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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
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
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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
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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, 2000
----------------------------- ----------------------------
Common Stock, $.001 par value 25,890,127 shares
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ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
QUARTERLY PERIOD ENDED JUNE 30, 2000
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, 1999 and June 30, 2000 (unaudited)...................... 4
Consolidated Statements of Operations:
Six Months Ended June 30, 1999 and June 30, 2000
(unaudited), the three months ended June 30, 1999 and June 30, 2000 (unaudited)
and for the Period from Inception (June 13, 1986) through June 30, 2000 (unaudited).............. 5
Consolidated Statements of Comprehensive Loss:
Six Months Ended June 30, 1999 and June 30, 2000 (unaudited)
and the three months ended June 30, 1999 and June 30, 2000 (unaudited) .......................... 5
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1999 and June 30, 2000
(unaudited) and for the Period from Inception (June 13, 1986)
through June 30, 2000 (unaudited)................................................................ 6
Notes to Consolidated Financial Statements - June 30, 2000 (unaudited)............................. 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......................................... 11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings ................................................................................. 12
Item 2 Changes in Securities and Use of Proceeds.......................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders................................................ 13
Item 6 Exhibits and Reports on Form 8-K................................................................... 13
SIGNATURES .......................................................................................... 14
</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"). When used in this document, 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
Amendment No. 1 to its Annual Report on Form 10-K for the year ended December
31, 1999 (the "1999 Form 10-K/A").
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 we believe 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, 1999 included in the 1999 Form 10-K/A.
The information presented in the accompanying consolidated 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
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 11,528 $ 14,613
Short-term investments .................................................... 7,804 1,557
Prepaid expenses and other assets ......................................... 453 319
--------- ---------
Total current assets ................................................. 19,785 16,489
Long-term investments ........................................................ 920 911
Furniture, equipment and leasehold improvements, net of accumulated .......... 2,029 1,801
--------- ---------
depreciation of $3,599 and $3,758, respectively
Total assets ......................................................... $ 22,734 $ 19,201
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 3,502 $ 2,710
Accrued payroll ........................................................... 644 392
Current portion of notes payable and obligations under capital leases ..... 340 361
--------- ---------
Total current liabilities ............................................ 4,486 3,463
Long-term liabilities:
Notes payable ............................................................. 3,517 3,365
--------- ---------
Total long-term liabilities .......................................... 3,517 3,365
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,
22,853,782 and 25,890,127 shares issued and outstanding,
respectively ......................................................... 23 26
Additional paid-in capital ................................................ 113,262 118,370
Common stock warrants ..................................................... 908 3,469
Treasury stock ............................................................ (11) (11)
Deferred compensation ..................................................... (69) (34)
Unrealized gain on investments ............................................ 2,147 --
Deficit accumulated during development stage .............................. (101,529) (109,447)
--------- ---------
Total stockholders' equity ........................................... 14,713 12,373
--------- ---------
Total liabilities and stockholders' equity ........................... $ 22,734 $ 19,201
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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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,
1999 2000 1999 2000 2000
-------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income ............................... $ 691 $ 507 $ 387 $ 286 $ 8,693
Research and development grants and contracts . 9,873 300 6,591 -- 23,139
-------- -------- ------- -------- ---------
Total revenues ....................... 10,564 807 6,978 286 31,822
Expenses:
Research and development ...................... 10,629 9,674 4,695 3,874 107,096
Purchase of in-process research and development -- -- -- -- 11,625
Selling, general and administrative ........... 1,726 1,461 942 762 23,271
Interest expense and other .................... 115 243 72 116 1,930
-------- -------- ------- -------- ---------
Total expenses ....................... 12,470 11,378 5,709 4,752 143,922
-------- -------- ------- -------- ---------
Operating income (loss) ............................ $ (1,906) $(10,571) $ 1,269 $ (4,466) $(112,100)
-------- -------- ------- -------- ---------
Other income:
Gain on sale of investments ................... -- 2,653 -- -- 2,653
-------- -------- ------- -------- ---------
Net income (loss) .................................. $ (1,906) $ (7,918) $ 1,269 $ (4,466) $(109,447)
======== ======== ======= ======== =========
Basic and diluted income (loss) per share .......... $ (0.09) $ (0.34) $ 0.06 $ (0.18)
Weighted average shares used in computing basic
income (loss) per share ....................... 20,705 23,627 22,496 24,357
Weighted average shares used in computing diluted
income (loss) per share ....................... 20,705 23,627 22,911 24,357
</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>
<CAPTION>
<S> <C> <C> <C> <C>
Comprehensive income:
Net income (loss).................................. $ (1,906) $ (7,918) $ 1,269 $ (4,466)
Unrealized gain on securities available for sale... 101 -- -- --
--------- --------- -------- --------
Comprehensive income...................... $ (1,805) $ (7,918) $ 1,269 $ (4,466)
========= ========= ======== ========
</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,
1999 2000 2000
-------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (1,906) $ (7,918) $(109,447)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization ................................ 323 306 5,764
Loss (gain) on disposal of assets ............................ (1) -- 200
Gain on sale of investments .................................. -- (2,653) (2,653)
Compensation expense related to stock and stock options ...... 550 224 5,091
Charge for purchase of in-process research and development ... -- -- 11,547
Unrealized gain on investment ................................ -- (2,147) --
Acquisition costs, net of cash received ...................... -- -- (270)
Accrued interest payable converted to stock .................. -- -- 97
Loss in affiliate ............................................ -- -- 500
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other assets ..... (555) 134 (134)
Increase in accounts receivable .............................. (168) -- --
Increase (decrease) in accounts payable and accrued expenses . (1,914) (1,044) 3,029
(1,914)
Decrease in deferred revenue ................................. -- -- (353)
-------- -------- ---------
Net cash used in operating activities .............. (3,671) (13,098) (86,629)
Cash flows from investing activities:
Purchases of investments .......................................... (18,444) (1,567) (262,928)
Sales of investments .............................................. 8,209 10,476 268,848
Purchase of furniture, equipment and leasehold improvements ....... (146) (78) (6,534)
Proceeds from sale of assets ...................................... -- -- 63
Investment in affiliate ........................................... -- -- (500)
-------- -------- ---------
Net cash provided by (used in) investing activities (10,381) 8,831 (1,051)
Cash flows from financing activities:
Proceeds from and increase in notes payable ....................... 898 24 6,992
Repayment of notes payable and principal payments under capital
lease obligations ................................................ (132) (155) (3,267)
Purchase of treasury stock ........................................ -- -- (11)
Proceeds from issuance of stock ................................... 11,780 7,483 98,579
-------- -------- ---------
Net cash provided by (used in) financing activities 12,546 7,352 102,293
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ................. (1,506) 3,085 14,613
Cash and cash equivalents at beginning of period ..................... 11,338 11,528 --
-------- -------- ---------
Cash and cash equivalents at end of period ........................... $ 9,832 $ 14,613 $ 14,613
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .......................... $ 87 $ 217 $ 1,356
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, 2000
(UNAUDITED)
1. Organization
Aronex Pharmaceuticals, Inc. (the "Company", "Aronex Pharmaceuticals",
"we", "us" or "our") 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, we
formed a wholly-owned 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, we expect to continue to incur losses for the foreseeable
future, and there can be no assurance that we will successfully complete the
transition from a development stage company to successful operations. The
research and development activities we engage in involve a high degree of risk
and uncertainty. Our ability to successfully develop, manufacture and market our
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. Our 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, we are
reliant upon collaborative arrangements for research, contractual agreements
with corporate partners, and our exclusive license agreements with The
University of Texas M.D. Anderson Cancer Center. Further, during the period
required to develop these products, we will require additional funds which may
not be available to us. We believe that we can conserve our current cash
resources to satisfy our funding needs into mid 2001. Accordingly, there can be
no assurance of our future success. See "Business -- Additional Business Risks"
in our 1999 Form 10-K/A.
The consolidated balance sheet at June 30, 2000 and the related
consolidated statements of operations and cash flows for the three and six month
periods ending June 30, 2000 and 1999 and the period from inception (June 13,
1986) through June 30, 2000 are unaudited. These interim financial statements
should be read in conjunction with the audited financial statements and related
notes included in our 1999 Form 10-K/A. 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. Long-term investments at
June 30, 2000 are available for sale securities which are United States
mortgage-backed securities with maturity dates over the next 23 years that have
an amortized cost of $911,000, which approximates fair market value and cost.
Aronex Pharmaceuticals currently has no trading securities.
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New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
fourth fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes." We are
currently in the process of evaluating what impact SAB 101 will have on our
financial position or our results of operations.
3. STOCKHOLDERS' EQUITY
In April 2000, we raised proceeds net of offering costs of approximately
$7.3 million in a private placement of Units. Each $100,000 Unit is comprised of
(1) shares of our common stock in an amount determined by dividing $100,000 by
$2.75 and (2) a warrant with a five-year term to purchase an amount of shares of
our common stock that is one third of the amount of shares contained in such
Unit at an exercise price of $3.00 per share. Through these Units, we issued
2,932,574 shares of common stock and warrants to purchase 977,524 shares of
common stock. In addition, we paid a finder, who assisted us in placing the
Units, a placement fee of 7% of the gross proceeds and issued warrants with a
seven-year term to purchase 150,000 shares of our common stock at an exercise
price of $3.25 per share. The fair value of the warrants issued, $2,560,780, is
recorded in our second quarter 2000 financial statements. This amount has been
estimated on the date of the grant using the Black Scholes option pricing model
with the following weighted-average assumptions: a risk free rate of 5.6%, with
no expected dividends, expected lives of 5 and 7 years and expected volatility
of 92%.
4. FEDERAL INCOME TAXES
At December 31, 1999, we had net operating loss ("NOL") carryforwards for
federal income tax purposes of approximately $114.8 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 our ability to utilize
these NOLs and tax credits. Accordingly, our 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 in 1995, a change
in control as defined by federal income tax law occurred, causing the use of the
carryforwards prior to the merger 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, we may not be able to take full advantage of our 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 our
deferred tax assets, a valuation allowance has been established to offset these
tax assets. We have not made any federal income tax payments since inception.
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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 discovery and development. We have been unprofitable to date
and expect to incur substantial operating losses for the next several years as
we expend our resources for product research and development, preclinical and
clinical testing and regulatory compliance. We have sustained losses of $112
million through June 30, 2000. Our research and development activities and
operations have been financed primarily through public and private offerings of
securities and, to a lesser extent, from revenues under research and development
grants and contracts. Our operating results have fluctuated significantly during
each quarter, and we anticipate that these 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, 1999 and 2000
Revenues from research and development grants and contracts decreased
100% for the three months ended June 30, 2000 from $6.6 million for the three
months ended June 30, 1999. Revenues from research and development grants and
contracts decreased 97% to $300,000 for the six months ended June 30, 2000 from
$9.9 million for the six months ended June 30, 1999. These decreases resulted
from a reduction of $9.6 million and $6.6 million in milestone and development
payments received under our license agreement for Nyotran(R) with Abbott
Laboratories ("Abbott") in the three and six month periods ending June 30, 2000,
respectively.
Interest income decreased by 26% to $286,000 for the three months ended
June 30, 2000 from $387,000 for the three months ended June 30, 1999. Interest
income decreased by 27% to $507,000 for the six months ended June 30, 2000, from
$691,000 for the six months ended June 30, 1999. These changes resulted from a
decrease in the average amount of funds available for investment for the three
and six month periods ended June 30, 2000.
Research and development expenses decreased by 17% to $3.9 million for the
three months ended June 30, 2000 from $4.7 million for the three months ended
June 30, 1999. Research and development expenses decreased by 8% to $9.7 million
for the six month period ending June 30, 2000 from $10.6 million for the six
month period ending June 30, 1999. The decrease in research and development
expenses for the three months ended June 30, 2000 described above resulted
primarily from:
o a decrease of $932,000 in clinical trial costs for Nyotran(R);
o a decrease of $319,000 in salary and payroll costs; and
o a decrease of $93,000 in regulatory consultant fees.
The decreases listed above were offset by:
o an increase of $329,000 in drug materials and manufacturing costs
related to Annamycin; and
o an increase of $267,000 in clinical trial costs for ATRAGEN(R).
The decrease in research and development expenses for the six months ended
June 30, 2000 described above resulted primarily from:
o a decrease of $2,182,000 in clinical trial costs for Nyotran(R); and
o a decrease of $952,000 in salaries and payroll costs.
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The decreases listed above were offset by:
o an increase of $811,000 in drug materials and manufacturing costs for
Annamycin and ATRAGEN(R) ;
o an increase of $1,223,000 in clinical trial costs for ATRAGEN(R); and
o an increase of $105,000 in consulting fees relating to regulatory
matters concerning ATRAGEN(R).
Selling, general and administrative expenses decreased 19% to $762,000 for
the three months ended June 30, 2000 from $942,000 for the three months ended
June 30, 1999. Selling, general and administrative expenses decreased 12% to
$1.5 million for the six months ended June 30, 2000 from $1.7 million for the
six months ended June 30, 1999. The decreases in selling, general and
administrative expenses were due primarily to decreases in sales and marketing
expenses relating to ATRAGEN(R) for the three and six month periods ending June
30, 2000, respectively.
Interest expense and other increased 61% to $116,000 for the three months
ended June 30, 2000 from $72,000 for the three months ended June 30, 1999.
Interest expense and other increased 111% to $243,000 for the six months ended
June 30, 2000 from $115,000 for the six months ended June 30, 1999. The increase
in interest expense was primarily due to an increase of $2.5 million in notes
payable relating to a promissory note issued to Genzyme Corporation in the
second quarter of 1999. Net loss increased by $5.8 million resulting in a net
loss of $4.5 million for the three months ended June 30, 2000. Net loss
increased by $6.0 million to $7.9 million for the six months ended June 30,
2000. These increased losses were due mainly to decreased research and
development revenue of $6.6 million and $6.9 million for the three and six month
periods ending June 30, 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, our primary source of cash has been from financing
activities, which have consisted primarily of sales of equity securities, and to
a lesser extent, from revenues under research and development agreements and
grants. We have raised an aggregate of $98.6 million from the sale of equity
securities from inception through June 30, 2000. In addition, we have received
$23.1 million since inception relating to research and development grants and
contracts.
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 and other consulting organizations to assist in
conducting our clinical trials. 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 such services
in the future.
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 $13.1 million and $3.7 million was
used in operating activities during the first six months of 2000 and 1999,
respectively. We had cash, cash-equivalents and long-term investments of $17.1
million as of June 30, 2000, consisting primarily of cash and money market
accounts, and United States government securities and investment grade
commercial paper.
We have experienced negative cash flows from operations since inception.
We have expended, and will continue to require, substantial funds to continue
our research and development activities, 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 believe that we can conserve our existing financial resources to
satisfy our capital and operating requirements into mid 2001. In the future, we
expect that we will need to raise substantial additional capital to fund our
operations.
We have experienced significant fluctuations in accounts payable and
accrued payroll primarily as a result of the development activities relating to
our 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
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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.
Also, 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 the risk
factors more completely described under "Business -- Additional Business Risks"
in our 1999 Form 10-K/A. 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, 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
for the Company, 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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
fourth fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes." We are
currently in the process of evaluating what impact SAB 101 will have on our
financial position or our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-11-
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, the U. S. Patent and Trademark Office ruled against us as to
priority of inventorship in a patent interference proceeding between the Company
and Sumitomo Pharmaceuticals Co., Ltd. The patents and patent applications at
issue relate to the drug NDDP. NDDP is the drug used in the formula for
AroplatinTM, which consists of the NDDP molecule in a unique liposomal vehicle.
The interference does not affect our proprietary positions on our liposomal
formulations of the drug. Both of the parties had claimed sole right to the
class of compounds including NDDP. Sumitomo relied on a Japanese patent
application for priority. The interference was declared by the Patent Office to
be between a currently pending U. S. patent application owned by Sumitomo and
certain issued patents licensed to us from the University of Texas M.D. Anderson
Cancer Center. If not overturned, the determination by the Patent Office that
Sumitomo's U.S. patent application has established priority of invention will
render our U.S. patent claims involved in the interference to be unenforceable.
Prior to the recent judgement, we received from Sumitomo proposed terms of
a licensing arrangement under which we would be able to market AroplatinTM. In
addition to continuing these negotiations with Sumitomo, we are currently
investigating our legal options. There can be no assurance that we will prevail
in court or be able to enter into a license with Sumitomo on acceptable terms,
if at all. In the meantime, we plan to continue with our clinical development
program for AroplatinTM.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 17, 2000, we completed a closing of a private placement of our
Common Stock and warrants to purchase our Common Stock. We sold an aggregate
of 2,932,574 shares in the private placement and issued five year warrants
(the "Warrants") to purchase 977,524 shares of Common Stock at an exercise
price of $3.00 per share.
We raised approximately $8.1 million ($7.3 million net of the finders' fee
and expenses). We intend to use the net proceeds of the private placement for
general corporate purposes.
Paramount Capital, Inc. ("Paramount") served as the finder for the private
placement. In consideration for such services, we paid Paramount a finders' fee
of $564,515 and issued a seven year warrant to Paramount exercisable for 150,000
shares of Common Stock at an exercise price of $3.25 per share.
The private placement was not registered under the Securities Act of 1933,
as amended (the "Securities Act"), and was made in reliance on Section 4(2) of
the Securities Act and Rule 506 of Regulation D. The purchasers in the private
placement consisted of accredited investors. On June 2, 2000, the Company filed
a registration statement on Form S-3 (Registration No. 333-38408) registering
the shares sold in the offering and the shares issuable upon exercise of the
warrants, which became effective on June 14, 2000.
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<PAGE> 13
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 16, 2000 to consider and vote upon the following proposals:
(i) Election of Class II Directors. The following individuals were nominated
and elected as Class II 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>
Geoffrey F. Cox, Ph.D. 21,516,612 -- 125,465
Gabriel Lopez-Berestein, M.D. 21,516,612 -- 125,465
Phyllis I. Gardner, M.D. 21,516,612 -- 125,465
For Against Abstain
---------- -------- --------
(ii) Ratification and approval of Arthur Andersen LLP
as independent public accountants 21,598,284 14,490 29,303
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Subscription Agreement (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
May 25, 2000 (the "Form 8-K")).
4.2 Form of Warrant (incorporated by reference to Exhibit 4.2 to the
Form 8-K).
4.3 Form of Warrant to Paramount (incorporated by reference to
Exhibit 4.3 to the Form 8-K).
10.1 Finders' Agreement between the Company and Paramount dated
March 30, 2000 (incorporated by reference to Exhibit 10.1 to the
Form 8-K).
11.1 Statement regarding Computation of Share Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
During the second quarter of 2000 the Company filed a Current Report on
Form 8-K on May 25, 2000 to report that it completed a closing of a private
placement of its common stock and warrants to purchase its common stock.
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<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: August 11, 2000 By:/s/ GEOFFREY F. COX
---------------------------------
Geoffrey F. Cox, Ph.D.
Chief Executive Officer
Dated: August 11, 2000 By:/s/ TERANCE A. MURNANE
---------------------------------
Terance A. Murnane
Controller (Principal Financial
and Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT No. DESCRIPTION
----------- -----------
<S> <C>
4.1 Form of Subscription Agreement (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
May 25, 2000 (the "Form 8-K")).
4.2 Form of Warrant (incorporated by reference to Exhibit 4.2 to the
Form 8-K).
4.3 Form of Warrant to Paramount (incorporated by reference to
Exhibit 4.3 to the Form 8-K).
10.1 Finders' Agreement between the Company and Paramount dated
March 30, 2000 (incorporated by reference to Exhibit 10.1 to the
Form 8-K).
11.1 Statement regarding Computation of Share Earnings.
27.1 Financial Data Schedule.
</TABLE>
