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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 000-31161
ARENA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2908305
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6166 Nancy Ridge Drive, San Diego, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(858) 453-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.0001 PAR VALUE 22,683,563 SHARES
------------------------------ -----------------
Class Outstanding at October 31, 2000
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ARENA PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets -- September 30, 2000 and
December 31, 1999 (unaudited) 1
Condensed Consolidated Statements of Operations -- Three and Nine Month
Periods Ended September 30, 2000 and 1999 (unaudited) 2
Condensed Consolidated Statements of Cash Flows -- Nine Month Periods
Ended September 30, 2000 and 1999 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 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. Change in Securities and Use of Proceeds 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures
</TABLE>
i
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARENA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 144,648,198 $ 5,401,508
Accounts receivable 950,000 -
Prepaid expenses 585,037 172,052
---------------------------------------
Total current assets 146,183,235 5,573,560
Property and equipment, net 3,726,679 2,773,382
Deposits and other assets 214,074 98,943
Restricted cash 840,895 79,955
---------------------------------------
Total assets $ 150,964,883 $ 8,525,840
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,309,453 $ 866,414
Current portion of deferred revenue 378,854 -
Current portion of obligations under capital leases 465,489 355,119
---------------------------------------
Total current liabilities 2,153,796 1,221,533
Convertible note payable to related party - 934,312
Deferred revenue, less current portion 540,000 -
Capital lease obligations, less current portion 1,084,388 1,224,472
Deferred rent payable 829,342 793,123
Redeemable convertible preferred stock - 18,251,949
Stockholders' equity (deficit):
Additional paid in capital 174,894,956 1,055,328
Common stock 2,268 111
Deferred compensation (6,783,958) (625,955)
Deficit accumulated (21,755,909) (14,329,033)
---------------------------------------
Total stockholders' equity (deficit) 146,357,357 (13,899,549)
---------------------------------------
Total liabilities and stockholders' deficit $ 150,964,883 $ 8,525,840
=======================================
</TABLE>
See accompanying notes to condensed financial statements.
1
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ARENA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------
20000 1999 2000 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Total revenues $2,314,126 $ - $ 3,603,397 $ -
EXPENSES
Research and development 3,465,360 2,332,866 8,546,347 5,877,283
General and administrative 800,383 378,703 1,719,883 1,377,673
Amortization of deferred compensation 1,123,358 97,628 2,952,402 277,014
----------------------------------------------------------------------
Total expenses 5,389,101 2,809,197 13,218,632 7,531,970
Interest Income 1,701,698 110,942 2,325,098 360,533
Interest expense (59,448) (38,646) (177,083) (91,354)
Other income 14,131 2,796 40,344 3,901
----------------------------------------------------------------------
Net loss (1,418,594) (2,734,105) (7,426,876) (7,258,890)
Non-cash preferred stock charge - - (22,391,068) -
----------------------------------------------------------------------
Net loss applicable to common stockholders $(1,418,594) $(2,734,105) $(29,817,944) $(7,258,890)
======================================================================
Historical net loss per share, basic and diluted $(0.09) $(2.65) $(4.91) $(7.18)
======================================================================
Shares used in calculating historical net loss
per share, basic and diluted 15,706,593 1,030,125 6,069,278 1,011,125
======================================================================
Pro forma net loss per share $(0.07) $(0.34) $(1.89) $(0.98)
----------------------------------------------------------------------
Shares used in calculating pro forma net
loss per share 19,571,378 7,938,718 15,801,764 7,404,168
======================================================================
</TABLE>
See accompanying notes to condensed financial statements.
2
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ARENA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,426,876) $ (7,258,890)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 562,230 253,527
Amortization of deferred compensation 2,952,402 277,014
Interest accrued on
notes payable to related party 40,662 62,704
Deferred rent 36,219 34,688
Deferred revenue 918,854 -
Deferred financing costs - 150,711
Changes in operating assets and liabilities
Accounts receivable (950,000) -
Prepaid expenses (412,985) (93,741)
Accounts payable and accrued expenses 443,039 655,244
Other liabilities - 87,827
-------------------------------------------
Net cash used in operating activities (3,836,455) (5,830,914)
INVESTING ACTIVITIES
Purchases of property and equipment (1,515,527) (1,746,606)
Deposits and restricted cash (876,071) (8,490)
-------------------------------------------
Net cash used in investing activities (2,391,598) (1,755,096)
FINANCING ACTIVITIES
Advances under capital lease obligations 377,015 927,610
Principal payments under capital lease obligations (406,729) (52,603)
Note payable proceeds - 375,000
Prepaid financing proceeds - -
Proceeds from warrants exercised 1,123,865 -
Proceeds from issuance of common stock 114,315,528 22,575
Proceeds from issuance of redeemable preferred stock 30,065,064 14,132,224
-------------------------------------------
Net cash provided by financing activities 145,474,743 15,404,806
-------------------------------------------
Net increase in cash and cash equivalents 139,246,690 7,818,796
Cash and cash equivalents at beginning of period 5,401,508 194,243
-------------------------------------------
Cash and cash equivalents at end of period $ 144,648,198 $ 8,013,039
===========================================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements of Arena Pharmaceuticals,
Inc. have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by 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. Interim
results are not necessarily indicative of results for a full year.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements should be read in
conjunction with the audited financial statements and footnotes thereto
included in the Arena's Registration Statement on Form S-1, as amended (File
No. 333-35944) for the year ended December 31, 1999, as filed with the
Securities and Exchange Commission ("SEC").
(2) Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin (or SAB) No. 98, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Potentially dilutive securities comprised of incremental
common shares issuable upon the exercise of stock options and warrants, and
common shares issuable on conversion of preferred stock, were excluded from
historical diluted loss per share because of their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that
automatically converted upon the closing of the Company's initial public
offering in July 2000 (using the as-if converted method from the original
date of issuance).
(3) Deferred Stock Compensation
During the year ended December 31, 1999 and the nine months ended September
30, 2000, in connection with the grant of stock options to employees, the
Company recorded deferred stock compensation totaling approximately $1.0
million and $9.3 million, respectively, representing the difference between
the exercise price and the estimated market value of the Company's common
stock as determined by the Company's management on the date such stock
options were granted. Deferred compensation is included as a reduction of
stockholders' equity and is being amortized to expense over the vesting
period of the options in accordance with FASB Interpretation No. 28, which
permits an accelerated amortization methodology. During the three months
ended September 30, 1999 and 2000 and the nine months ended September 30,
1999 and 2000, the Company recorded amortization of deferred compensation
expense of approximately $98,000, $1.1 million, $277,000 and $3.0 million,
respectively. At September 30, 2000, total charges to be recognized in future
periods from amortization of deferred stock compensation are anticipated to
be approximately $1.0 million, $3.1 million, $2.0 million, 663,000, and
$16,000 for the remaining three months of 2000, and for the years ended
December 31, 2001, 2002, 2003 and 2004, respectively.
During the nine months ended September 30, 2000, in connection with the grant
of stock options to consultants, the Company recorded deferred stock
compensation totaling approximately $267,000. Deferred compensation for stock
options granted to consultants is periodically remeasured as the underlying
options vest. For the nine months ended September 30, 2000 the Company
recorded approximately $141,000 in deferred compensation expense relating to
options granted to our consultants.
(4) Non-cash preferred stock charge
In January 2000, March 2000 and April 2000, the Company sold Shares of Series
E Convertible Redeemable Preferred Stock, Series F Convertible Redeemable
Preferred Stock, and Series G Convertible Redeemable Preferred Stock,
respectively, at what management believed was fair value. Subsequent to the
commencement of the initial public
4
<PAGE>
offering process, the Company re-evaluated the fair value of its common stock
as of January 2000, March 2000 and April 2000 and determined it to be $4.68,
$13.50 and $13.50, respectively. In accordance with EITF 98-5, the Company
recorded a non-cash preferred stock charge in the amount of approximately
$22.4 million in the nine months ended September 30, 2000. The Company
recorded the charge at the date of issuance by offsetting charges and credits
to preferred stock, without any effect on stockholders' equity. The non-cash
preferred stock charge increases the loss applicable to common stockholders
in the calculation of basic net loss per share for the nine months ended
September 30, 2000.
(5) Initial Public Offering of Common Stock
On July 28, 2000 the Company completed an initial public offering in which it
sold 6,000,000 shares of common stock at $18.00 per share for net proceeds of
approximately 98.9 million, net of underwriting discounts, commissions and
offering expenses. Upon the closing of the offering, all of the Company's
redeemable convertible preferred stock converted into 12,698,578 shares of
common stock.
On August 10, 2000 the underwriters exercised an over-allotment option to
purchase an additional 900,000 shares resulting in net proceeds to the
Company of approximately $15.1 million.
(6) New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
guidance in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt the
pronouncement during the fourth quarter of 2000. The Company does not expect
SAB 101 to have a material effect on its financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 clarifies certain issues in the application
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12,
2000. FIN 44 did not have a material impact on the Company's financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our financial
statements and accompanying notes included in this report and the financial
statements and notes thereto for the year ended December 31, 1999 included in
the Company's Registration Statement on Form S-1, as amended (File No.
333-35944) which was declared effective by the Securities and Exchange
Commission on July 27, 2000. Operating results are not necessarily indicative
of results that may occur in future periods.
Certain statements contained in this Form 10-Q, other securities filings,
press releases, interviews, our web-site (WWW.ARENAPHARM.COM) and other
public statements that are not historical facts, including those statements
that refer to our plans, prospects, expectations, strategies, intentions,
hopes and beliefs, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. You should not place
undue reliance on these forward-looking statements. These statements involve
risks, uncertainties and other factors, including those described below and
elsewhere in this Form 10-Q, that may cause our actual results or timing of
events to differ materially from any expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," or the negative of these terms or other comparable terminology.
Examples of such forward-looking statements include, but are not limited to,
statements about our plans and objectives during the remainder of 2000 and
beyond, and our plans and objectives generally, statements about our expected
receipts of revenues from our collaborations, and our collaborations
generally, statements about our future operating losses and anticipated
operating and capital expenditures, statements about increases in our
research and development expenses, statements about future non-cash charges
related to option grants to our employees, statements about the sufficiency
of our cash on hand and the net proceeds from our recent initial public
offering to fund our operations for the next 24 months, statements about
anticipated hiring, and statements about the effect of changes in interest
rates on our business and financial results. Factors that might cause such a
difference include, but are not limited to, those discussed elsewhere in this
document and those discussed in "Risk Factors" and elsewhere in our
Registration Statement on Form
5
<PAGE>
S-1, as amended (File No. 333-35944). We assume no obligation to update these
forward-looking statements as circumstances change in the future.
We are a biotechnology company that has developed CART, a new technology
which we use to identify new drug candidates more efficiently than
traditional drug discovery techniques. Using CART, we have discovered new
drug candidates in the areas of obesity and schizophrenia. Based on our
success using CART, we have established collaborative drug discovery programs
with a number of pharmaceutical and biotechnology companies.
Since our inception in April 1997, we have devoted substantially all of our
resources to the research and development of CART. We have incurred
significant operating losses since our inception and, as of September 30,
2000, we had an accumulated deficit of $21.8 million. We expect to incur
additional operating losses as we continue to develop our technologies and to
fund internal research and development. We recorded revenues attributable to
our collaborations, which included research funding, milestone payments and
technology access and development fees. Our prospects should be considered in
light of the risks, expenses and difficulties encountered by companies in the
early stages of development, particularly those companies in the rapidly
changing pharmaceutical and biotechnology industries.
We plan to pursue several specific objectives during the remainder of
2000, namely:
- expanding the number of receptors available for activation by CART
through internal research efforts and, potentially, external licensing
agreements
- increasing our internally funded drug discovery efforts, including
expansion of our chemistry and screening efforts
- continuing clinical trials of T-82 and potentially entering into
collaborations to develop our anti-obesity and anti-psychotic drug
programs
Our ability to achieve our identified goals or objectives is dependent upon
many factors, some of which are out of our control, and we may not achieve
our identified goals or objectives.
Our quarterly operating results will depend upon many factors, including
expiration or termination of research contracts with our collaborators, the
size of future collaborations, the success rate of our technology
collaborations leading to milestones and royalties, and general and
industry-specific economic conditions which may affect research and
development expenditures. As a consequence, our revenues in future periods
are likely to fluctuate significantly from period to period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
We recorded revenues of $2.3 million during the three months ended September
30, 2000 as compared to no revenue during the three months ended September
30, 1999. The revenues for the three months ended September 30, 2000 were
primarily attributable to our collaborations with Eli Lilly and Taisho
Pharmaceutical, which included research funding, milestone payments, and
technology access and development fees. Research funding is recognized as
revenue when the services are rendered. Revenue from technology access and
development fees is recognized over the term of the collaboration. Revenue
from milestone payments is recognized when the milestone is achieved. Our
collaborators often pay us before we recognize the revenue, and these
payments are deferred until earned. As of September 30, 2000, we had current
and long-term deferred revenue totaling approximately $919,000.
Research and Development
Research and development expenses increased $1.2 million to $3.5 million for
the three months ended September 30, 2000 from $2.3 million for the three
months ended September 30, 1999. The increase was due primarily to increased
personnel related expenses and lab supplies to support the personnel in order
to expand the application of our technology. The increase was offset by
reduced expenses of $1.0 million related to the development of T-82 for which
we initiated Phase I clinical trials in early 1999, and which were completed
in late 1999. As of September 30, 2000, all
6
<PAGE>
research and development costs have been expensed as incurred. We believe
that continued investment in research and development is critical to
attaining our strategic objectives and we expect these expenses to continue
and to increase.
General and Administrative
General and administrative expenses increased $421,000 to $800,000 for the
three months ended September 30, 2000 from $379,000 for the three months
ended September 30, 1999. The increase was a result of increased personnel
added to support a growing company as well as supporting the needs of a
public company. General and administrative expenses consist primarily of
salaries and related personnel expenses for executive, finance and
administrative personnel, professional fees, and other general corporate
expenses. We expect that our general and administrative expenses will
increase to support our growth and requirements as a public company.
Non-Cash Stock-Based Compensation Charges
Deferred compensation for options granted to employees has been determined as
the difference between the exercise price and the fair value of our common
stock, as estimated by us for financial reporting purposes, on the date
options were granted. Deferred compensation for options granted to
consultants was determined in accordance with Statement of Financial
Accounting Standards No. 123 as the fair value of the equity instruments
issued and is periodically remeasured as the underlying options vest in
accordance with EITF 96-18.
For the three months ended September 30, 2000, we recorded amortization of
deferred compensation of approximately $1.1 million, compared to $98,000 for
the three months ended September 30, 1999.
Interest Income
Interest income increased to $1.7 million for the three months ended
September 30, 2000 from $111,000 in the same period in 1999, due to higher
average cash balances.
Interest Expense
Interest expensed increased $20,000 to $59,000 for the three months ended
September 30, 2000 as compared to $39,000 for the same period in 1999. This
increase represents interest accrued on our equipment leases.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
We recorded revenues of $3.6 million during the nine months ended September
30, 2000 as compared to no revenue during the nine months ended September 30,
1999. The revenues for the nine months ended September 30, 2000 were
attributable to our collaborations with Eli Lilly and Taisho Pharmaceutical,
which included research funding, milestone payments, and technology access
and development fees. Research funding is recognized as revenue when the
services are rendered. Revenue from technology access and development fees is
recognized over the term of the collaboration. Revenue from milestone
payments is recognized when the milestone is achieved. Our collaborators
often pay us before we recognize the revenue, and these payments are deferred
until earned. As of September 30, 2000, we had current and long-term deferred
revenue totaling approximately $919,000.
Research and Development
Research and development expenses increased $2.6 million to $8.5 million for
the nine months ended September 30, 2000 from $5.9 million for the nine
months ended September 30, 1999. The increase was due primarily to increased
personnel related expenses and lab supplies to support the personnel in order
to expand the application of our technology. The increase was partially
offset by reduced expenses of $737,000 related to the development of T-82 for
which we initiated Phase I clinical trials in early 1999, and which were
completed in late 1999. As of September 30, 2000, all research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and we expect these expenses to continue and to increase.
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General and Administrative
General and administrative expenses increased $300,000 to $1.7 million for
the nine months ended September 30, 2000 from $1.4 million for the nine
months ended September 30, 1999. The increase was due to increased personnel
to support the needs of a growing company as well as supporting the needs of
a public company. The increase was partially offset by a negotiated
satisfaction in the nine months ended September 30, 1999 related to our
Series C Preferred round of financing. General and administrative expenses
consist primarily of salaries and related personnel expenses for executive,
finance and administrative personnel, professional fees, and other general
corporate expenses. We expect that our general and administrative expenses
will increase to support our growth and requirements as a public company.
Non-Cash Stock-Based Compensation Charges
For the nine months ended September 30, 2000, we recorded amortization of
deferred compensation of approximately $3.0 million, compared to $277,000 for
the nine months ended September 30, 1999. We also recorded non-cash
compensation charges of $141,000 in the nine months ended September 30, 2000
for stock options granted to consultants.
Interest Income
Interest income increased to $2.3 million for the nine months ended September
30, 2000 from $361,000 in the same period in 1999, due to higher average cash
balances.
Interest Expense
Interest expense increased $86,000 to $177,000 for the nine months ended
September 30, 2000 as compared to $91,000 for the same period in 1999. This
increase represents interest accrued on our equipment leases, as well as
interest accrued on our other debt which was converted into our common stock
in July 2000.
Non-cash preferred stock charge
We recorded a non-cash preferred stock charge of $22.4 million for the nine
months ended September 30, 2000. This non-cash preferred stock charge relates
to the issuance of our Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock in January 2000, March 2000, and April 2000,
respectively, which converted into shares of our common stock. We recorded
the non-cash preferred stock charge at the date of each issuance by
increasing the net loss applicable to common stockholders, without any effect
on total stockholders' equity. The amount increased our basic net loss per
share for the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations since
our inception. At September 30, 2000, we had an accumulated deficit of $21.8
million. Our net losses have resulted primarily from expenses incurred in
connection with our research and development activities and general and
administrative expenses. To date, we have funded our operations primarily
through private equity financings and to a lesser extent through funding from
our collaborators.
As of September 30, 2000, we had $144.6 million in cash and cash equivalents
compared to $5.4 million in cash and cash equivalents as of December 31,
1999. The increase primarily represents proceeds from our initial public
offering in July of 2000 as well as our issuances of preferred stock in
January, March and April of 2000.
Net cash used in operating activities was approximately $3.8 million during
the nine months ended September 30, 2000 and was approximately $5.8 million
during the nine months ended September 30, 1999. The primary use of cash was
to fund our net losses for these periods, adjusted for non-cash expenses,
including amortization of deferred compensarion, and changes in operating
assets and liabilities.
Net cash used in investing activities was approximately $2.4 million during
the nine months ended September 30, 2000 and was approximately $1.8 million
during the nine months ended September 30, 1999. Net cash used in investing
8
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activities was primarily the result of the acquisition of laboratory and
computer equipment, leasehold improvements and furniture and fixtures.
Net cash proceeds from financing activities was approximately $145.5 million
during the nine months ended September 30, 2000 and was approximately $15.4
million during the nine months ended September 30, 1999. The net cash
proceeds from financing activities for the nine months ended September 30,
2000 were primarily from the issuance of our common stock of $114.0 million
and our preferred stock of $30.1 million. The net cash proceeds from
financing activities for the nine months ended September 30,1999 were
primarily from the issuance of our preferred stock.
We lease our corporate and research and development facilities under two
leases which expire on April 30, 2013. The leases provide us with options to
extend for two additional five-year periods. We have also entered into
capital lease agreements for various lab and office equipment. The terms of
these capital lease agreements range from 48 to 60 months. Current total
minimum annual payments under these capital leases are approximately $500,000
in 2000, $500,000 in 2001, $500,000 in 2002, $381,000 in 2003 and $17,000 in
2004.
We expect to continue to incur substantial losses through at least fiscal
2000, and may incur net losses in subsequent periods. The amount and timing
of future losses are highly uncertain. Our ability to achieve and thereafter
sustain profitability will be dependent upon, among other things, obtaining
additional strategic alliances as well as establishing additional
collaborative or licensing arrangements.
Based on the research collaborations we already have in place and our current
internal business plan, we expect to hire an additional 10 to 15 employees,
primarily scientists, by the end of 2000. While we believe that our cash
balance at September 30, 2000 of $144.6 million combined with anticipated
cash flows from our collaborations, will be sufficient to meet our capital
requirements for at least the next two years, we cannot assure you that we
will not require additional financing before such time. Our funding
requirements may change at any time due to technological advances or
competition from other companies. Our future capital requirements will also
depend on numerous other factors, including scientific progress in our
research and development programs, additional personnel costs, progress in
pre-clinical testing, the time and cost related to proposed regulatory
approvals, if any, and the costs of filing and prosecution of patent
applications and enforcing patent claims. We cannot assure you that adequate
funding will be available to us or, if available, that such funding will be
available on acceptable terms. Any shortfall in funding could result in the
curtailment of our research and development efforts.
INCOME TAXES
As of December 31, 1999, we had approximately $12.6 million of net operating
loss carryforwards and $681,000 of research and development credit
carryforwards for federal income tax purposes. These carryforwards expire on
various dates beginning in 2012. These amounts reflect different treatment of
expenses for tax reporting than are used for financial reporting. United
States tax law contains provisions that may limit our ability to use net
operating loss and tax credit carryforwards in any year, or if there has been
an ownership change. Any future ownership change may limit the use of net
operating loss and tax credit carryforwards. Based on our valuation and
applicable Internal Revenue Code regulations, we believe our activities,
including our initial public offering, will not have a material effect on our
ability to use those carryforwards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our cash equivalents and short-term investments. We do not use derivative
financial instruments in our investment portfolio. Our cash and investment
policy emphasizes liquidity and preservation of principal over other
portfolio considerations. We select investments that maximize interest income
to the extent possible within these guidelines. If market interest rates were
to decrease by 1% from September 30, 2000, we would expect future interest
income from our portfolio to decline annually by less than $1.5 million. The
modeling technique used measures the change in fair values arising from an
immediate hypothetical shift in market interest rates and assumes ending fair
values include principal plus earned interest.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000 we granted options to
purchase 19,000 shares of common stock to employees under our 1998 Stock Plan
and we granted options to purchase 460,000 shares of common stock to
employees under our 2000 Stock Plan. During the three months ended September
30, 2000 employees and non-employees exercised options for 15,575 shares of
common stock. The issuance of these restricted securities were deemed to be
exempt from registration under the Securities Act of 1933 (the "Act") in
reliance upon Section 4 (2) of the Act or Rule 701 promulgated under Section
3 (b) of the Act.
On July 28, 2000 we completed our initial public offering of 6,000,000 shares
of our common stock at an initial public offering price of $18.00 per share
for gross proceeds of $108 million and estimated net proceeds of
approximately $98.9 million. We paid a total of approximately $7.6 million in
underwriting discounts and commissions and other costs and expenses, other
than underwriting discounts and commissions, totaled approximately $1.5
million in connection with the offering. The managing underwriters in the
offering were ING Barings, Prudential Vector Healthcare and SG Cowen. The
shares of common stock sold in the offering were registered under the Act in
a Registration Statement on Form S-1, as amended (No. 333-35944). The
Securities and Exchange Commission declared the Registration Statement
effective on July 27, 2000.
Furthermore, on August 10, 2000 the underwriters exercised an over-allotment
option for an additional 900,000 shares of our common stock at the initial
public offering price of $18.00 per share for gross proceeds of $16.2 million
and net proceeds of approximately $15.1 million. We paid a total of
approximately $1.1 million in underwriting discounts and commissions in
connection with the exercise of the over-allotment option.
In connection with the offering, our total net proceeds from the offering
were approximately $114.0 million. No expenses were paid or payments made to
our directors, officers or affiliates or 10% owners of any class of our
equity securities. Through September 30, 2000, all of the net proceeds remain
in working capital, held as temporary investments. We intend to use the net
proceeds from the offering for general corporate purposes, including working
capital, drug candidate discovery, development and clinical testing using
non-partnered G protein-coupled receptor targets, and other research and
development and clinical testing activities. The amounts and timing of our
actual expenditures for each purpose may vary significantly depending upon
numerous factors. In addition, we may use a portion of the net proceeds to
acquire complementary businesses or technologies.
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
10
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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.
ARENA PHARMACEUTICALS , INC.
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(Registrant)
Date: November 13, 2000 /s/ JACK LIEF
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Jack Lief
President and Chief Executive Officer
/s/ ROBERT HOFFMAN
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Robert Hoffman
Vice President, Finance and Chief Accounting Officer
