions applied for.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Array BioPharma Inc. during the
quarter ended March 31, 2001.
Items 1, 3, 4 and 5 are not applicable and have been omitted.
15
16
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.
ARRAY BIOPHARMA INC.
Dated: May 14, 2001 By: /s/ Robert E. Conway
------------ ----------------------
Robert E. Conway
Chief Executive Officer
Dated: May 14, 2001 By: /s/ Michael Carruthers
------------ ----------------------
Michael Carruthers
Chief Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
16
17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Second Amendment to Lease Agreement by and between Registrant, as
Subtenant, and Amgen Inc., as Sublandlord, dated April 1, 2001.
10.2 Option Agreement by and between Registrant, as Subtenant, and Boulder
Headquarters LLC, as Landlord, dated April 1, 2001.
10.3* Letter Agreement dated March 17, 2001 by and between Registrant and
ICOS Corporation amending the Drug Discovery Collaboration Agreement
dated July 31, 2000.
- ----------
* Confidential Treatment of redacted portions applied for.