FORM 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-19732
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CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0238812
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3030 Science Park Road
San Diego, California 92121
(Address of principal executive offices and zip code)
(619) 455-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (l) 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
----- ----
At May 3, 1999, there were 15,158,016 shares of Common Stock, $0.001
par value, of the Registrant issued and outstanding.
CORVAS INTERNATIONAL, INC.
Index
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 1
Condensed Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 2
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 3
Notes to Condensed Financial Statements (unaudited) 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3 Quantitative and Qualitative Disclosures About Market Risk 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
None
Item 3 Defaults Upon Senior Securities 10
None
Item 4 Submission of Matters to a Vote of Security Holders 10
None
Item 5 Other Information 10
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits 10
(b) Reports on Form 8-K 10
None
SIGNATURES 11
Part I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CORVAS INTERNATIONAL, INC.
Condensed Balance Sheets
(In thousands)
March 31, 1999 December 31, 1998
----------------- -----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 829 $ 611
Short-term debt securities held to maturity
and time deposits, partially restricted 15,037 17,002
Receivables 263 251
Note receivable from related party 153 153
Other current assets 520 411
----------------- -----------------
Total current assets 16,802 18,428
Property and equipment, net 1,368 1,484
----------------- -----------------
$ 18,170 $ 19,912
================= =================
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 474 $ 326
Accrued liabilities 928 993
Accrued vacation 207 207
----------------- -----------------
Total current liabilities 1,609 1,526
----------------- -----------------
Stockholders' equity:
Preferred stock - Series A 1 1
Preferred stock - Series B 0 0
Common stock 15 15
Additional paid-in capital 96,273 96,223
Accumulated deficit (79,728) (77,853)
----------------- -----------------
Total stockholders' equity 16,561 18,386
Commitments and contingencies
----------------- -----------------
$ 18,170 $ 19,912
================= =================
See accompanying notes to condensed financial statements.
1
CORVAS INTERNATIONAL, INC.
Condensed Statements of Operations
In thousands, except per share data (unaudited)
Three Months Ended
March 31,
---------------------------------------
1999 1998
----------------- -----------------
Revenues:
Revenue from collaborative agreements $ 1,746 $ 1,746
License fees and milestones 0 1,000
Net product sales 0 34
Royalties 23 43
----------------- -----------------
Total revenues 1,769 2,823
----------------- -----------------
Costs and expenses:
Research and development 3,104 3,584
General and administrative 778 866
Cost of products sold 0 17
----------------- -----------------
Total costs and expenses 3,882 4,467
----------------- -----------------
Loss from operations (2,113) (1,644)
----------------- -----------------
Other income:
Interest income 238 322
Other income 0 5
----------------- -----------------
238 327
----------------- -----------------
Net loss $ (1,875) $ (1,317)
================= =================
Basic and diluted net loss per share $ (0.12) $ (0.09)
================= =================
Shares used in calculation of basic and
diluted net loss per share 15,126 13,972
================= =================
See accompanying notes to condensed financial statements.
2
CORVAS INTERNATIONAL, INC.
Condensed Statements of Cash Flows
In thousands (unaudited)
Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- -----------------
Cash flows from operating activities:
Net loss $ (1,875) $ (1,317)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 142 151
Amortization of premiums and discounts on investments (72) (260)
Stock compensation expense 3 25
Change in assets and liabilities:
Increase in receivables (12) (813)
Increase in other current assets (109) (159)
Increase in accounts payable, accrued
liabilities and accrued vacation 83 375
Decrease in deferred revenue 0 (1,393)
----------------- -----------------
Net cash used in operating activities (1,840) (3,391)
----------------- -----------------
Cash flows from investing activities:
Purchases of investments held to maturity (4,371) (13,251)
Proceeds from maturity of investments held to maturity 6,408 16,295
Purchases of property and equipment (26) (480)
Proceeds from sale of property and equipment 0 81
----------------- -----------------
Net cash provided by investing activities 2,011 2,645
----------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 47 143
----------------- -----------------
Net cash provided by financing activities 47 143
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 218 (603)
Cash and cash equivalents at beginning of period 611 2,044
----------------- -----------------
Cash and cash equivalents at end of period $ 829 $ 1,441
================= =================
See accompanying notes to condensed financial statements.
3
CORVAS INTERNATIONAL, INC.
Notes to Condensed Financial Statements
(unaudited)
(1) The Company
-----------
Corvas International, Inc. (the "Company") was incorporated on March
27, 1987 under the laws of the State of California. In July 1993, the Company
reincorporated in the State of Delaware. The Company is engaged in the design
and development of a new generation of therapeutic agents for cardiovascular,
cancer and other major diseases.
(2) Basis of Presentation
---------------------
The interim financial information contained herein is unaudited but, in
management's opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1998. Results for
the interim periods are not necessarily indicative of results for other interim
periods or for the full year.
(3) Net Loss Per Share
------------------
Net loss per share for the three months ended March 31, 1999 and 1998
is computed using the weighted average number of common share equivalents
outstanding. Options, warrants and convertible preferred stock totaling
5,069,000 and 6,184,000 shares were excluded from the calculation of net loss
per share for the three months ended March 31, 1999 and 1998, respectively,
since the effect of their inclusion would be anti-dilutive.
4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
OVERVIEW
Formed in 1987, Corvas International, Inc. ("Corvas" or the "Company")
is a biopharmaceutical firm engaged in the design and development of a new
generation of therapeutic agents for cardiovascular, cancer and other major
diseases. To date, the Company has not generated significant revenues from
product sales and currently does not sell any commercial products. The Company
has not been profitable on an annual basis since inception and expects to incur
substantial additional operating losses over the next several years as the
Company progresses in its research and development programs. The Company's
historical results are not necessarily indicative of future results. In
addition, there is no assurance that the Company will successfully develop,
commercialize, manufacture or market its products or generate sufficient
revenues to become profitable on a sustained basis or at all. At March 31, 1999,
the Company had an accumulated deficit of $79,728,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
In the three months ended March 31, 1999, operating revenues decreased
to $1,769,000 from $2,823,000 in the corresponding period of 1998. This
$1,054,000 decrease was primarily attributable to a $1,000,000 reduction in
license fees and milestones revenue resulting from a $1,000,000 milestone
payment received from Pfizer Inc. ("Pfizer") in the first quarter of 1998, upon
commencement of a Phase I clinical trial of neutrophil inhibitory factor
("NIF"). No product sales were recorded in the first quarter of 1999 due to the
discontinuation of tissue factor manufacturing in 1998. During the first
quarters of both 1999 and 1998, revenue from collaborative agreements consisted
of $1,000,000 attributable to the Company's strategic alliance agreement with
Schering Corporation ("Schering-Plough") covering orally-active inhibitors of
thrombosis, $394,000 resulting from a collaboration with Schering-Plough to
develop oral inhibitors of a key protease necessary for hepatitis C virus
replication, $240,000 pursuant to an agreement with Vascular Genomics Inc.
("VGI") which covers a novel vascular targeting technology, and $112,000 of
funding from Pfizer on the NIF program.
Comparing the three month period ended March 31, 1999 to the same
period in 1998, total costs and expenses decreased to $3,882,000 from
$4,467,000. Research and development expenses, which accounted for the majority
of this $585,000 decrease, fell to $3,104,000 from $3,584,000. This was mainly
due to costs incurred in the first quarter of 1998 for the manufacture of
clinical supplies on the Company's proprietary rNAP5 program which were not
incurred in 1999. General and administrative expenses decreased to $778,000 from
$866,000 comparing the same quarters, primarily due to a decrease in
administrative staffing.
Total other income was $238,000 in the quarter ended March 31, 1999,
compared to $327,000 for the corresponding period in 1998. This $89,000 decrease
resulted from reduced interest income due to lower cash balances available for
investment.
5
Subject to the availability of additional capital, the Company expects
it will continue to incur significant expenses and operating losses over the
next several years as research and development and clinical trials progress.
However, there is no assurance that the Company will be able to raise any
additional capital. The Company also expects both its expenses and losses to
fluctuate from quarter to quarter and that such fluctuations may, at times, be
substantial.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's operations have been funded primarily
through public offerings and private placements of equity securities, revenues
and milestones from collaborative agreements, license fees and interest income
earned on cash and investment balances. The Company's principle sources of
liquidity are its cash and cash equivalents, time deposits and debt securities
which, net of a restricted time deposit, totaled $15,806,000 as of March 31,
1999. Working capital at March 31, 1999 was $15,193,000. Available cash is
invested in accordance with the Company's investment policy, which was set by
the Board of Directors. This policy provides guidelines concerning the quality,
term and liquidity of investments, and has established objectives to preserve
principle, maintain adequate liquidity and maximize income. The Company
presently invests its excess cash primarily in government-backed debt
instruments and, to a smaller degree, in debt instruments of corporations with
strong credit ratings.
Net cash used in operating activities was $1,840,000 for the three
months ended March 31, 1999, a decrease of $1,551,000 compared to one year
earlier. This decrease was primarily due to recognition of deferred revenue in
the first quarter of 1998. Net cash provided by investing activities decreased
to $2,011,000 in the three months ended March 31, 1999, from $2,645,000 in the
first quarter of 1998. This was mainly attributable to fewer capital
expenditures in the first quarter of 1999 than in the same quarter of 1998. Net
cash provided by financing activities decreased to $47,000 in the three months
ended March 31, 1999, from $143,000 in the same period in 1998. This was due to
the exercise of fewer stock options in the first quarter of 1999 than one year
earlier.
The Company expects it will continue to incur substantial additional
costs in the future, including, but not limited to, costs related to clinical
trials, preclinical studies, and research and development activities. Over the
next several years, the Company expects such costs will result in additional
operating losses and negative cash flows from operations. Further, the Company
expects that 1999 revenues will be less than those recognized in 1998 due to
reaching the contractual end of the NIF research funding and a nine month
funding extension on the oral anticoagulant program, compared to 12 months of
funding in 1998. Management continues to pursue strategic financings and
additional collaborative relationships, and will continue to consider ways to
reduce the Company's burn rate and allocate its existing clinical resources to
programs which are more advanced. In this regard, the Company has decided to
focus its allocation of limited resources to expand the potential indications
for rNAPc2, which is currently in Phase II clinical testing in orthopedic
surgery patients, to coronary care patients in a Phase IIa study scheduled to
start by the end of 1999. Accordingly, the Phase I clinical trial of the
injectable anticoagulant rNAP5 will be delayed until such time as the Company
acquires additional funding or a strategic partner for this program. As of March
31, 1999, the Company believes that, at the current burn rate, its existing
capital resources and interest earned thereon should be sufficient to satisfy
its anticipated funding requirements for at least the next 12 months. In the
future, the Company may also receive additional funds through milestone payments
and royalties on sales of products in connection with its alliances. However,
there is no assurance that the Company will receive any additional amounts under
existing or any future alliances, or that it will be successful in raising
additional capital through strategic or other financings or through
collaborative relationships.
6
Strategic collaborations with Schering-Plough and Pfizer provide for
payments to the Company if and when certain milestones are met. In addition to
future milestones, the Company may also receive royalties on sales of products
in connection with its existing, as well as any future, alliances. If all
milestones on all of the Company's existing collaborations are achieved, Corvas
could receive a maximum of $70,469,000 in future milestone payments and research
and development funding over the next several years. However, there is no
assurance that the Company's existing collaborations will be successful, that
the Company will receive any future milestones or other payments pursuant to
collaborative agreements, that the collaborations will continue since the
existing agreements are terminable at the option of the collaborator upon
certain events, or that the existing collaborations will be commercially
successful.
In June 1997, Corvas entered into an option agreement with VGI whereby
the Company has the option through June 2000 to acquire all of the stock of VGI
in exchange for Corvas Common Stock, or, in certain circumstances, a combination
of cash and Common Stock. The aggregate acquisition price is based on the timing
of option exercise, and ranges from a minimum as of March 31, 1999 of
$14,173,000 to a maximum of $19,960,000 at June 30, 2000. Currently, Corvas does
not anticipate the exercise of this option in 1999. If the Company elects not
to, or is unable to, exercise its option, VGI may require the Company to
purchase 19.9% of its outstanding stock for $3,960,000 in Corvas Common Stock,
priced at then-current market rates. If VGI requires the Company to purchase
this 19.9% of its outstanding stock, substantial dilution to existing
stockholders could result. During the option period, Corvas is making monthly
option payments of approximately $83,000 to VGI. In addition, under a research
and development agreement, VGI is required to make monthly payments of $80,000
to fund the research and development of this technology. Although the net impact
of these payments is not material, the Company has incurred, and may continue to
incur, substantial additional costs to develop this technology. To date, Corvas
has not demonstrated adequate proof of principle with respect to the VGI
technology and, therefore, has not been in a position to enter into one or more
collaborative relationships to fund the development and commercialization of
this technology. The Company cannot predict whether or when it will be able to
establish proof of principle or whether it will be able to establish
collaborative relationships on satisfactory terms, that such relationships will
successfully reduce the costs associated with the research and development of
this technology, that the option will be exercised, or that if the option is not
exercised, that VGI would not put 19.9% of its shares to Corvas.
The Company leases its laboratory and office facilities under an
operating lease that expires in September 2006. Future capital requirements of
the Company will depend on many factors, including, but not limited to, the
following: the scientific progress in and magnitude of its drug discovery
programs; the progress and results of preclinical testing and clinical trials;
the costs involved in regulatory compliance; the costs of filing, prosecuting,
maintaining and enforcing patents; the progress of competing technologies and
other market developments; the changes in its existing collaborative
relationships; the Company's ability to establish and maintain collaborative or
licensing arrangements; the cost of manufacturing scale-up; and the
effectiveness of activities and arrangements of the Company or its collaborative
partners to commercialize the Company's products.
7
To continue its long-term product development efforts, the Company must
raise substantial additional funding either through collaborative arrangements
or through public or private financings. The Company's ability to raise
additional funds through such sales of securities depends in part on investors'
perceptions of the biotechnology industry, in general, and of Corvas, in
particular. The market for securities of biotechnology companies, including
Corvas, has historically been highly volatile and, accordingly, there is no
assurance that additional funding will be available, or, if available, that it
will be available on acceptable terms. If additional funds are raised by issuing
securities, further dilution, possibly substantial, to existing stockholders
will likely result. The Company may enter into additional collaborative
relationships to develop and commercialize certain of its current or future
technologies or products. There is no assurance that the Company will be able to
establish such relationships on satisfactory terms, if at all, or that
agreements with collaborators will successfully reduce the Company's funding
requirements. In addition, the Company has not attempted to establish bank
financing arrangements, and there is no assurance that it would be able to
establish such arrangements on satisfactory terms, if at all. If adequate funds
are not available, the Company may be required to significantly delay, scale
back or discontinue one or more of its drug discovery programs, clinical trials
or other aspects of its operations, or obtain funds through arrangements with
collaborative partners or others which may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would not otherwise relinquish or at prices below what the Company would
otherwise choose to accept for relinquishing such rights.
IMPACT OF YEAR 2000
Many of the world's computer systems are currently coded to accept only
two digit entries in the date field. Such systems will be unable to properly
interpret dates beyond the end of 1999, which could lead to business
interruptions commonly referred to as the "Year 2000" or "Y2K" issue.
In August 1998, Corvas established an internal task force to administer
the Company's Y2K program and access the impact of this possible disruption. The
task force meets regularly to review the potential exposure of the Company's
current information systems, laboratory and office equipment, and corporate
infrastructure, as well as its key vendors and suppliers, corporate partners,
communication providers, financial institutions and certain governmental
entities.
The Company's assessment of its internal operations and equipment is
ongoing. A list of systems, equipment and software which the Company believes
are critical in nature has been compiled. Testing of these critical items has
begun and will continue throughout 1999. As of March 31, 1999, the Company's
review of its financial, informational and operational systems has not
identified any material Y2K issues and the Company does not expect costs
connected with remediation, if any, to be material.
In addition to risks associated with the Company's internal computer
systems and equipment, the Company is potentially vulnerable to failure of third
parties to adequately address their Y2K issues. Corvas continues to access the
readiness of key third parties by monitoring such parties' readiness statements.
To date, no significant issues have been identified relating to third parties'
systems. However, there is no assurance that the systems of third parties on
which the Company relies will be Y2K ready, or that any system failure by such
parties would not have a material adverse effect on the Company. The Company has
developed a contingency plan which identifies and addresses material risks to
Corvas from power outages and steps to avoid problems with the shipment of
clinical trial materials and contract manufacturing. Corvas believes that its
most likely exposure will be from third parties that fail to remediate their Y2K
issues.
8
As the Company continues its evaluation of the impact of Y2K issues,
there is no assurance that additional costs and efforts will not be required
which may have a material adverse impact on the Company's business, financial
condition or results of operations. Furthermore, the Y2K issue is complex and
there is no assurance that the Company will be able to address any problems that
may arise without incurring a material adverse effect on the Company's business,
financial condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company invests its excess cash in short-term, high quality fixed
income investments that are held to maturity. The Company does not invest in
derivative financial instruments or any other market risk sensitive instruments.
Interest income earned on the Company's short-term investment portfolio is
affected by changes in the general level of interest rates. The Company believes
that its interest rate market risk is limited, and that it is not exposed to
significant changes in fair value because such investments are held to maturity.
The fair value of each investment approximates its amortized cost.
9
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1999, the Company was served with a Complaint in the Superior
Court of California, County of San Diego, by a former employee of the Company
who is also a principal shareholder of VGI. The Complaint consists of several
allegations including, among others, violation of the Labor Code and breach of
contract. The Company has filed an answer denying all of the substantive
allegations contained in the Complaint and asserting various affirmative
defenses and a cross-complaint for breach of contract. The parties have
initiated discovery. As this matter is still in an early stage of litigation,
the Company cannot yet estimate its financial impact, if any. The Company
intends to vigorously defend itself in this lawsuit.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
-------------- -----------
10.58 Letter of Agreement between the Company and
Schering Corporation and Schering-Plough, Ltd.,
dated as of April 29, 1999. (1)
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31,
1999.
- --------
(1) Confidential treatment has been requested from the Securities and Exchange
Commission for portions of this exhibit.
10
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.
CORVAS INTERNATIONAL, INC.
Date: May 13, 1999 By: /s/ RANDALL E. WOODS
-------------------------------------
Randall E. Woods
President and Chief Executive Officer
Date: May 13, 1999 By: /s/ CAROLYN M. FELZER
-------------------------------------
Carolyn M. Felzer
Senior Director of Finance
Principal Financial Officer
11