<PAGE> 1
================================================================================
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 [NO FEE REQUIRED]
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 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission File No. 0-20111
ARONEX PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0196535
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8707 Technology Forest Place, The Woodlands, Texas 77381-1191
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (281) 367-1666
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.
CLASS OUTSTANDING AT MARCH 31, 1999
-------------------------- -----------------------------
Common Stock, $.001 par value 22,494,671 shares
================================================================================
<PAGE> 2
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
QUARTERLY PERIOD MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Factors Affecting Forward-Looking Statements................................................................ 3
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements.................................................................. 3
Consolidated Balance Sheets - December 31, 1998 and March 31, 1999 (unaudited)..................... 4
Consolidated Statements of Operations:
Three Months Ended March 31, 1998 and March 31, 1999
(unaudited) and for the Period from Inception (June 13, 1986)
through March 31, 1999 (unaudited)............................................................... 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1998 and March 31, 1999
(unaudited) and for the Period from Inception (June 13, 1986)
through March 31, 1999 (unaudited)............................................................... 6
Notes to Consolidated Financial Statements - March 31, 1999........................................ 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................. 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................................................... 13
SIGNATURES ................................................................................................. 14
</TABLE>
- 2 -
<PAGE> 3
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The words "anticipate," "believe," "expect," "estimate,"
"project" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, expected, estimated or projected.
For additional discussion of such risks, uncertainties and assumptions, see
"Item 1. Business -- Manufacturing," "-- Sales and Marketing," "-- Patents and
Proprietary Rights," "-- Government Regulation," "-- Competition" and "--
Additional Business Risks" included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "-- Liquidity and
Capital Resources" included elsewhere in this report.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made herein are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, filed pursuant to
Section 13 or 15(d) of the Exchange Act.
The information presented in the accompanying financial statements is
unaudited, but in the opinion of management, reflects all adjustments (which
include only normal recurring adjustments) necessary to present fairly such
information.
- 3 -
<PAGE> 4
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
1998 (UNAUDITED)
--------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $ 11,338 $ 11,007
Short-term investments.................................................... 7,757 16,630
Accounts receivable....................................................... 132 328
Prepaid expenses and other assets......................................... 260 479
--------------- -------------
Total current assets................................................. 19,487 28,444
Long-term investments........................................................ 1,295 1,222
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,839 and $3,003, respectively.............................. 2,263 2,173
--------------- -------------
Total assets......................................................... $ 23,045 $ 31,839
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................................... $ 5,319 $ 4,813
Accrued payroll........................................................... 885 804
Advance from Genzyme...................................................... 2,000 2,000
Current portion of notes payable and obligations under capital leases..... 219 317
--------------- -------------
Total current liabilities............................................ 8,423 7,934
Long-term liabilities:
Notes payable and obligations under capital leases, net of current portion 1,012 1,391
--------------- -------------
Total long-term liabilities.......................................... 1,012 1,391
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding.......................................... -- --
Common stock $.001 par value, 30,000,000 shares authorized,
16,379,309 and 22,494,671 shares issued and outstanding,
respectively......................................................... 16 22
Additional paid-in capital................................................ 100,704 112,580
Treasury stock............................................................ (11) (11)
Deferred compensation..................................................... (380) (284)
Unrealized gain on investments............................................ 716 817
Deficit accumulated during development stage.............................. (87,435) (90,610)
--------------- -------------
Total stockholders' equity........................................... 13,610 22,514
--------------- -------------
Total liabilities and stockholders' equity................................ $ 23,045 $ 31,839
=============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
<PAGE> 5
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
THREE MONTHS ENDED 1986)
MARCH 31, THROUGH
------------------------ MARCH 31,
1998 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Interest income ..................................... $ 417 $ 304 $ 7,150
Research and development grants and contracts ....... 103 3,282 15,069
--------- --------- ---------
Total revenues ................................. 520 3,586 22,219
--------- --------- ---------
Expenses:
Research and development ............................ 4,522 5,934 81,862
Purchase of in-process research and development ..... -- -- 11,625
General and administrative .......................... 904 785 17,943
Interest expense and other .......................... 5 42 1,399
--------- --------- ---------
Total expenses ................................. 5,431 6,761 112,829
--------- --------- ---------
Net loss ............................................... $ (4,911) $ (3,175) $ (90,610)
========= ========= =========
Basic and diluted loss per share ....................... $ (0.32) $ (0.17)
========= =========
Weighted average shares used in computing basic and
diluted loss per share .............................. 15,461 18,894
</TABLE>
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Comprehensive Income:
Net Loss............................................. $ (4,911) $ (3,175)
Unrealized gain on securities available for sale..... -- 101
--------- ---------
Comprehensive Income............................ $ (4,911) $ (3,074)
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 5 -
<PAGE> 6
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
THREE MONTHS ENDED 1986)
MARCH 31, THROUGH
------------------------ MARCH 31,
1998 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................ $ (4,911) $ (3,175) $ (90,610)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization ...................................... 169 167 5,014
Loss (gain) on disposal of assets .................................. (2) (1) 199
Compensation expense related to stock and stock options ............ 111 280 4,063
Charge for purchase of in-process research and development ......... -- -- 11,547
Unrealized gain on investment ...................................... -- 101 817
Acquisition costs, net of cash received ............................ -- -- (270)
Accrued interest payable converted to stock ........................ -- -- 97
Loss in affiliate .................................................. -- -- 500
Changes in assets and liabilities:
Increase in prepaid expenses and other assets ...................... (351) (219) (294)
Decrease (increase) in accounts receivable ......................... 100 (196) (328)
Increase (decrease) in accounts payable and accrued expenses ....... 1,347 (587) 5,544
Decrease in deferred revenue ....................................... -- -- (353)
--------- --------- ---------
Net cash used in operating activities .................... (3,537) (3,630) (64,074)
Cash flows from investing activities:
Purchases of investments ................................................ (12,071) (13,815) (264,065)
Sales of investments .................................................... 17,650 5,015 251,948
Purchase of furniture, equipment and leasehold improvements ............. (1,165) (77) (6,156)
Proceeds from sale of assets ............................................ 6 -- 63
Deposits ................................................................ 490 -- --
Investment in affiliate ................................................. -- -- (500)
--------- --------- ---------
Net cash provided by (used in) investing activities ...... 4,910 (8,877) (18,710)
Cash flows from financing activities:
Proceeds from notes payable ............................................. -- 547 6,588
Repayment of notes payable and principal payments under capital
lease obligations ..................................................... (99) (70) (2,881)
Purchase of treasury stock .............................................. -- -- (11)
Proceeds from issuance of stock ......................................... 3 11,699 90,095
--------- --------- ---------
Net cash provided by (used in) financing activities ...... (96) 12,176 93,791
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....................... 1,277 (331) 11,007
Cash and cash equivalents at beginning of period ........................... 2,029 11,338 --
--------- --------- ---------
Cash and cash equivalents at end of period ................................. $ 3,306 $ 11,007 $ 11,007
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................................ $ 5 $ 43 $ 909
Supplemental schedule of noncash financing activities:
Conversion of notes payable and accrued interest to common stock ........ $ -- $ -- $ 3,043
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 6 -
<PAGE> 7
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. (the "Company" or "Aronex
Pharmaceuticals") was incorporated in Delaware on June 13, 1986 and merged with
Triplex Pharmaceutical Corporation ("Triplex") and Oncologix, Inc. ("Oncologix")
effective September 11, 1995. In 1998, the Company formed a subsidiary, Aronex
Europe Limited. Aronex Pharmaceuticals is a development-stage company that has
devoted substantially all of its efforts to research and product development and
has not yet generated any significant revenues, nor is there any assurance of
future revenues. In addition, Aronex Pharmaceuticals expects to continue to
incur losses for the foreseeable future, and there can be no assurance that
Aronex Pharmaceuticals will successfully complete the transition from a
development-stage company to successful operations. The research and development
activities engaged in by Aronex Pharmaceuticals involve a high degree of risk
and uncertainty. The Company's ability to successfully develop, manufacture and
market its proprietary products is dependent upon many factors. These factors
include, but are not limited to, the need for additional financing, attracting
and retaining key personnel and consultants, and successfully developing
manufacturing, sales and marketing operations. The Company's ability to develop
these operations may be immensely impacted by uncertainties related to patents
and proprietary technologies, technological change and obsolescence, product
development, competition, government regulations and approvals, health care
reform, third-party reimbursement and product liability exposure. Additionally,
the Company is reliant upon collaborative arrangements for research, contractual
agreements with corporate partners, and its exclusive license agreements with
The University of Texas M.D. Anderson Cancer Center. Further, during the period
required to develop these products, the Company will require additional funds
which may not be available to it. Accordingly, there can be no assurance of its
future success. See "Business -- Additional Business Risks" in the Company's
Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K").
The consolidated balance sheet at March 31, 1999 and the related
consolidated statements of operations and cash flows for the three month periods
ending March 31, 1999 and 1998 and the period from inception (June 13, 1986)
through March 31, 1999 are unaudited. These interim financial statements should
be read in conjunction with the audited financial statements and related notes
included in the 1998 Form 10-K. The unaudited interim consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented and
all such adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aronex
Pharmaceuticals, Triplex, Oncologix and Aronex Europe Limited. All material
intercompany transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short- and Long-Term Investments
Cash and cash equivalents include money market accounts and
investments with an original maturity of less than three months. At March 31,
1999, short-term investments include held to maturity securities and available
for sale securities. The held to maturity securities consist of high-grade
commercial paper with a carrying value of $15,813,000, which approximates fair
market value and cost. Available for sale securities consist of Targeted
Genetics Corporation common stock with an amortized cost of zero, a fair market
value of $817,000 and an
- 7 -
<PAGE> 8
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unrealized gain of $817,000. Long-term investments at March 31, 1999 are
available for sale securities which are United States mortgage-backed securities
with maturity dates over the next twenty-four years that have an amortized cost
of $1,222,000, which approximates fair market value and cost. Aronex
Pharmaceuticals currently has no trading securities.
3. STOCKHOLDERS' EQUITY
In February 1999, Aronex Pharmaceuticals raised proceeds net of
offering costs of approximately $11.7 million in a public offering of 6,000,000
shares of Common Stock. In connection with this offering, the Company issued
warrants to purchase 600,000 shares of Common Stock at an exercise price of
$3.28 per share. These warrants are exercisable from February 16, 2000 through
February 16, 2004. The fair value of the warrants, $758,400, has been recorded
in the accompanying financial statements. This amount has been estimated on the
date of the grant using the Black Scholes options pricing model with the
following weighted-average assumptions: a risk-free interest rate of 5.2% with
no expected dividends, an expected life of 5 years and expected volatility of
113%.
4. FEDERAL INCOME TAXES
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $102.2 million.
The Tax Reform Act of 1986 provided a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. As a result of
the merger with Triplex and Oncologix, a change in control as defined by federal
income tax law occurred, causing the use of these carryforwards to be limited
and possibly eliminated. Additionally, because United States tax laws limit the
time during which NOLs and the tax credit carryforwards may be applied against
future taxable income and tax liabilities, the Company may not be able to take
full advantage of its NOLs and tax credit carryforwards for federal income tax
purposes. The carryforwards will begin to expire in 2001 if not otherwise used.
Due to the possibility of not reaching a level of profitability that will allow
for the utilization of the Company's deferred tax assets, a valuation allowance
has been established to offset these tax assets. The Company has not made any
federal income tax payments since inception.
5. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENT
At March 1999, Genzyme Corporation ("Genzyme") notified the Company
that they did not intend to exercise their option to acquire the right to market
and sell ATRAGEN(R) worldwide. As a result of the election, the Company has
regained full marketing rights to ATRAGEN(R) on a worldwide basis and the
Company is obligated to repay Genzyme the $2.0 million advance by May 21, 1999
and pay product royalties, including $500,000 in minimum royalties by April 24,
2000. The $2.0 million advance was originally due April 24, 1999; however,
Genzyme extended the due date until May 21, 1999.
- 8 -
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Since inception in 1986, we have has primarily devoted our resources
to fund research, drug identification and development. We have been unprofitable
to date and expect to incur operating losses for the next several years as we
expend resources for product research and development, preclinical and clinical
testing and regulatory compliance. We have sustained net losses of approximately
$90.6 million from inception through March 31, 1999. We have primarily financed
our research and development activities and operations through public and
private offerings of securities. Our operating results have fluctuated
significantly during each quarter, and we anticipates that such fluctuations,
largely attributable to varying commitments and expenditures for clinical trials
and research and development, will continue for the next several years.
Three Month Periods Ended March 31, 1998 and 1999
Revenues from research and development grants and contracts increased
3,086% to $3.3 million in 1999 from $103,000 in 1998. This increase was due to
$3.3 million in milestone and development payments received relating to our
license agreement for NYOTRAN(R) with Abbott Laboratories ("Abbott") in the
first quarter of 1999.
Interest income decreased 27% to $304,000 in 1999 from $417,000 in
1998. The decrease in interest income resulted from a decrease in the average
amount of funds available for investment during the first three months of 1999.
Research and development expenses increased 31% to $5.9 million in
1999 from $4.5 million in 1998. The $1.4 million increase in research and
development expenses resulted primarily from an increase of $1.9 million in the
medical affairs and regulatory department costs in 1999 as explained below:
o an increase of $787,000 in clinical trials for our late-stage
product NYOTRAN(R);
o an increase of $214,000 in clinical trials for ATRAGEN(R); and
o an increase of $783,000 in salaries and payroll costs. The number
of personnel in these departments increased significantly in 1999
from the same period in 1998. The majority of the personnel added
was attributable to the development of NYOTRAN(R).
The increases listed above were offset by a $429,000 decrease in
manufacturing costs relating mostly to NYOTRAN(R).
General and administrative expenses decreased 13% to $785,000 in 1999
from $904,000 in 1998. The decrease in general and administrative expenses
resulted primarily from a decrease of $177,000 in salaries and payroll costs,
due mainly to termination and severance payments relating to our former
president recorded in the first quarter of 1998.
Interest expense was $43,000 and $5,000 for the three months ended
March 31, 1999 and 1998, respectively. The $38,000 increase in interest expense
resulted primarily from an increase in the balance of notes payable obtained to
finance furniture and equipment.
- 9 -
<PAGE> 10
Net loss decreased by $1,736,000 to $3,175,000 in the first quarter of
1999, compared to $4,911,000 for the first quarter of 1998, due mainly to the
$3,179,000 increase in research and development revenue. The effect of the
additional revenue was partially offset by an increase of $1,412,000 in research
and development expenses, the majority of which related to advancing our two
lead products, NYOTRAN(R) and ATRAGEN(R) .
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our primary source of cash has been from financing
activities, which have consisted primarily of sales of equity securities. We
have raised an aggregate of approximately $90 million from the sale of equity
securities from the Company's inception through March 31, 1999. In July 1992, we
raised net proceeds of approximately $10.7 million in our initial public
offering of Common Stock. In September 1993, we entered into a collaborative
agreement with Genzyme relating to the development and commercialization of
ATRAGEN(R), in which we received net proceeds of approximately $4.5 million from
the sale of common stock to Genzyme. In November 1993, we raised net proceeds of
approximately $11.5 million; in May 1996, we raised net proceeds of
approximately $32.1 million; and in February 1999, we raised net proceeds of
approximately $11.7 million through public offerings of common stock. From
October 1995 through December 31, 1998, we received aggregate net proceeds of
approximately $6.5 million from the exercise of certain warrants issued in our
1995 merger with Oncologix. In November 1998, we entered into a license
agreement with Abbott relating to NYOTRAN(R), in which Abbott purchased 837,989
shares of Common Stock for $3.0 million. Through April 30, 1999, we received an
additional $14.7 million in up-front and milestone payments from Abbott, all of
which are non-refundable. Of this amount, $3.0 million and $6.3 million was
received in the periods ending March 31, 1999 and June 30, 1999, respectively.
In September 1996, Genzyme advanced us $2.0 million relating to the
$5.0 million equity milestone. Early in 1997, we amended the agreement through
which (1) we released Genzyme from any further obligation to perform development
work for ATRAGEN(R) and (2) the license granted to Genzyme under the agreement
was converted to an option to acquire the right to market and sell ATRAGEN(R)
worldwide. We retained co-promotion rights in the United States. If Genzyme had
exercised its option, Genzyme would have been required to pay us $3.0 million
and product royalties, and we would have been entitled to retain the $2.0
million advance. In March 1999, Genzyme notified us that they did not intend to
exercise their option. As a result of the election, we have regained full
marketing rights to ATRAGEN(R) on a worldwide basis and we are obligated to
repay Genzyme the $2.0 million advance by May 21, 1999 and to pay product
royalties, including $500,000 in minimum royalties by April 24, 2000.
The majority of our development activities are committed on a
short-term, as-needed basis through contracts and purchase orders. These
arrangements can be changed based on our needs and development activities. We
have contracted with certain clinical research organizations to conduct our
non-United States clinical trials for NYOTRAN(R) in the following indications:
cryptococcal meningitis, presumed fungal infections and Aspergillus salvage. The
remaining amount projected to be expended to complete the clinical research
organizations' activities with respect to those indications is approximately
$1.7 million. The agreements provide that we can terminate them at any time,
should either our financial situation or the results of the studies require it.
Nonetheless, we intend to continue to engage clinical research organizations in
the future to monitor our various clinical trials in non-United States
countries.
Our primary use of cash to date has been in operating activities to
fund research and development, including preclinical studies and clinical trials
and general and administrative expenses. Cash of $3.5 million and $3.6 million
was used in operating activities during the first quarter of 1999 and 1998,
respectively. We had cash, cash-equivalents and short-term and long-term
investments of $28.9 million as of March 31, 1999, consisting primarily of cash
and money market accounts, and United States government securities, common stock
and investment grade commercial paper.
We have experienced negative cash flows from operations since our
inception and we have funded our activities to date primarily from equity
financing. We have expended, and will continue to require, substantial funds
- 10 -
<PAGE> 11
to continue research and development, including preclinical studies and clinical
trials of our products, and to commence sales and marketing efforts if the U.S.
Food and Drug Administration ("FDA") and other regulatory approvals are
obtained.
We expect that our existing financial resources should be sufficient
to fund our capital requirements into the year 2001. During this period, we
anticipate receiving further payments from Abbott under the license agreement
for NYOTRAN(R); however, these payments are dependent upon performance and are
not guaranteed. In the future, we may need to raise substantial additional
capital to fund our operations.
We have experienced significant increases in accounts payable and
accrued payroll since 1996, primarily as a result of the increased development
activities relating to our two late-stage products. We anticipate that the
amounts expended for these items in the future will continue to correspond with
our development activities. If the volume of development activities decreases,
there will be a decrease in outstanding payables and a decrease in our liquidity
position. We expect that our expenses relating to development activities will
fluctuate from quarter to quarter over the next few years as we have not yet
generated revenues from product sales. We have typically obtained debt financing
when necessary for equipment, furniture and leasehold improvement requirements,
and we expect that we will continue to incur additional debt to meet our capital
requirements from time to time in the future, based on our financial resources
and needs.
Our capital requirements will depend on many factors, including the
risk factors more completely described under "Business -- Additional Business
Risks" in our 1998 Form 10K. These factors include:
o problems, delays, expenses and complications frequently
encountered by development-stage companies;
o the progress of our research, development and clinical trial
programs;
o the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements;
o the costs and timing of seeking regulatory approvals of our
products;
o our ability to obtain regulatory approvals;
o the success of our sales and marketing programs;
o the costs of filing, prosecuting and defending and enforcing any
patent claims and other intellectual property rights; and
o changes in economic, regulatory or competitive conditions of our
planned business.
Estimates about the adequacy of funding for our activities are based on certain
assumptions, including the assumption that testing and regulatory procedures
relating to our products can be conducted at projected costs. There can be no
assurance that changes in our research and development plans, acquisitions, or
other events will not result in accelerated or unexpected expenditures.
To satisfy our capital requirements, we may seek to raise additional
funds in the public or private capital markets. Our ability to raise additional
funds in the public or private markets will be adversely affected if the results
of our current or future clinical trials are not favorable. We may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any funding will be available to us on
favorable terms or at all. If adequate funds are not available, we may be
required to curtail significantly one or more of our research or development
programs, or we may be required to obtain funds through arrangements with future
collaborative partners or other parties that may require us to relinquish rights
to some or all of our technologies or products. If we are successful in
obtaining additional financing, the terms of such financing may have the effect
of diluting or adversely affecting the holdings or the rights of the holders of
our Common Stock.
- 11 -
<PAGE> 12
YEAR 2000
Year 2000 issues result from the inability of certain computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is represented as the year
1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.
We are in the process of assessing all of Aronex Pharmaceuticals'
financial and operational systems and equipment to ensure year 2000 compliance.
We have completed our initial review of our financial and operational systems
and equipment, with the exception of certain personal computer and network
hardware which we are continuing to assess. Except for the personal computer and
network hardware that remains under assessment, we have either obtained
certifications as to year 2000 compliance from vendors or have tested the year
2000 compliance of substantially all its systems and equipment, and have taken
the steps we believe will be necessary to remediate year 2000 problems
associated with the systems and equipment that it determined not to be year 2000
compliant. We have completed our assessment of the Company's financial and
operational systems and equipment. We believe that the potential impact, if any,
of our systems not being year 2000 compliant could result in the loss of data,
which is available in hard-copy, that would have to be re-entered. We believe
that any loss of computer data will not materially affect our ability to
continue its research and development activities or have a material adverse
effect on the Company's business, results of operations or financial condition.
However, this potential loss of data could result in a material delay in
completing clinical studies of our products which could have a material adverse
effect on the Company's business, results of operations and financial condition.
We are in the process of contacting our consultants and other
suppliers of goods and services, as well as our corporate partners, to assess
the possible impact of year 2000 compliance of their systems and equipment on
us. We plan to complete our assessment of these matters by July 31, 1999. We
believe that the potential impact, if any, of the systems of our consultants
(including clinical research organizations and hospitals), suppliers and
corporate partners not being year 2000 compliant could result in the loss of
data, which is available in hard-copy, that would have to be re-entered. Any
loss of computer data will not materially affect our ability to continue the
Company's research and development activities. However, this potential loss of
data could result in a material delay in completing clinical studies of our
products which could have a material adverse effect on our business, results of
operations and financial condition.
Based on our assessments and remediation efforts to date, we do not
anticipate that the Company will incur any significant costs relating to the
assessment and remediation of year 2000 issues. To date, we estimate that the
Company has spent less than $25,000 in reviewing and remediating year 2000
issues and that total expenditures incurred in completing our review and
remediation efforts will not exceed $100,000. However, there can be no assurance
that planned expenditures for these efforts will not exceed such amount should
unforeseen complications arise during such review and assessment or as a result
of our remediation efforts or those of our vendors, consultants or partners.
Such expenditures are budgeted as part of the Company's operating expenses.
Also, there can be no assurance that we or our consultants, suppliers and
corporate partners will successfully be able to identify and remedy all
potential year 2000 problems or that a system failure resulting from a failure
to identify any problems would not have a material adverse effect on the
Company.
We have developed and are implementing a contingency plan of
maintaining all data that is generated or collected by it or its collaborators,
including clinical research organizations, hospitals, physicians, consultants
and others, in hard-copy. Any loss of data due to year 2000 problems could be
re-entered manually. We also maintain all of our accounting records in hard copy
so that Aronex Pharmaceuticals can continue to manually pay vendors, employees,
consultants and collaborators in the event that its accounting software or other
computer programs or systems malfunction due to the year 2000 issue. We also
have keys to the doors of our facilities to enable us to gain access to our
laboratory and offices in the event that the building's security systems
malfunction. We are continuing to review these and related operational
requirements in order to complete our contingency plan for our non-critical
business functions.
- 12 -
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Severance Agreement and Release dated March 26, 1999,
between the Company and David S. Gordon., M.D.
10.2 Form of Placement Agency Agreement dated November 19, 1999
between Aronex Pharmaceuticals, Inc. and Paramount Capital,
Inc., incorporated by reference to Exhibit 1.1 to the
Company's Registration Statement on Form S-1 (Registration
Statement No. 333-67599).
10.3 Form of Warrant for the purchase of Common Stock,
incorporated by reference to Exhibit 1.2 of the Company's
Registration Statement on Form S-1 (Registration Statement
No. 333-67599).
11.1 Statement regarding computation of per share earnings.
27.1 Financial data schedule.
(b) Reports on Form 8-K
None
- 13 -
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ARONEX PHARMACEUTICALS, INC.
Dated: May 14, 1999 By: /s/ GEOFFREY F. COX
-----------------------------------------
Geoffrey F. Cox, Ph.D.
Chief Executive Officer
Dated: May 14, 1999 By: /s/ TERANCE A. MURNANE
----------------------------------------
Terance A. Murnane
Controller
(Principal Financial and Accounting Officer)
- 14 -
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Severance Agreement and Release dated March 26, 1999,
between the Company and David S. Gordon., M.D.
10.2 Form of Placement Agency Agreement dated November 19, 1999
between Aronex Pharmaceuticals, Inc. and Paramount Capital,
Inc., incorporated by reference to Exhibit 1.1 to the
Company's Registration Statement on Form S-1 (Registration
Statement No. 333-67599).
10.3 Form of Warrant for the purchase of Common Stock,
incorporated by reference to Exhibit 1.2 of the Company's
Registration Statement on Form S-1 (Registration Statement
No. 333-67599).
11.1 Statement regarding computation of per share earnings.
27.1 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SEVERANCE AGREEMENT AND RELEASE
This Release and Severance Agreement ("Agreement") is being entered
into by David S. Gordon and Aronex Pharmaceuticals, Inc. in order to further the
mutually desired terms and conditions set forth herein:
For and in consideration for execution of this Agreement, Aronex
Pharmaceuticals, Inc. will pay a total payment of $229,000.
("Severance Payment"), less standard deductions. In addition,
your Aronex Pharmaceuticals, Inc. vested stock options can be
exercised for a period of twenty four (24) months from your
termination date. Except as provided in Paragraph 2 below,
this sum represents the exclusive amount to be paid by Aronex
Pharmaceuticals, Inc., in connection with or arising out of
David S. Gordon's termination of employment with Aronex
Pharmaceuticals, Inc., and no further amounts shall be
required for any items, including, but not limited to,
attorneys' fees.
David S. Gordon on behalf of himself, his heirs, beneficiaries and
personal representatives, hereby releases, acquits and forever
discharges Aronex Pharmaceuticals, Inc., its officers,
employees, former employees, shareholders, directors,
partners, agents and assigns, and all other persons, firms,
partnerships, or corporations in control of, under the
direction of, or in any way presently or formerly associated
with Aronex Pharmaceuticals, Inc., of and from all claims,
charges, complaints, liabilities, obligations, promises,
agreements, contracts, damages, actions, causes of action,
suits, accrued benefits or other liabilities of any kind or
character, whether known or hereafter discovered, arising from
or in any way connected or related with employment with Aronex
Pharmaceuticals, Inc. and termination of employment with
Aronex Pharmaceuticals, Inc., including, but not limited to,
allegations of wrongful termination, breach of contract,
intentional infliction of emotional distress, negligent
infliction of emotional distress, defamation, invasion of
privacy, any action in tort or contract, any violation of any
federal, state, or local law, including, but not limited to,
any violation of Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. Section 2000e et seq., the Equal Pay Act,
29 U.S.C. Section 206; the Employee Retirement Income Security
Act of 1974, the Americans with Disabilities Act, 42 U.S.C.
Section 12101 et seq., the Fair Labor Standards Act, as
amended, 29 U.S.C. Section 201 et seq., the Texas Commission
on Human Rights Act, Texas Labor Code Section 21.001, et seq.,
the Age Discrimination in Employment Act of 1967, as amended
("ADEA"), 29 U.S.C. Section 621 et seq., or any other
employment or civil rights act, and any and all claims for
severance pay or benefits under any compensation or employee
benefit plan, program, policy, contract, agreement or other
arrangement of Aronex Pharmaceuticals, Inc., but excluding any
benefits which David S. Gordon is entitled to receive under
any Aronex Pharmaceuticals, Inc. plan that is a qualified plan
under IRC Section 401(a) or is a group health plan subject to
COBRA, to the extent David S. Gordon properly elects and pays
for such COBRA continuation coverage.
David S. Gordon agrees not to commence any legal proceeding or lawsuit
against Aronex Pharmaceuticals, Inc. arising out of or based
upon employment with Aronex Pharmaceuticals, Inc. or the
termination of employment with Aronex Pharmaceuticals, Inc.
The consideration cited above and the promises contained herein are
made for the purpose of purchasing the peace of Aronex
Pharmaceuticals, Inc. and are not to be construed as an
admission of liability or as evidence or unlawful conduct by
Aronex Pharmaceuticals, Inc., all liability being expressly
denied.
<PAGE> 2
5. David S. Gordon voluntarily accepts the consideration cited
herein, as sufficient payment for the full, final and complete
release stated herein, and agrees that no other promises or
representations have been made to by Aronex Pharmaceuticals,
Inc. or any other person purporting to act on behalf of Aronex
Pharmaceuticals, Inc., except as expressly stated herein.
6. David S. Gordon understands that this is a full, complete, and
final release of Aronex Pharmaceuticals, Inc. As evidenced by
the signature below, expressly promises and represents to
Aronex Pharmaceuticals, Inc. that he has completely read this
Agreement and understands its terms, contents, conditions, and
effects.
7. David S. Gordon understands that he has the right to consult
an attorney of his choice and has consulted with an attorney
or has knowingly and voluntarily decided not to do so.
8. David S. Gordon states that he is not presently effected by
any disability which would prevent him from knowingly and
voluntarily granting this release, and further states that the
promises made herein are not made under duress, coercion or
undue influence.
This Agreement will supersede any and all obligations Aronex
Pharmaceuticals, Inc. might otherwise owe to David S. Gordon
for any act or omission whatsoever that took place, or should
have taken place, on or before the date this Agreement is
signed and executed by. This Agreement constitutes the entire
understanding and agreement between the parties and it may
only be modified or amended in a signed writing by both
parties hereto.
Should any future dispute arise with respect to this Agreement, both
parties agree that it should be resolved solely in accordance
with the terms and provision of this Agreement and the laws of
the State of Texas.
David S. Gordon hereby waives all rights to recall, reinstatement,
employment, reemployment, and past or future wages from Aronex
Pharmaceuticals, Inc.
12. David S. Gordon understands that he has Twenty-one (21) days
within which to consider this Agreement and that this
Agreement is revocable by him for a period of seven (7) days
following the execution of this Agreement, and if not so
revoked, will become effective and enforceable. The
consideration cited in Paragraph 1 above to be paid through
out normal pay cycle.
13. David S. Gordon expressly represents and warrants to Aronex
Pharmaceuticals, Inc. that he has completely read this
Agreement prior to executing it, has had an opportunity to
review it with his counsel, has been offered twenty one (21)
days within which to consider this Agreement and to understand
its terms, contents, conditions and effects and has entered
into this Agreement knowingly and voluntarily.
14. David S. Gordon agrees that the terms and conditions of this
Agreement, including without limitation of the amount of money
and other
<PAGE> 3
consideration, shall be treated as confidential, and shall not
be revealed to any other person or entity whatsoever, except
as follows:
to the extent as may be compelled by legal process; or
to the extent necessary to legal or financial advisors.
David S. Gordon agrees that the confidentiality provisions of this Agreement are
a material part of it and are contractual in nature.
Date
------------------------
- ------------------------------------
David S. Gordon, M.D.
- ------------------------------------
Geoffrey F. Cox, Ph.D.
<PAGE> 1
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The following reflects the information used in calculating the number of shares
in the computation of net loss per share for each of the periods set forth in
the Statements of Operations.
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES PER
SHARES OUTSTANDING SHARES X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1998:
15,459,166 11 170,050,826
15,460,684 71 1,097,708,564
15,465,729 1 15,465,729
15,467,281 7 108,270,967
90 1,391,496,086 /90 15,461,068 (4,911,000) (0.32)
QUARTER ENDED MARCH 31, 1999: 16,379,309 3 49,137,927
16,415,664 50 820,783,200
22,415,664 14 313,819,296
22,463,211 21 471,727,431
22,474,987 1 22,474,987
22,494,671 1 22,494,671
90 1,700,437,512 /90 18,893,750 (3,175,000) (0.17)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ARONEX PHARMACEUTICALS, INC. SET FORTH IN THE COMPANY'S
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 11,007,000
<SECURITIES> 17,852,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,444,000
<PP&E> 5,176,000
<DEPRECIATION> 3,003,000
<TOTAL-ASSETS> 31,839,000
<CURRENT-LIABILITIES> 7,934,000
<BONDS> 0
22,000
0
<COMMON> 0
<OTHER-SE> 22,492,000
<TOTAL-LIABILITY-AND-EQUITY> 31,839,000
<SALES> 0
<TOTAL-REVENUES> 3,586,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,000
<INCOME-PRETAX> (3,175,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,175,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,175,000)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
