<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
-------------------
(MARK ONE)
X
- - --------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1995 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 0-20726
CORTECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0894091
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 N. BROADWAY, SUITE 300 80221
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
(303) 650-1200
(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 the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.002 par value 17,725,504
----------------------------- -----------------------------
(Class) (Outstanding at April 30, 1995)
<PAGE>
CORTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements and Notes
Balance Sheets -- March 31, 1995
and December 31, 1994 . . . . . . . . . 3
Statements of Operations --
for the three months ended
March 31, 1995 and 1994 . . . . . . . . 4
Statements of Cash Flows --
for the three months ended
March 31, 1995 and 1994 . . . . . . . . 5
Notes to Financial Statements . . . . . . 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . 11
Item 2. Changes in Securities. . . . . . . . . . 11
Item 3. Default upon Senior Securities . . . . . 11
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . 11
Item 5. Other Information. . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND NOTES.
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
--------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . $ 18,130 $ 12,327
Short-term investments (Note 3) . . . . . . 15,605 23,941
Prepaid expenses and other. . . . . . . . . 636 404
--------- ---------
Total current assets . . . . . . . . . . 34,371 36,672
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Laboratory and pilot production equipment . 6,494 6,412
Leasehold improvements. . . . . . . . . . . 7,761 7,679
Office furniture and equipment. . . . . . . 2,501 2,458
--------- ---------
16,756 16,549
Less -- Accumulated depreciation and
amortization . . . . . . . . . . . . . . . (8,760) (7,668)
--------- ---------
7,996 8,881
--------- ---------
$ 42,367 $ 45,553
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . $ 1,398 $ 1,992
Accrued compensation, payroll taxes and
other. . . . . . . . . . . . . . . . . . . 945 313
Unearned income . . . . . . . . . . . . . . 2,636 --
Other . . . . . . . . . . . . . . . . . . . -- 175
--------- ---------
Total current liabilities. . . . . . . . 4,979 2,480
--------- ---------
STOCKHOLDERS' EQUITY (Note 2)
Preferred stock, $.002 par value,
2,000,000 shares authorized, none issued . -- --
Common stock, $.002 par value, 50,000,000
shares authorized, 17,725,504 shares
issued and outstanding. . . . . . . . . . 35 35
Warrants. . . . . . . . . . . . . . . . . . 3,407 3,407
Additional paid-in capital. . . . . . . . . 94,978 94,925
Deferred compensation . . . . . . . . . . . (170) (193)
Accumulated deficit . . . . . . . . . . . . (60,862) (55,101)
--------- ---------
Total stockholders' equity . . . . . . . 37,388 43,073
--------- ---------
$ 42,367 $ 45,553
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
3
<PAGE>
CORTECH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
<S> <C> <C>
REVENUES:
Sponsored research and development
Related parties. . . . . . . . . $ 351 $ 313
Other. . . . . . . . . . . . . . 615 --
Interest income . . . . . . . . . . 484 479
------------ ------------
1,450 792
------------ ------------
EXPENSES:
Research and development. . . . . . 5,880 5,034
General and administrative. . . . . 1,331 1,470
------------ ------------
7,211 6,504
------------ ------------
NET LOSS. . . . . . . . . . . . . . . . $ (5,761) $ (5,712)
------------ ------------
------------ ------------
Net loss per share. . . . . . . . . $ (0.33) $ (0.33)
------------ ------------
------------ ------------
Weighted average common shares
outstanding . . . . . . . . . . . 17,725,504 17,426,146
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
4
<PAGE>
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1995 MARCH 31, 1994
-------------------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . $ (5,761) $ (5,712)
Adjustments to reconcile net loss
to net cash used in operations --
Depreciation and amortization. . . . . . 1,092 516
Compensation expense related to grant
of options, including amortization
of deferred compensation. . . . . . . 76 73
(Increase) decrease in prepaid expenses
and other. . . . . . . . . . . . . . . (232) 108
(Decrease) increase in accounts payable. (594) 285
Increase in accrued compensation,
payroll taxes and other. . . . . . . . 457 304
Increase in unearned income. . . . . . . 2,636 --
-------- ---------
Net cash used in operating
activities. . . . . . . . . . . . . (2,326) (4,426)
-------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchases of property and equipment. . . . (207) (2,770)
Purchases of short-term investments. . . . (14,654) (55,790)
Sales of short-term investments. . . . . . 22,990 63,799
-------- ---------
Net cash provided by investing
activities . . . . . . . . . . . . . 8,129 5,239
-------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from exercise of warrants . . . . -- 1,828
Proceeds from exercise of options. . . . . -- 37
Cash paid for offering costs . . . . . . . -- (20)
-------- ---------
Net cash provided by financing
activities . . . . . . . . . . . . . -- 1,845
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . 5,803 2,658
CASH AND CASH EQUIVALENTS, beginning of
period . . . . . . . . . . . . . . . . . . . 12,327 2,792
-------- ---------
CASH AND CASH EQUIVALENTS, end of period . . . $ 18,130 $ 5,450
-------- ---------
-------- ---------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
5
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at March 31, 1995, the related statements of operations
and statements of cash flows for the three month periods ended March 31, 1995
and 1994 are unaudited, but in management's opinion include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year. The accompanying
financial statements should be read in conjunction with the financial
statements as of and for the year ended December 31, 1994.
(2) STOCKHOLDERS' EQUITY
In January 1994, warrants to purchase 203,439 shares of common stock with
an exercise price of $9 per share were exercised and warrants to purchase
157,063 shares of common stock at $9 per share expired. Net proceeds to the
Company totaled $1.8 million.
In connection with the resignation of the Company's president and chief
executive officer during the first quarter of 1994, the Company has reversed
$200,000 of deferred compensation related to options granted at exercise
prices below fair market value.
(3) SHORT-TERM INVESTMENTS
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company's
short-term investments, which consisted entirely of government securities,
were classified as available-for-sale. These securities mature on various
dates through November 1995. As of March 31, 1995, these securities had an
amortized cost of $15.6 million which approximated fair market value.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Since its inception in 1982, Cortech has devoted substantially all of its
resources to the discovery and development of novel compounds for the
treatment of inflammatory and immunologic disorders. The Company currently
has research and development programs focused on three types of compounds
bradykinin antagonists, elastase inhibitors and antigen-specific
immunomodulators each of which has generated a lead compound that is in or
about to enter clinical trials.
BRADYCOR
In 1994, the Company completed two Phase 2 clinical trials of its lead
bradykinin antagonist, BradycorTM. The first, in patients with systemic
inflammatory response syndrome (SIRS) and presumed sepsis, did not produce a
statistically significant improvement of risk-adjusted, 28-day mortality, the
trial's primary endpoint, in the overall patient population. Subsequent,
prospectively defined analyses showed a statistically significant improvement
in the subgroup of patients who had pure Gram-negative infections. To
explore more fully these effects, the Company has expanded its second Phase 2
SIRS/sepsis trial from 100 to up to 250 patients. In this second trial,
which was initiated in May 1994, patients receive Bradycor or placebo for
seven days rather than the three-day infusion as in the first study. Also in
1994, Cortech completed a single-center, single-blind pilot study in 20
patients with traumatic brain injury, or head trauma, in which Bradycor
demonstrated statistically significant improvements in three outcome
measurements. Cortech currently is preparing for a multi-center trial to
confirm these results.
Funding for Bradycor has been provided in the past by CP-0127 Development
Corporation (CDC), a research funding corporation, which raised approximately
$8.5 million in 1992. All amounts due have been paid by CDC to Cortech under
research and development and license agreements and in connection with the
issuance of warrants for Cortech common stock. Subsequent Bradycor funding
has come from general corporate funds, primarily from the proceeds of the
Company's 1992 and 1993 public stock offerings.
ELASTASE INHIBITORS
Since 1987, Cortech has been working in conjunction with Marion Merrell
Dow (MMD) to develop a human neutrophil elastase inhibitor. Cortech filed an
IND application for CE-1037, the Company's lead elastase inhibitor, in July
1994 and expects to report the results of a Phase 1 clinical trial of CE-1037
for acute respiratory distress syndrome (ARDS) in 1995. MMD continues to
fund the Company's work on that compound and has paid Cortech a total of
$11.6 million in research funding through March 31, 1995. The Company's
agreement with MMD has been extended through 1995.
In March 1995, Cortech also entered into a research, development and
license agreement with Ono Pharmaceutical Co., Ltd. (Ono) to develop an
orally bioavailable elastase inhibitor. Such a compound might be beneficial
in chronic inflammatory conditions such as rheumatoid arthritis, inflammatory
bowel disease and chronic obstructive pulmonary disease. Ono will pay
Cortech up to $10.5 million at scheduled calendar dates subject to milestones
for the development of an orally bioavailable elastase inhibitor. The
Company deferred revenue of $2.6 million from the first payment relating to
work to be performed during the remainder of the first 12 months of the
agreement.
7
<PAGE>
ANTIGEN-SPECIFIC IMMUNOMODULATORS
The Company is also continuing to develop its lead antigen-specific
immunomodulator, SulfasimTM, and filed an IND in March 1995. This compound
has been designed for the potential prevention and treatment of
sulfamethoxazole allergy in AIDS patients.
BUSINESS RISKS
The Company's products are in an early stage of development and face a
high degree of technological, regulatory and competitive risk. The
regulatory approval process for any new drug is arduous, and successful
completion of any trial or any phase of development does not give any
assurance that future phases also will be successfully completed or that
approval will be obtained. None of the Company's compounds have yet
completed, nor can there be any assurance they will complete, the tests that
assess clinical efficacy.
To date, the Company has not received revenues from the sale of products
and does not expect to receive such revenue for at least several years.
Cortech has been unprofitable every year since its founding and expects to
incur substantial operating losses and negative cash flows from operations
for the next several years due to continued spending on research, preclinical
and clinical testing, regulatory affairs, process development and
administration. These activities are likely to require the Company to seek
additional financing in the future.
Given the Company's current stock price and an adverse financing climate
in the biopharmaceutical sector, management believes that raising funds in
the public capital markets will remain extremely difficult unless and until
data from future clinical trials demonstrate that the Company's technology is
likely to lead to marketable products. Therefore, the Company will likely be
dependent in large part upon entering into new arrangements with
collaborative partners for necessary future funding. There can be no
assurances that success in any trial or phase of development will result in
an enhanced ability to raise capital or that the Company will be successful
in establishing and maintaining any additional collaborative arrangements.
Cortech believes that it has adequate pilot manufacturing capacity, when
augmented by external purchases, to supply planned clinical trials. However,
it must still develop commercially viable manufacturing processes, either
using internal resources or through external contracts and partnerships. It
will also need to finance the construction of a commercial-scale plant or to
find other means of securing adequate production capacity before it can
launch any product in the marketplace. Similarly, the Company does not have
a sales and marketing component today. No assurance can be given that the
Company can successfully develop any of its products for marketing, that it
can successfully manufacture commercial quantities of any products that are
approved for marketing, that its manufacturing costs will be economically
viable, or that it can develop an effective sales and marketing strategy to
promote any marketed product.
The risks discussed above reflect the Company's early stage of
development. The Company also faces risks stemming from the nature of the
biopharmaceutical industry including, among others, the risk of competition;
the risk of regulatory change including potential changes in health care
coverage; and uncertainties associated with obtaining and enforcing patents
and proprietary technology.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had cash, cash equivalents and short-term
investments totaling $33.7 million. The Company's expenditures for operating
costs and property and equipment, net of depreciation, totaled $6.3 million
and $8.8 million for the three months ended March 31, 1995, and March 31,
1994, respectively. Management presently expects that the Company's
expenditures will level off at or
8
<PAGE>
below the rate experienced for the first quarter of 1995. The rate of
expenditures, however, will depend upon numerous factors, including the
progress of its research programs and clinical trials; the development of
regulatory submissions; the quantity of materials required for clinical
trials; the retention of existing additional collaborative partners and the
availability and terms of funding from collaborative partners or through the
capital markets. The Company continues to carefully manage all of its
planned and current spending programs.
From its inception through March 31, 1995, the Company raised cash
totaling $95.5 million from the sale of equity securities, including $33.6
million in net proceeds from its November 1992 initial public offering and
$37.7 million in net proceeds from its November 1993 follow-on public
offering. The Company also received proceeds totaling $1.8 million in
January 1994 from the exercise of certain warrants.
Prior to its initial public offering in November 1992, Cortech financed
its operations primarily from capital raised through several rounds of
private financing and from contract research performed for MMD and CDC. By
the end of the third quarter of 1993, all of the $8.5 million raised by CDC
and payable to the Company had been received, and no additional funds are
expected from CDC. MMD has provided research funding for certain work
conducted by Cortech in support of the CE-1037 program. This agreement has
been extended several times since it was entered into, and the current
extension expires on December 31, 1995. MMD will pay Cortech a total of $1.5
million in 1995 for research to be performed under the current extension.
The amount of funding beyond 1995 cannot be determined in advance since it
will depend upon further extensions of the collaborative agreement, upon the
allocation of tasks between the companies and upon the size and cost of
preclinical development activities and clinical trials.
The Company has experienced net losses and negative cash flows from
operations each year since inception and had incurred an accumulated deficit
of $60.9 million through March 31, 1995. The Company expects to incur
substantial additional expenses in the pursuit of its product development
programs, either alone or in collaboration with partners. The expenses may
include costs of expanded research and development, conduct of additional
clinical trials, construction of manufacturing facilities, establishment of a
marketing and sales organization and provision of additional administrative
activities. In order to fund such expenses, the Company anticipates that it
will have to seek additional private or public financing and additional
research, development and marketing arrangements with collaborative partners;
there can be no assurance that such agreements will be concluded. In
addition, management believes that the Company's stock price along with an
adverse financing climate in the biopharmaceutical sector limit the Company's
access to public equity financing. Accordingly, no assurance can be given
that the Company will be able to raise additional capital when required or
that such capital would be available under favorable terms.
RESULTS OF OPERATIONS
REVENUES
Revenues from research and development were $966,000 and $313,000 in the
three month periods ended March 31, 1995 and 1994, respectively. The
increase in revenues resulted primarily from the first payments received
under the Ono contract. The Company's research, development and license
agreement with Ono provides for payments to Cortech approximating Cortech's
rate of spending on the development of an orally bioavailable elastase
inhibitor. Ono has made payments under the agreement totaling $3.25 million.
The Company deferred revenue of $2.6 million for research activities to be
performed through the first quarter of 1996.
The Company's research agreement with MMD has provided for payments to
Cortech approximating Cortech's rate of spending on the portion of the
CE-1037 program directed at ARDS. The current extension of this agreement
expires on December 31, 1995. MMD has agreed to make payments totaling $1.5
million
9
<PAGE>
during 1995, of which $351,000 is for work performed in the first quarter of
1995. Payments from MMD totaled $313,000 in the first quarter of 1994. The
amount of funding from MMD beyond 1995 cannot be determined in advance since
it will depend upon an extension of the collaborative agreement, the
allocation of tasks between the companies and the size and cost of
preclinical development activities and clinical trials
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development expenses increased from $5.0
million in the first quarter of 1994 to $5.9 million in the first quarter of
1995. This increase was due primarily to a $304,000 increase in depreciation
related to expansions of the Company's manufacturing and laboratory
facilities that were under construction in the first quarter of 1994 and a
$269,000 charge relating to the March 1995 reduction in force. To date, the
Company has completed Phase 2 clinical trials of Bradycor for sepsis
(three-day infusion) and head trauma. Phase 2 clinical trials of Bradycor
for sepsis (seven-day infusion) and multiple trauma are ongoing. In 1995,
the Company also expects to begin a follow-on study of Bradycor for traumatic
brain injury along with clinical trials of Sulfasim and CE-1037.
Now that the CDC funds have been expended, funds required for research
and development of Bradycor have been and will continue to be paid from
Cortech's general funds or through possible future arrangements with other
collaborative partners. No assurance can be given that the Company will be
able to enter into any such arrangements. Management expects the rate of
spending on research and development to level off at or below the rate
experienced for the three months ended March 31, 1995, pending the near-term
results of Bradycor clinical trials still in progress and development of the
Company's other compounds. Positive or negative developments could lead to an
increase or decrease in these expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses decreased from $1.5
million in the first quarter of 1994 to $1.3 million in first quarter of
1995. During the first quarter of 1994, the Company recognized approximately
$300,000 for salary and deferred compensation expense related to the
resignation of the Company's president and chief executive officer. The
Company also recognized $161,000 for salary expense related to the
resignation of the Company's acting president and chief executive officer in
the first quarter of 1995. The Company expects its spending for general and
administrative activities to follow a similar trend as that for research and
development.
NET LOSS
The net loss increased from $5.7 million in the first quarter of 1994 to
$5.8 million in the first quarter of 1995. The Company expects to report
substantial losses for the foreseeable future.
10
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
ITEM DESCRIPTION
---- -----------
10.1 Research, Development and License Agreement dated
March 8, 1995, between the Company and Ono Pharmaceutical
Co., Ltd.*
b. Reports on Form 8-K
Not applicable.
* Confidential treatment requested.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 12th day
of May, 1995.
CORTECH, INC.
(Registrant)
Date: May 12, 1995 By: /s/ JOSEPH L. TURNER
----------------------------- -------------------------------
Joseph L. Turner
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND PRINCIPAL
ACCOUNTING OFFICER
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 12th day
of May, 1995.
CORTECH, INC.
(Registrant)
Date: May 12, 1995 By:
----------------------------- -------------------------------
Joseph L. Turner
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND PRINCIPAL
ACCOUNTING OFFICER
12
