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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 June 30, 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 JUNE 30, 1999
----- ----------------------------
Common Stock, $.001 par value 22,555,435 shares
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
QUARTERLY PERIOD JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
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<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 June 30, 1999 (unaudited)...................... 4
Consolidated Statements of Operations:
Six Months Ended June 30, 1998 and June 30, 1999
(unaudited) and for the Period from Inception (June 13, 1986)
through June 30, 1999 (unaudited)................................................................ 5
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1998 and June 30, 1999
(unaudited) and for the Period from Inception (June 13, 1986)
through June 30, 1999 (unaudited)................................................................ 6
Notes to Consolidated Financial Statements - June 30, 1999......................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................. 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk......................................... 13
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders................................................ 14
Item 6 Exhibits and Reports on Form 8-K................................................................... 15
SIGNATURES.................................................................................................. 16
</TABLE>
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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, (the "1998 Form 10-K") 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 1998 Form 10-K.
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.
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
JUNE 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 11,338 $ 9,832
Short-term investments .............................................. 7,757 18,338
Accounts receivable ................................................. 132 300
Prepaid expenses and other assets ................................... 260 815
------------ ------------
Total current assets ........................................... 19,487 29,285
Long-term investments .................................................. 1,295 1,050
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,839 and $3,162, respectively ..................... 2,263 2,085
------------ ------------
Total assets ................................................... $ 23,045 $ 32,420
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................... $ 5,319 $ 3,515
Accrued payroll ..................................................... 885 775
Advance from Genzyme ................................................ 2,000 --
Current portion of notes payable and obligations under capital
leases ............................................................. 219 317
------------ ------------
Total current liabilities ...................................... 8,423 4,607
Long-term liabilities:
Notes payable ....................................................... 1,012 3,680
------------ ------------
Total long-term liabilities .................................... 1,012 3,680
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding .................................... -- --
Common stock $.001 par value, 40,000,000 shares authorized,
22,494,671 and 22,555,435 shares issued and outstanding,
respectively ................................................... 16 23
Additional paid-in capital .......................................... 100,654 111,892
Common stock warrants ............................................... 50 959
Treasury stock ...................................................... (11) (11)
Deferred compensation ............................................... (380) (206)
Unrealized gain on investments ...................................... 716 817
Deficit accumulated during development stage ........................ (87,435) (89,341)
------------ ------------
Total stockholders' equity ..................................... 13,610 24,133
------------ ------------
Total liabilities and stockholders' equity ..................... $ 23,045 $ 32,420
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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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,
SIX MONTHS ENDED THREE MONTHS ENDED 1986)
JUNE 30, JUNE 30, THROUGH
---------------------- --------------------- JUNE 30,
1998 1999 1998 1999 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income ..................................... $ 748 $ 691 $ 331 $ 387 $ 7,537
Research and development grants and contracts ....... 193 9,873 90 6,591 21,660
--------- --------- --------- --------- ---------
Total revenues ............................. 941 10,564 421 6,978 29,197
Expenses:
Research and development ............................ 9,867 10,629 5,345 4,695 86,557
Purchase of in-process research and development ..... -- -- -- -- 11,625
Selling, general and administrative ................. 1,547 1,726 643 942 18,885
Interest expense and other .......................... 14 115 9 72 1,471
--------- --------- --------- --------- ---------
Total expenses ............................. 11,428 12,470 5,997 5,709 118,538
--------- --------- --------- --------- ---------
Net income (loss) ........................................ $ (10,487) $ (1,906) $ (5,576) $ 1,269 $ (89,341)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share ................ $ (0.68) $ (0.09) $ (0.36) $ 0.06
========= ========= ========= =========
Weighted average shares used in computing basic
income (loss) per share ............................. 15,464 20,705 15,468 22,496
Weighted average shares used in computing diluted
income (loss) per share ............................. 15,464 20,705 15,468 22,911
</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> <C> <C>
Comprehensive income:
Net income(loss) ............................... $(10,487) $ (1,906) $ (5,576) $ 1,269
Unrealized gain on securities available for sale -- 101 -- --
-------- -------- -------- --------
Comprehensive income .................. $(10,487) $ (1,805) $ (5,576) $ 1,269
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (JUNE 13, 1986)
JUNE 30, THROUGH
---------------------- JUNE 30,
1998 1999 1999
--------- --------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................... $ (10,487) $ (1,906) $ (89,341)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization ..................................... 360 323 5,170
Loss (gain) on disposal of assets ................................. (2) (1) 199
Compensation expense related to stock, stock options and stock
warrants ........................................................ 268 550 4,333
Charge for purchase of in-process research and development ........ -- -- 11,547
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 ..................... (300) (555) (630)
Decrease (increase) in accounts receivable ........................ 100 (168) (300)
Increase (decrease) in accounts payable and accrued expenses ...... 1,077 (1,914) 4,217
Decrease in deferred revenue ...................................... -- -- (353)
--------- --------- ---------
Net cash used in operating activities ................... (8,984) (3,671) (64,831)
Cash flows from investing activities:
Purchases of investments ............................................... (22,165) (18,444) (267,978)
Sales of investments ................................................... 35,124 8,209 255,142
Purchase of furniture, equipment and leasehold improvements ............ (1,421) (146) (6,225)
Proceeds from sale of assets ........................................... 9 -- 63
Deposits ......................................................... 490 -- --
Investment in affiliate ................................................ -- -- (500)
--------- --------- ---------
Net cash provided by (used in) investing activities ..... 12,037 (10,381) (19,498)
Cash flows from financing activities:
Proceeds from and increase in notes payable ............................ 1,369 898 6,939
Repayment of notes payable and principal payments under capital
lease obligations .................................................... (254) (132) (2,943)
Purchase of treasury stock ............................................. -- -- (11)
Proceeds from issuance of stock ........................................ 68 11,780 90,176
--------- --------- ---------
Net cash provided by (used in) financing activities ..... 1,183 12,546 94,161
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...................... 4,236 (1,506) 9,832
Cash and cash equivalents at beginning of period .......................... 2,029 11,338 --
--------- --------- ---------
Cash and cash equivalents at end of period ................................ $ 6,265 $ 9,832 $ 9,832
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................... $ 14 $ 87 $ 953
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.
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 API Acquisition Company, Inc.
("API"), formerly Oncologix, Inc., 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 Company's research and development activities 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 1998 Form 10-K.
The consolidated balance sheet at June 30, 1999 and the related
consolidated statements of operations and cash flows for the three and six month
periods ending June 30, 1999 and 1998 and the period from inception (June 13,
1986) through June 30, 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, API 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 June 30,
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 $17,521,000, which approximates fair
market value. 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 unrealized gain of $817,000. Long-term investments at June 30,
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
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
cost of $1,050,000, which approximates fair market value. 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 five 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 API, 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
In 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 was 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. In May 1999, the $2.0 million advance from Genzyme and the $500,000 in
minimum royalties were converted into a $2.5 million convertible note payable to
Genzyme. This note bears interest at 10% per annum with interest payable
semi-annually, and the principal is due May 21, 2002. This note can be converted
into Common Stock of the Company at $4.35 per share at Genzyme's option. In
connection with this financing, the Company issued Genzyme warrants to purchase
50,000 shares of Common Stock at an exercise price of $4.00 per share. These
warrants are exercisable until May 21, 2004. The fair value of the warrants,
$150,000, has been recorded in the accompanying financial statements. This
amount has been estimated on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: a risk free
interest rate of 5.2% with an expected life of five years and expected
volatility of 114%.
6. SUBSEQUENT EVENT
In July 1999, an officer of the Company left under a severance
agreement and release. Under the agreement, the Company is obligated to pay this
officer a monthly salary of $13,333 plus certain benefits for a period of 12
months after termination and to accelerate the vesting of certain stock options.
In July 1999, the Company recorded a non-cash compensation expense of $177,600
relating to these stock options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Since our inception in 1986, we have 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
$89.3 million from inception through June 30, 1999. We have primarily financed
our research and development activities and operations through offerings of
securities and research and development collaborations. Our operating results
have fluctuated significantly during each quarter, and we anticipate 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 and Six Month Periods Ended June 30, 1998 and 1999
Revenues from research and development grants and contracts
increased 7,223% to $6.6 million for the three months ended June 30, 1999 from
$90,000 for the three months ended June 30, 1998. Revenues from research and
development grants and contracts increased 5,016% to $9.9 million for the six
months ended June 30, 1999 from $193,000 for the six months ended June 30, 1998.
These increases resulted from $3.3 million and $6.6 million in milestone and
development payments received under our license agreement for NYOTRAN(R) with
Abbott Laboratories ("Abbott") in the first and second quarters of 1999,
respectively.
Interest income increased by 17% to $387,000 for the three months
ended June 30, 1999 from $331,000 for the three months ended June 30, 1998.
Interest income decreased by 8% to $691,000 for the six months ended June 30,
1999, from $748,000 for the six months ended June 30, 1998. These changes
resulted from an increase in the average amount of funds available for
investment for the three months ended June 30, 1999 and a decrease in the
average amount of funds available for the six months ended June 30, 1999.
Research and development expenses decreased by 12% to $4.7 million for
the three months ended June 30, 1999 from $5.4 million for the three months
ended June 30, 1998. Research and development expenses increased by 8% to $10.6
million for the six month period ending June 30, 1999 from $9.9 million for the
six month period ending June 30, 1998.
The decrease in research and development expenses for the three months
ended June 30, 1999 described above resulted primarily from:
o a decrease of $522,000 in clinical trial costs for NYOTRAN(R) and
Platar;
o a decrease of $429,000 in drug materials and manufacturing costs
for NYOTRAN(R) and Platar; and
o a decrease of $180,000 in outside pharmacology and toxicology
studies relating mainly to NYOTRAN(R).
The decreases listed above were offset by an increase of $158,000 in
consulting fees relating to regulatory matters concerning NYOTRAN(R) and
ATRAGEN(R) and an increase of $252,000 in salaries and payroll costs.
The increase in research and development expenses for the six months
ended June 30, 1999 described above resulted primarily from:
o an increase of $311,000 in clinical trial costs for; NYOTRAN(R)
an increase of $1.0 million in salaries and payroll costs;
o an increase of $248,000 in consulting fees relating to regulatory
matters concerning NYOTRAN(R) and ATRAGEN(R); and
o an increase of $118,000 in outside research consultants and
contracts.
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<PAGE> 10
The increases listed above were offset by a decrease of $788,000 in
drug materials and manufacturing costs for NYOTRAN(R) and Platar and a decrease
of $208,000 in outside pharmacology and toxicology studies relating mainly to
NYOTRAN(R).
Selling, general and administrative expenses increased 47% to $942,000
for the three months ended June 30, 1999 from $643,000 for the three months
ended June 30, 1998. Selling, general and administrative expenses increased 12%
to $1,726,000 for the six months ended June 30, 1999 from $1,547,000 for the six
months ended June 30, 1998. The increases in selling, general and administrative
expenses were due primarily to increases of $280,000 and $407,000 for the three
and six month periods ending June 30, 1999, respectively, in sales and marketing
expenses, including salaries and payroll costs and other marketing expenses
relating to ATRAGEN(R). The increase for the six months ended June 30, 1999 was
offset by a decrease of $165,000 in salary and payroll costs, due mainly to
termination and severance payments to the Company's former president recorded in
the first quarter of 1998.
Interest expense and other increased 700% to $72,000 for the three
months ended June 30, 1999 from $9,000 for the three months ending June 30,
1998. Interest expense and other increased 721% to $115,000 for the six months
ended June 30, 1999 from $14,000 for the six months ended June 30, 1998. The
increase in interest expense was primarily due to the following:
o an increase in the balance of notes payable obtained to finance
furniture and equipment; and
o an increase of $2.5 million in notes payable relating to a
promissory note issued to Genzyme in the second quarter of 1999.
Net loss decreased by $6.8 million resulting in income of $1.3 million
for the three months ended June 30, 1999. Net loss decreased by $8.6 million to
$1.9 million for the six months ended June 30, 1999. These decreases were due
mainly to increased revenue of $6.5 million and $9.7 million for the three and
six month periods ending June 30, 1999, respectively.
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 our inception through June 30, 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. We received the following net proceeds in public offerings of
our Common Stock on the following dates:
o November 1993 $ 11.5 million
o May 1996 $ 32.1 million
o February 1999 $ 11.7 million
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 API. 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 June 30, 1999, we received an additional
$14.7 million in up-front and milestone payments from Abbott, all of which are
non-refundable.
In September 1996, Genzyme advanced us $2.0 million relating to a $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 regained full marketing
rights to ATRAGEN(R) on a worldwide basis and we were obligated to repay Genzyme
the $2.0 million advance by May 21,
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<PAGE> 11
1999 and to pay product royalties, including $500,000 in minimum royalties by
April 24, 2000. In May 1999, the $2.0 million advance and $500,000 in minimum
royalties were converted into a $2.5 million convertible promissory note payable
which bears interest at 10% per annum.
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
clinical trials outside of the United States 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 less
than $1.0 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 outside of
the United States.
Our primary use of cash to date has been in operating activities to
fund research and development, including preclinical studies and clinical trials
and selling, general and administrative expenses. We used cash of $3.7 million
and $9.0 million in operating activities during the first six months of 1999 and
1998, respectively. We had cash, cash-equivalents and short-term and long-term
investments of $29.2 million as of June 30, 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 and corporate collaborations. We have expended, and will continue to
require, substantial funds 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 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, NYOTRAN(R) and ATRAGEN(R).
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. 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 those
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;
- 11 -
<PAGE> 12
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. We
cannot assure 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. On August 4, 1999,
the FDA informed us that its invitation to us to discuss our ATRAGEN(R) NDA
filing at the Oncologic Drugs Advisory Committee, or ODAC, on September 17, 1999
had been withdrawn. The FDA cited deficiencies in our ATRAGEN(R) filing but did
not specify what those deficiencies are or how we might correct them. We intend
to work with the FDA to move our ATRAGEN(R) NDA filing forward, but we cannot
assure that this process will progress quickly. We may seek additional funding
through corporate collaborations and other financing vehicles. We cannot assure
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 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.
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, typically occurring because such programs or
equipment erroneously interpret the year 2000 as the year 1900. System failure
or miscalculations could result 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 our 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 our 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 we have determined not to be year 2000 compliant. We
have completed our assessment of our 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 our research
and development activities or have a material adverse effect on our 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 our 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 August 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 our
research and development activities. However, this potential loss of data could
result in a material delay in completing
- 12 -
<PAGE> 13
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 incurring any significant costs relating to the assessment and
remediation of year 2000 issues. To date, we estimate that we have 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, we cannot assure 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 corporate partners. Such expenditures are budgeted
as part of our 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 us.
We have developed and are implementing a contingency plan of
maintaining in hard copy form all data that is generated or collected by us or
our collaborators, including clinical research organizations, hospitals,
physicians, consultants and others. 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 we can continue to manually pay vendors, employees,
consultants and collaborators in the event that our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
- 13 -
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Aronex Pharmaceuticals, Inc.
was held on May 11, 1999 to consider and vote upon the following proposals:
(i) Election of Class III Directors. The following individuals were
nominated and elected as Class III directors, with the following number
of shares voted for and against and withheld for each director.
<TABLE>
<CAPTION>
For Against Withheld
---------- -------- ---------
<S> <C> <C> <C>
James R. Butler 18,231,620 -- 58,419
Gregory F. Zaic 18,231,720 -- 58,319
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
---------- -------- -------
<S> <C> <C> <C>
(ii) Amendment of Restated Certificate of Incorporation
to increase the number of authorized shares of
Common Stock from 30,000,000 to 40,000,000 17,838,783 432,358 18,898
(iii) Ratification and approval of Arthur Andersen LLP as
independent public accountants 18,247,799 24,280 17,960
</TABLE>
- 14 -
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation, as Amended
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June
30, 1997).
3.1(i) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company.
10.1 Amendment No. 4 to License and Development Agreement
originally dated September 10, 1996 with Genzyme Corporation
relating to ATRAGEN(R), amended May 21, 1999 (incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed on May 21, 1999 (the "May 21, 1999 Form
8-K").
10.2 10% Convertible Note of the Company payable Genzyme
Corporation dated May 21, 1999 (incorporated by reference to
Exhibit 10.2 to the May 21, 1999 Form 8-K).
10.3 Common Stock Purchase Warrant to Genzyme Corporation dated
May 21, 1999 (incorporated by reference to Exhibit 10.3 to
the May 21, 1999 Form 8-K).
11.1 Statement regarding Computation of Share Earnings.
27.1 Financial Data Schedule.
99.1 Press release dated August 5, 1999.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 21, 1999 to report
an item under Item 5.
- 15 -
<PAGE> 16
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: August 9, 1999 By: /s/ GEOFFREY F. COX
---------------------------------
Geoffrey F. Cox, Ph.D.
Chief Executive Officer
Dated: August 9, 1999 By: /s/ TERANCE A. MURNANE
---------------------------------
Terance A. Murnane
Controller
(Principal Financial and Accounting
Officer)
- 16 -
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation, as Amended
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June
30, 1997).
3.1(i) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company.
10.1 Amendment No. 4 to License and Development Agreement
originally dated September 10, 1996 with Genzyme Corporation
relating to ATRAGEN(R), amended May 21, 1999 (incorporated
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed on May 21, 1999 (the "May 21, 1999 Form
8-K").
10.2 10% Convertible Note of the Company payable Genzyme
Corporation dated May 21, 1999 (incorporated by reference to
Exhibit 10.2 to the May 21, 1999 Form 8-K).
10.3 Common Stock Purchase Warrant to Genzyme Corporation dated
May 21, 1999 (incorporated by reference to Exhibit 10.3 to
the May 21, 1999 Form 8-K).
11.1 Statement regarding Computation of Share Earnings.
27.1 Financial Data Schedule.
99.1 Press release dated August 5, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 3.1(i)
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ARONEX PHARMACEUTICALS, INC.
Aronex Pharmaceuticals, Inc. (the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL") does hereby certify:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth the following amendment to the Amended and Restated
Certificate of Incorporation of the Corporation (the "Amendment"), declaring the
Amendment to be advisable and calling for the submission of the proposed
Amendment to the stockholders of the Corporation for consideration thereof. The
resolution setting forth the proposed Amendment is as follows:
ARTICLE IV of the Amended and Restated Certificate of Incorporation of
Aronex Pharmaceuticals, Inc., a Delaware corporation, is hereby amended by
deleting Section A, and inserting the following as Section A:
A. Classes of Stock
The number of shares of all classes of capital stock that the
Corporation shall be authorized to issue is 45,000,000 shares, divided into the
following: (i) 5,000,000 shares of preferred stock, par value $.001 per share
("Preferred Stock"), and (ii) 40,000,000 shares of common stock, par value $.001
per share ("Common Stock").
SECOND: That thereafter pursuant to a resolution of the Board of
Directors, a meeting of the stockholders of the Corporation was duly called and
held, upon notice in accordance with Section 222 of the DGCL at which meeting
the necessary number of shares as required by statute were voted in favor of the
Amendment.
THIRD: That the Amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
FOURTH: That the Amendment shall be effective on the date this
Certificate of Amendment is filed and accepted by the Secretary of State of the
State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Geoffrey F. Cox, its Chief Executive Officer, and attested by Terance
A. Murnane, its Secretary, this 24th day of May, 1999.
ARONEX PHARMACEUTICALS, INC.
By: /s/ GEOFFREY F. COX, PH.D.
-----------------------------------
Geoffrey F. Cox, Ph.D.
Chief Executive Officer
ATTEST: /s/ TERANCE A. MURNANE
------------------------------
Terance A. Murnane
Secretary
<PAGE> 1
EXHIBIT 11.1
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
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>
INCOME
AVERAGE (LOSS)
DAYS SHARES INCOME PER
SHARES OUTSTANDING SHARES X DAYS OUTSTANDING (LOSS) SHARE
SIX MONTHS ENDED JUNE 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
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 98 1,515,793,538
15,497,443 1 15,497,443
182 2,814,516,100/182 15,464,374 (10,487,000) (0.68)
Six Months Ended June 30, 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
22,495,050 64 1,439,683,200
22,496,505 26 584,909,130
22,555,435 1 22,555,435
181 3,747,585,277/181 20,704,891 (2,055,000) (0.10)
QUARTER ENDED JUNE 30, 1998:
15,467,281 91 1,407,522,571
15,497,443 1 15,497,443
92 1,423,020,014/92 15,467,609 (5,576,000) (0.36)
QUARTER ENDED JUNE 30, 1999: 22,495,050 64 1,439,683,200
(BASIC) 22,496,505 26 584,909,130
22,555,435 1 22,555,435
91 2,047,147,765/91 22,496,129 1,269,000 0.06
QUARTER ENDED JUNE 30, 1999: 22,652,230 19 430,392,370
(DILUTED) 22,652,380 14 317,133,320
22,652,592 8 181,220,736
22,661,974 10 226,619,740
23,236,687 14 325,313,618
23,237,687 25 580,942,175
23,297,072 1 23,297,072
91 2,084,919,031/91 22,911,198 1,269,000 0.06
</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 JUNE 30, 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> JUN-30-1999
<CASH> 9,832,000
<SECURITIES> 19,388,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,285,000
<PP&E> 5,247,000
<DEPRECIATION> 3,162,000
<TOTAL-ASSETS> 32,420,000
<CURRENT-LIABILITIES> 4,607,000
<BONDS> 0
0
0
<COMMON> 23,000
<OTHER-SE> 24,110,000
<TOTAL-LIABILITY-AND-EQUITY> 32,420,000
<SALES> 0
<TOTAL-REVENUES> 6,978,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,000
<INCOME-PRETAX> 1,269,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,269,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,269,000
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[ARONEX PHARMACEUTICALS, INC. LOGO]
CONTACTS:
Connie Stout Michelle Linn and Karen Drake
Associate Director, Corporate Communications Feinstein Kean Partners Inc.
Aronex Pharmaceuticals, Inc. 508-490-0954
281-367-1666 http://www.fkpi.com
http://www.aronex-pharm.com
FOR IMMEDIATE RELEASE
- --------------------------------------------------------------------------------
ARONEX PHARMACEUTICALS WILL NOT PRESENT AT SEPTEMBER 17
ONCOLOGIC DRUGS ADVISORY COMMITTEE MEETING
THE WOODLANDS, TEXAS, AUGUST 5, 1999 --- Aronex Pharmaceuticals, Inc. (Nasdaq
National Market: ARNX), a biopharmaceutical company focused on proprietary
medicines to treat cancer and infectious diseases, announced today that it has
been informed by the U.S. Food and Drug Administration (FDA) that the
invitation, extended to the Company in writing on July 23 to discuss its
ATRAGEN(R) New Drug Application (NDA) filing at the Oncologic Drugs Advisory
Committee (ODAC) on September 17, has been withdrawn.
In discussions during a conference call held on August 4, 1999, the FDA cited
deficiencies in the ATRAGEN filing as its reason for the ODAC withdrawal. At
this time, the Company has not received any written or verbal communication from
the FDA as to the nature of the deficiencies, or in what ways they may be
addressed.
Geoffrey F. Cox, Ph.D., Chairman and CEO of Aronex Pharmaceuticals, said, "The
Company plans to work diligently with the FDA in coming weeks to move forward
with the regulatory review of the product. We firmly believe in the clinical
utility of ATRAGEN in acute promyelocytic leukemia, and are moving forward with
our filings in Europe in this indication. Additionally, we are continuing with
the expanded ATRAGEN clinical programs in non-Hodgkin's lymphoma, refractory
prostate cancer, renal cell carcinoma and superficial bladder cancer."
In December 1998, the Company filed an NDA with the FDA for ATRAGEN for the
treatment of patients with acute promyelocytic leukemia, for whom therapy with
tretinoin is necessary but for whom an intravenous administration is required.
<PAGE> 2
- more -
Aronex Pharmaceuticals, Inc.
Page Two
Aronex Pharmaceuticals, Inc. is a biopharmaceutical company that develops and
commercializes proprietary innovative medicines to treat cancer and infectious
diseases. Aronex Pharmaceuticals currently has five products in clinical
development, two of which (ATRAGEN(R) and NYOTRAN(R)) are in an advanced stage,
as well as a pipeline of additional products.
Any statements which are not historical facts, including statements regarding
the Company's clinical development programs and the expected timing of clinical
trials and NDA filings, contained in this release are forward looking statements
that involve risks and uncertainties, including but not limited to those
relating to product demand, pricing, market acceptance, the effect of economic
conditions, intellectual property rights and litigation, clinical trials,
governmental regulation, competitive products, risks in product and technology
development, the results of financing efforts, the ability to complete
transactions and other risks identified in the Company's Securities and Exchange
Commission filings.
###
