<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 JUNE 30, 1996 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.)
6850 N. BROADWAY, SUITE G 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 18,223,006
----------------------------- ------------------------------
(Class) (Outstanding at July 31, 1996)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
CORTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements and Notes
Balance Sheets -- June 30, 1996
and December 31, 1995 ....................................... 3
Statements of Operations --
for the three and six months ended
June 30, 1996 and 1995 ...................................... 4
Statements of Cash Flows --
for the six months ended
June 30, 1996 and 1995 ...................................... 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 ............................................. 10
Item 2. Changes in Securities ......................................... 10
Item 3. Default 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 .............................................................. 11
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND NOTES.
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 10,438 $ 6,194
Short-term investments........................................................ 13,135 16,953
Prepaid expenses and other.................................................... 310 410
-------- --------
Total current assets...................................................... 23,883 23,557
-------- --------
PROPERTY AND EQUIPMENT, at cost
Laboratory and pilot production equipment..................................... 6,907 6,643
Leasehold improvements........................................................ 8,012 7,880
Office furniture and equipment................................................ 2,427 2,462
-------- --------
17,346 16,985
Less -- Accumulated depreciation and amortization............................. (13,026) (11,899)
-------- --------
4,320 5,086
-------- --------
$ 28,203 $ 28,643
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. $ 906 $ 605
Accrued compensation, payroll taxes and other................................. 382 218
Unearned income............................................................... 573 573
Advances from corporate partners.............................................. 1,138 --
Other......................................................................... 160 270
-------- --------
Total current liabilities................................................. 3,159 1,666
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.002 par value,
2,000,000 shares authorized, none issued................................. -- --
Common stock, $.002 par value, 50,000,000 shares authorized
18,211,446 and 17,823,456 shares issued and outstanding, respectively.... 37 36
Warrants...................................................................... 3,407 3,407
Additional paid-in capital.................................................... 95,862 95,153
Deferred compensation......................................................... (69) (97)
Accumulated deficit........................................................... (74,193) (71,522)
-------- --------
Total stockholders' equity................................................ 25,044 26,977
-------- --------
$ 28,203 $ 28,643
-------- --------
-------- --------
</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>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Sponsored research and development
Corporate partners.................. $ 688 $ 687 $ 3,925 $ 1,302
Related parties .................... 337 278 674 630
Interest income ...................... 308 475 611 959
----------- ----------- ----------- -----------
1,333 1,440 5,210 2,891
----------- ----------- ----------- -----------
EXPENSES
Research and development ............. 2,584 5,321 6,014 11,202
General and administrative ........... 859 1,143 1,867 2,473
----------- ----------- ----------- -----------
3,443 6,464 7,881 13,675
----------- ----------- ----------- -----------
NET LOSS ............................... $ (2,110) $ (5,024) $ (2,671) $ (10,784)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share ................... $ (0.12) $ (0.28) $ (0.15) $ (0.61)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares
outstanding ........................ 18,142,120 17,728,742 18,044,937 17,727,132
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss .................................................. $ (2,671) $ (10,784)
Adjustments to reconcile net loss
to net cash provided by (used in) operations --
Depreciation and amortization ........................... 1,127 2,114
Issuance of common stock for services ................... -- 25
Research and compensation expense related to grant
of options, including amortization
of deferred compensation .............................. 75 98
Decrease in prepaid expenses and other .................. 100 252
Increase (decrease) in accounts payable ................. 301 (834)
Increase in unearned income ............................. -- 2,435
Increase in advances from corporate partners ............ 1,138 --
Increase in accrued compensation,
payroll taxes and other ............................... 54 269
--------- ---------
Net cash provided by (used in) operating activities.. 124 (6,425)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of property and equipment ....................... (361) (338)
Purchases of short-term investments ....................... (13,431) (19,984)
Sales of short-term investments ........................... 17,250 23,990
--------- ---------
Net cash provided by investing activities ........... 3,458 3,668
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from the issuance of common stock ................ 29 57
Proceeds from exercise of options ......................... 633 12
--------- ---------
Net cash provided by financing activities ........... 662 69
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 4,244 (2,688)
CASH AND CASH EQUIVALENTS, beginning of period .............. 6,194 12,327
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .................... $ 10,438 $ 9,639
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
5
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at June 30, 1996, the related statements of operations
and statements of cash flows for the three and six-month periods ended June
30, 1996 and 1995 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, 1995.
(2) SHORT-TERM INVESTMENTS
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," Cortech, Inc.'s (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 April 1997. As of June 30, 1996, these securities
had an amortized cost of $13.1 million and a gross unrealized holding gain of
$15,000.
(3) RESEARCH AND DEVELOPMENT AGREEMENTS
Cortech received a $1.2 million milestone payment in the first quarter
of 1996 and received an additional $2.8 million in milestone payments in the
second quarter of 1996 under an agreement with SmithKline Beecham plc ("SB").
Of the $4.0 million, $2.6 million has been recognized as revenue in the
first six months of 1996.
Under an agreement signed in March 1995 to develop an oral elastase
inhibitor, Cortech received $1.4 million from Ono Pharmaceutical Co., Ltd. in
the first quarter of 1996. Of the $1.4 million, $802,000 has been recognized
as revenue for work performed in the first half of the year and the remaining
$573,000 will be recognized in the third quarter.
In April 1996, Cortech received $674,000 from Hoechst Marion Roussel,
Inc. ("HMRI") of which $337,000 was paid for work completed during the first
quarter of 1996 and $337,000 was paid for work completed during the second
quarter of 1996 under the December 1995 extension of the research and
development contract.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE COMPANY'S
1995 ANNUAL REPORT ON FORM 10-K.
GENERAL
Since its inception in 1982, Cortech has devoted a substantial portion
of its resources to the discovery and development of novel compounds for the
treatment of inflammatory disorders. The Company currently has research and
development programs focused primarily on two types of compounds, bradykinin
antagonists and proteinase inhibitors, each of which has generated a lead
compound that is in early stage clinical trials.
The Company's products are in an early stage of development and by their
nature, 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 provide
assurance that future phases will also be successfully completed or that
marketing approval will ultimately be obtained. There can be no assurance
that any of the Company's compounds will successfully lead to products that
can be commercialized or that they will attract and maintain the support of a
collaborative partner.
Drug discovery and drug development programs are capital intensive.
Management believes that raising funds in the public capital markets may
remain unattractive for the Company at least for the near term. 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 assurance that success in any 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.
The risks discussed herein largely reflect the Company's early stage of
development. Inherent in this stage is a range of additional risks,
including the Company's history of losses and the uncertainty of future
financing. 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. In addition, the Company's stock price, like
that of many publicly-traded biotechnology companies, has in the past been
highly volatile and may in the future experience significant volatility.
RESULTS OF OPERATIONS
REVENUES
Revenues from research and development increased from $965,000 in the
second quarter of 1995 to $1.0 million in the second quarter of 1996 and from
$1.9 million to $4.6 million in the six month periods ending June 30, 1995
and 1996, respectively. The increase in revenues resulted primarily from
milestone payments in accordance with the SB contract of which $2.6 million
has been recorded as
7
<PAGE>
revenue. The agreements between the Company and each of its corporate
partners provide for payments to the Company based upon the achievement of
predetermined milestones. The agreements currently are in their research and
development phases, during which payments generally are tied to specific
milestones of a non-recurring nature. Thus, the payments received from SB
during the first half of 1996 are not predictive of future revenue levels.
These agreements provide for early termination under certain circumstances.
There can be no assurance that any of these collaborations will not be
discontinued in accordance with their terms.
RESEARCH AND DEVELOPMENT EXPENSES
Expenses for research and development decreased from $5.3 million in the
second quarter of 1995 to $2.6 million in the second quarter of 1996 and
decreased from $11.2 million in the six months ended June 30, 1995 to $6.0
million in the six months ended June 30, 1996. This decrease is due
primarily to restructurings announced in March and August 1995.
Management expects that the Company's near term rate of research and
development expenses will level off at or below the rate experienced for the
first half of 1996. Expenditures will continue to depend upon numerous
factors, including the progress of research and development programs. The
Company continues to review carefully all of its planned and current
expenditures on these programs. Such review can lead to either increases or
decreases in project-related spending.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased from $1.1 million in the
second quarter of 1995 to $859,000 in the second quarter of 1996 and
decreased from $2.5 million in the six months ended June 30, 1995 to $1.9
million in the six months ended June 30, 1996. This decline resulted from
decreases in staffing, office space and business activity. In general, the
Company expects its general and administrative expenses to follow a trend
similar to that noted above for research and development.
NET LOSS
The net loss decreased from $5.0 million in the second quarter of 1995
to $2.1 million in the second quarter of 1996 and from $10.8 million in the
six months ended June 30, 1995 to $2.7 million in the six months ended June
30, 1996. This decrease was due principally to the decreased expenses and
increased revenues described above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash, cash equivalents and short-term
investments totaling $23.6 million, compared to $23.1 million at December 31,
1995. The Company's net cash used in operating activities, including
purchases of property, plant and equipment, totaled $610,000 and $237,000 for
the three and six months ended June 30, 1996, respectively. The Company's
expenditures, net of depreciation and non-cash charges, decreased from $5.5
million in the second quarter of 1995 to $2.7 in the second quarter of 1996
and decreased from $11.8 million in the six months ended June 30, 1995 to
$7.0 million in the six months ended June 30, 1996. This reduction reflects
the Company's continued monitoring of expenditures and its efforts to focus
resources on the projects with the greatest expected value.
8
<PAGE>
From its inception through June 30, 1996, the Company raised cash
totaling $97.0 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.
Cortech received a $1.2 million milestone payment in the first quarter
of 1996 and received an additional $2.8 million in milestone payments in the
second quarter of 1996 under an agreement with SmithKline Beecham plc ("SB").
Of the $4.0 million, $2.6 million has been recognized as revenue in the
first six months of 1996.
Under an agreement signed in March 1995 to develop an oral elastase
inhibitor, Cortech received $1.4 million from Ono Pharmaceutical Co., Ltd. in
the first quarter of 1996. Of the $1.4 million, $802,000 has been recognized
as revenue for work performed in the first half of the year and the remaining
$573,000 will be recognized in the third quarter.
In April 1996, Cortech received $674,000 from Hoechst Marion Roussel,
Inc. ("HMRI") of which $337,000 was paid for work completed during the first
quarter of 1996 and $337,000 was paid for work completed during the second
quarter of 1996 under the December 1995 extension of the research and
development contract.
The Company has experienced net losses and negative cash flows from
operations each year since inception and has incurred an accumulated deficit
of $74.2 million through June 30, 1996. The Company expects to incur
substantial additional expenses in the pursuit of its research and product
development programs, either alone or in collaboration with partners. The
expenses may include costs of expanded research and development, clinical
trials, construction of manufacturing facilities, establishment of a
marketing and sales organization and additional administrative activities.
In order to fund such expenses, the Company anticipates that it will have to
seek additional research, development and marketing arrangements with
collaborative partners and/or additional private or public financing. There
can be no assurance that such agreements will be concluded or that the
Company will be able to raise additional capital when required or that such
capital would be available under favorable terms.
9
<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.
The Company held an Annual Meeting of Stockholders on May 20, 1996.
The stockholders elected the Board's nominee as a Class II director by
the votes indicated:
NOMINEE VOTES IN FAVOR VOTES WITHHELD
------- -------------- --------------
Bert Fingerhut 14,044,928 91,695
The selection of Arthur Andersen LLP as the company's independent auditors
was ratified with 14,017,086 votes in favor, 71,427 against, and 48,110
abstentions.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
ITEM DESCRIPTION
---- -----------
27.1 Financial Data Schedule
b. Reports on Form 8-K
Not applicable.
10
<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 9th day
of August, 1996.
CORTECH, INC.
(Registrant)
Date: August 9, 1996 By: /s/ JOSEPH L. TURNER
------------------------------ ------------------------------------
Joseph L. Turner
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND
PRINCIPAL ACCOUNTING OFFICER
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,438
<SECURITIES> 13,135
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,883
<PP&E> 17,346
<DEPRECIATION> 13,026
<TOTAL-ASSETS> 28,203
<CURRENT-LIABILITIES> 3,159
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 25,007
<TOTAL-LIABILITY-AND-EQUITY> 28,203
<SALES> 0
<TOTAL-REVENUES> 5,210
<CGS> 0
<TOTAL-COSTS> 7,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,671)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
