FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 0-19732
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CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0238812
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3030 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
(858) 455-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (l) 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
------- -------
At May 1, 2000, there were 21,106,269 shares of Common Stock, $0.001
par value, of the Registrant issued and outstanding.
<PAGE>
CORVAS INTERNATIONAL, INC.
INDEX
Page
PART I -- FINANCIAL INFORMATION ----
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 1
Condensed Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 2
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 3
Notes to Condensed Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 9
None
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
None
Item 4. Submission of Matters to a Vote of Security Holders 9
None
Item 5. Other Information 9
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 9
(b) Reports on Form 8-K 9
None
SIGNATURES 10
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
CORVAS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
ASSETS (unaudited)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 440 $ 881
Short-term debt securities held to maturity
and time deposits, partially restricted 30,615 20,630
Receivables 144 316
Note receivable from related party 278 278
Other current assets 634 547
-------------- --------------
Total current assets 32,111 22,652
-------------- --------------
Debt issuance costs 122 127
Long-term debt securities held to maturity 1,987 0
Property and equipment, net 1,166 1,110
-------------- --------------
$ 35,386 $ 23,889
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 367 $ 993
Accrued liabilities 1,938 1,167
Accrued vacation 249 214
-------------- --------------
Total current liabilities 2,554 2,374
-------------- --------------
Convertible notes payable 10,401 10,215
Deferred rent 49 25
Stockholders' equity:
Preferred stock - Series A and Series B 0 1
Common stock 21 17
Additional paid-in capital 116,830 102,127
Accumulated deficit (94,469) (90,870)
-------------- --------------
Total stockholders' equity 22,382 11,275
Commitments and contingencies
-------------- --------------
$ 35,386 $ 23,889
============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
In thousands, except per share data
(unaudited)
Three Months Ended
March 31,
------------------------------
2000 1999
-------------- --------------
REVENUES:
Revenue from collaborative agreements $ 1,013 $ 1,746
Royalties 9 23
Research grants 21 0
-------------- --------------
Total revenues 1,043 1,769
-------------- --------------
COSTS AND EXPENSES:
Research and development 3,910 3,104
General and administrative 927 778
-------------- --------------
Total costs and expenses 4,837 3,882
-------------- --------------
Loss from operations (3,794) (2,113)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest income 386 238
Interest expense (191) 0
-------------- --------------
195 238
-------------- --------------
Net loss and other comprehensive loss $ (3,599) $ (1,875)
============== ==============
Basis and diluted net loss per share $ (0.18) $ (0.12)
============== ==============
Shares used in calculation of basic
and diluted net loss per share 19,636 15,126
============== ==============
See accompanying notes to condensed financial statements.
2
<PAGE>
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
In thousands
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,599) $ (1,875)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 122 142
Amortization of premiums and discounts on investments (317) (72)
Amortization of debt issuance costs 5 0
Non-cash interest expense on convertible notes payable 186 0
Stock compensation expense 15 3
Change in assets and liabilities:
(Increase) decrease in receivables 172 (12)
Increase in other current assets (87) (109)
Increase in accounts payable, accrued
liabilities and accrued vacation 180 83
Increase in deferred rent 24 0
-------------- --------------
Net cash used in operating activities (3,299) (1,840)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (26,050) (4,371)
Proceeds from maturity of investments held to maturity 14,395 6,408
Purchases of property and equipment (178) (26)
-------------- --------------
Net cash provided by (used in) investing activities (11,833) 2,011
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 12,130 47
Capital contribution 2,561 0
-------------- --------------
Net cash provided by financing activities 14,691 47
-------------- --------------
Net increase (decrease) in cash and cash equivalents (441) 218
Cash and cash equivalents at beginning of period 881 611
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 440 $ 829
============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CORVAS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) The Company
-----------
Corvas International, Inc. (the "Company") was incorporated on March
27, 1987 under the laws of the State of California. In July 1993, the Company
reincorporated in the State of Delaware. The Company is engaged in the design
and development of a new generation of therapeutic agents for cardiovascular,
cancer, stroke and other major diseases.
(2) Basis of Presentation
---------------------
The interim financial information contained herein is unaudited but, in
management's opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The condensed
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K. Results for the interim
periods are not necessarily indicative of results for other interim periods or
for the full year.
(3) Stockholders' Equity
--------------------
In February 2000, 1,000,000 shares of Series A Convertible Preferred
Stock and 250,000 shares of Series B Convertible Preferred Stock held by
Schering-Plough automatically converted into Common Stock after the market price
of the Company's Common Stock exceeded $7.50 and $12.00 per share, respectively,
for 10 consecutive trading days. Each preferred share converted into one share
of Common Stock.
In the first quarter of 2000, some of the warrant holders from the
February 1996 financing exercised their warrants, which resulted in total net
proceeds of $10,650,000. A total of 1,980,000 shares of the Company's Common
Stock was issued pursuant to the exercise of these warrants.
(4) Net Loss Per Share
------------------
Net loss per share for the three months ended March 31, 2000 and 1999
is computed using the weighted-average number of common shares outstanding.
Options and warrants totaling 2,131,000 and 3,819,000 shares were excluded from
the calculation of net loss per share for the three months ended March 31, 2000
and 1999, respectively, since the effect of their inclusion would be
anti-dilutive. In addition, 3,172,000 shares from the assumed conversion of the
5.5% convertible senior subordinated notes issued during 1999 have been excluded
from the March 31, 2000 calculation, and 1,250,000 shares of convertible
preferred stock have been excluded from the March 31, 1999 calculation, since
their inclusion would be anti-dilutive.
4
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM WHAT IS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN OUR ANNUAL REPORT ON FORM
10-K UNDER THE HEADING "RISK FACTORS."
THE TERMS "CORVAS," "WE," "US" AND "OUR" REFER TO CORVAS
INTERNATIONAL, INC.
OVERVIEW
Corvas International, Inc. is a clinical-stage biopharmaceutical firm
engaged in the design and development of a new generation of therapeutic agents
for cardiovascular, cancer, stroke and other major diseases. Since our inception
in 1987, we have not generated significant revenues from product sales and we
currently do not sell any commercial products. We have not been profitable on an
annual basis since inception and we anticipate that we will incur substantial
additional operating losses over the next several years as we progress in our
research and development programs. We expect that our sources of income, if any,
for the next several years will continue to primarily consist of payments under
collaborative agreements and interest income. Our historical results are not
necessarily indicative of our future results. In addition we may not
successfully develop, commercialize, manufacture or market any products or
generate sufficient revenues to ever achieve or sustain profitability. At March
31, 2000, we had an accumulated deficit of $94,469,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Our operating revenues decreased to $1,043,000 in the three months
ended March 31, 2000, from $1,769,000 in the corresponding period of 1999. This
decrease was mainly comprised of $250,000 from fewer scientists working on the
extended agreement with Schering Corporation, or Schering-Plough, covering oral
anticoagulants for chronic thrombosis, $240,000 due to the 1999 termination of
the option and related research and development agreements with Vascular
Genomics Inc., and $112,000 due to the 1999 completion of the research funding
from Pfizer Inc. on our UK-279,276 program (previously designated rNIF). We also
received revenue of $21,000 in the first quarter of 2000 from a Small Business
Innovation Research grant awarded in September 1999 to fund our malaria research
program.
Comparing the three months ended March 31, 2000 to the same period in
1999, total costs and expenses increased to $4,837,000 from $3,882,000. Research
and development expenses, which accounted for the majority of this $955,000
increase, increased to $3,910,000 from $3,104,000 one year earlier. This
increase was mainly attributable to expenses associated with the increased
enrollment in our Phase II clinical trial of rNAPc2, our proprietary
anticoagulant drug candidate. General and administrative expenses increased to
$927,000 from $778,000 comparing the same quarters, primarily due to the hiring
of additional administrative employees and related expenses.
5
<PAGE>
Total other income was $195,000 in the first quarter of 2000, compared
to $238,000 in the first quarter of 1999. Interest income increased by $148,000
as a result of the $15,000,000 ($10,000,000 in the form of 5.5% convertible
senior subordinated notes and $5,000,000 of common stock) raised in the second
half of 1999 and the higher yields earned thereon. This increase in interest
income was offset by $191,000 of interest expense recorded pursuant to the 5.5%
senior subordinated convertible notes, in an aggregate principal amount of
$10,000,000, that were issued in the second half of 1999.
Provided that additional capital is available to fund our operations,
we expect that we will continue to incur significant expenses and operating
losses over the next several years as our research and development and clinical
trials progress. However, we may not be able to raise any additional capital. We
also expect both our expenses and losses to fluctuate from quarter to quarter
and that the fluctuations may, at times, be substantial.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
a public offering and private placements of our debt and equity securities,
payments from collaborative agreements, and interest income earned on cash and
investment balances. Our principal sources of liquidity are cash and cash
equivalents, time deposits and short- and long-term debt securities which, net
of a $221,000 restricted time deposit, totaled $32,821,000 as of March 31, 2000.
Working capital at March 31, 2000 was $29,557,000. In the first quarter of 2000,
Corvas received $10,650,000 in total net proceeds from the exercise of warrants
held by institutional investors. We invest available cash in accordance with an
investment policy set by our Board of Directors, which has established
objectives to preserve principal, maintain adequate liquidity and maximize
income. Our policy provides guidelines concerning the quality, term and
liquidity of investments. We presently invest our excess cash primarily in
government-backed debt instruments and, to a smaller degree, in debt instruments
of corporations with strong credit ratings.
In the three months ended March 31, 2000, net cash of $3,299,000 was
used in operating activities and net cash of $11,833,000 was used in investing
activities. Net cash provided by financing activities was $14,691,000 in this
same period, primarily due to the exercise of warrants which resulted in total
net proceeds of $10,650,000, as well as $1,480,000 from stock option exercises
and $2,561,000 of profit recovered from the inadvertent purchase and sale of our
stock within a six month time period.
In the second half of 1999 we issued and sold, in two separate private
financings, a total of 2,000,000 shares of common stock for $2.50 per share and
5.5% convertible senior subordinated notes, due in August 2006, in an aggregate
principal amount of $10,000,000. Total net proceeds of $14,740,000 were raised
in these financings. Interest on the outstanding principal amounts of these
notes accretes at 5.5% per annum, compounded semi-annually, with interest
payable upon redemption or conversion. Upon maturity, these notes will have an
accreted value of $14,572,000. At our option, the accretion on both notes may be
paid in cash or in our common stock priced at the then-current market price. We
have agreed to pay any applicable withholding taxes that may be required in
connection with the accretion, which are estimated and accrued at 30% of the
annual accretion. At the option of the note holder, the principal of both notes
is convertible into shares of Corvas common stock at $3.25 per share, subject to
certain adjustments. We may call the notes for redemption anytime after August
18, 2002.
6
<PAGE>
We expect that we will continue to incur substantial additional costs
in the foreseeable future due to, among other factors, costs related to ongoing
and planned clinical trials and other research and development activities. Over
the next several years, we expect these costs will result in additional
operating losses and negative cash flows from operations. We are continuing to
pursue additional collaborative relationships, particularly for our NAP program.
We currently believe that our existing capital resources and projected interest
income should be sufficient to satisfy our anticipated funding requirements for
more than two years. In the future, we may also receive additional funds from
milestone payments and royalties on sales of products in connection with our
alliances. However, we may not receive any additional amounts under our existing
or any future alliances, and we may not be successful in raising additional
capital through strategic or other financings or through collaborative
relationships. Additionally, our expected cash requirements may vary materially
from those now anticipated.
Ongoing strategic collaborations with Schering-Plough and Pfizer
provide for payments to us if certain milestones are met. In addition to future
milestones, we may also receive royalties on product sales in connection with
our existing alliances, as well as from any future alliances. If all the
milestones on all of our existing collaborations are met, Corvas could receive a
maximum of $71,394,000 in future milestone payments and research and development
funding over the next several years. However, our existing collaborations may
not be successful, we may not receive any future milestones or other payments
related to our collaborative agreements, and our collaborations may not continue
(since the existing agreements are terminable at the option of our collaborators
upon certain events).
Our future capital requirements will depend on many factors, including:
o the scientific progress in, and magnitude of, our drug discovery
programs;
o the scope and results of our preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs of filing, prosecuting, maintaining and enforcing patents;
o the progress of competing technology and other market developments;
o our ability to establish and maintain collaborative or licensing
arrangements;
o any changes in our existing collaborative relationships;
o the cost of manufacturing scale-up; and
o the effectiveness of our activities and arrangements, or those of our
collaborative partners, to commercialize our products.
To continue our long-term product development efforts, we must raise
substantial additional funding either through collaborative arrangements or
through public or private financings. Our ability to raise additional funds
through sales of securities depends in part on investors' perceptions of the
biotechnology industry, in general, and of Corvas, in particular. The market for
securities of biotechnology companies, including Corvas, has historically been
highly volatile, especially recently, and, accordingly, additional funding may
not be available on acceptable terms or at all. If additional funds are raised
by issuing securities, our stockholders will experience dilution, which may be
substantial. We may enter into additional collaborative relationships to develop
and commercialize some or all of our current or future technologies or products.
We may not be able to establish such relationships on satisfactory terms, if at
all, and agreements with collaborators may not successfully reduce our funding
requirements. In addition, we have not attempted to establish bank financing
arrangements, and we may not be able to establish such arrangements on
satisfactory terms, if at all. If adequate funds are not available in the
7
<PAGE>
future, we may be required to significantly delay, scale back or discontinue one
or more of our drug discovery programs, clinical trials or other aspects of our
operations. We could also be forced to seek collaborative partners for programs
at an earlier stage than would be desirable to maximize the rights to future
product candidates retained by Corvas.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which includes certain revenue recognition issues related to biotechnology
companies. We are currently evaluating the impact of SAB 101 on our reported
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We invest our excess cash primarily in short-term, high quality fixed
income investments that are held to maturity. We do not invest in derivative
financial instruments or any other market risk sensitive instruments. Interest
income earned on our investment portfolio is affected by changes in the general
level of interest rates. We believe that our interest rate market risk is
limited, and that we are not exposed to significant changes in fair value
because our investments are held to maturity. The fair value of each investment
approximates its amortized cost.
We have assumed that the similar nature of our investments warrants
aggregation for purposes of interest rate sensitivity. The principal amount of
all held to maturity investments as of March 31, 2000 is $32,602,000, and they
have a weighted-average interest rate of 6.10%.
Considering our investment balances as of March 31, 2000, rates of
return and the fixed rate nature of the convertible notes payable that were
issued in the second half of 1999, an immediate 10% change in interest rates
would not have a material impact on our financial condition or results of
operations.
Underlying market risk exists related to an increase in our stock price
or an increase in interest rates that may make conversion of the convertible
notes payable into common stock beneficial to the holder. Conversion of the
convertible notes payable would have a dilutive effect on ownership of our
stock.
8
<PAGE>
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
In February 2000, 1,000,000 shares of Series A Convertible Preferred
Stock and 250,000 shares of Series B Convertible Preferred Stock held by
Schering-Plough automatically converted into common stock after the market price
of our common stock exceeded $7.50 and $12.00 per share, respectively, for 10
consecutive trading days. Each share of preferred stock converted into one share
of common stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
-------------- -----------
10.56 Letter of Agreement between the Company and
Schering Corporation and Schering-Plough,
Ltd., dated as of March 30, 2000.
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31,
2000.
9
<PAGE>
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.
CORVAS INTERNATIONAL, INC.
Date: May 12, 2000 By: /s/ RANDALL E. WOODS
--------------------------------------
Randall E. Woods
President and Chief Executive Officer
Date: May 12, 2000 By: /s/ CAROLYN M. FELZER
--------------------------------------
Carolyn M. Felzer
Senior Director of Finance
Principal Financial Officer
10
[Letterhead of Schering Corporation]
March 30, 2000
Mr. Randall E. Woods
President and Chief Executive Officer
Corvas International, Inc.
3030 Science Park Road
San Diego, California 92121
RE: HCV Research Program
Dear Mr. Woods:
This is in reference to the License and Collaboration Agreement by and between
Corvas International, Inc. (hereinafter "Corvas") and Schering Corporation and
Schering-Plough Ltd. (collectively called "Schering"), effective as of June 11,
1997 (the "Agreement").
As you are aware, we are in the process of finalizing an agreement amending
certain terms of the Agreement. Those amendments will include provisions for
the early termination of the Research Program, effective as of March 31, 2000,
along with Schering's remaining obligations with respect to research funding.
However, it now appears that despite the good faith efforts of both parties,
the amendment agreement will not be completed prior to that date. Accordingly,
this letter will confirm our understanding that Corvas' obligations with
respect to performance of the Research Program and Schering's obligations to
provide research funding are hereby suspended pending execution of the
amendment agreement.
Please indicate your acceptance and agreement to the provisions set forth in
this letter by signing below on behalf of Corvas and returning one signed
original to Schering.
Very truly yours,
Schering Corporation Schering-Plough Ltd.
LEGAL REVIEW LEGAL REVIEW
/s/ DAVID POORVIN /s/ DAVID POORVIN
-------------------- --------------------
David Poorvin, Ph.D. David Poorvin, Ph.D.
Vice President Prokurist
Acknowledged and Agreed to
Corvas International, Inc.
By: /s/ RANDALL E. WOODS
--------------------
Randall E. Woods
President and Chief Executive Officer
Date: 3 - 31 - 00
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 440
<SECURITIES> 30,615
<RECEIVABLES> 422
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,111
<PP&E> 5,508
<DEPRECIATION> 4,342
<TOTAL-ASSETS> 35,386
<CURRENT-LIABILITIES> 2,554
<BONDS> 10,401
0
0
<COMMON> 21
<OTHER-SE> 22,361
<TOTAL-LIABILITY-AND-EQUITY> 35,386
<SALES> 0
<TOTAL-REVENUES> 1,043
<CGS> 0
<TOTAL-COSTS> 4,837
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (191)
<INCOME-PRETAX> (3,599)
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<EPS-BASIC> (.18)
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