-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bs1yghN+L1xN9/rL0+7yEIACljjFBlaNcu7jnmCKzyfyre6tcDzg7NQNxxjtVdz0 xV0Otl2OapudPnlX5YBbNQ== 0000912057-97-017511.txt : 19970515 0000912057-97-017511.hdr.sgml : 19970515 ACCESSION NUMBER: 0000912057-97-017511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARRIS PHARMACEUTICAL CORP/DE/ CENTRAL INDEX KEY: 0000913056 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222969941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22788 FILM NUMBER: 97604140 BUSINESS ADDRESS: STREET 1: 385 OYSTER POINT BLVD STREET 2: SUITE 3 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4157378600 MAIL ADDRESS: STREET 1: 385 OYSTER POINT BLVD STREET 2: SUITE 3 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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: 0-22788 ARRIS PHARMACEUTICAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-2969941 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 385 OYSTER POINT BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 (Address of principal executive offices) (415) 829-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required 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. [x] Yes [ ] No The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 14,963,227 as of April 30, 1997. 1 ARRIS PHARMACEUTICAL CORPORATION INDEX PAGE PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) * Consolidated Balance Sheets - March 31, 1997 and December 31, 1996...... 3 Consolidated Statements of Operations - Three months ended March 31, 1997 and 1996................................. 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1996 ..................................... 5 Notes to Consolidated Financial Statements - March 31, 1997............. 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 8 PART II: OTHER INFORMATION ............................................ 13 ITEM 1. Legal Proceedings ITEM 2. Changes in Securities ITEM 3. Defaults Upon Senior Securities ITEM 4. Submission of Matters to a Vote of Security Holders ITEM 5. Other Information ITEM 6. Exhibits and Reports on Form 8-K SIGNATURES............................................................. 14 * The financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed on March 31, 1997. 2 ARRIS PHARMACEUTICAL CORPORATION PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1997 1996 (unaudited) ----------- ------------ ASSETS (IN THOUSANDS) Current assets: Cash and cash equivalents $ 7,166 $ 10,822 Short-term marketable investments 39,406 37,021 Prepaid expenses and other current assets 3,309 2,217 --------- --------- Total current assets 49,881 50,060 Long-term marketable investments 6,706 11,627 Restricted investments 9,250 7,250 Property and equipment, net 11,298 10,446 Other assets 1,492 1,449 --------- --------- TOTAL ASSETS $ 78,627 $ 80,832 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,801 $ 1,439 Accrued compensation 1,027 1,480 Other accrued liabilities 1,761 1,570 Current portion of deferred revenue 8,322 10,783 Current portion of capital lease and debt obligations 1,899 1,984 --------- --------- Total current liabilities 14,810 17,256 Deferred revenue, noncurrent 2,146 1,973 Capital lease and debt obligations, net of current portion 10,389 8,703 Stockholders' equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, none issued or outstanding -- -- Common stock, $.001 par value; 30,000,000 shares authorized, 14,938,674 shares and 14,831,975 shares issued and outstanding at March 31, 1997 and December 31, 1996, respectively 116,332 115,904 Note receivable from officer (200) (200) Accumulated deficit (64,850) (62,804) --------- --------- Total stockholders' equity 51,282 52,900 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,627 $ 80,832 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 3 ARRIS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31, ----------------------- 1997 1996 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Contract revenues $ 6,689 $ 5,044 Operating expenses: Research and development 7,847 5,644 General and administrative 1,615 1,205 --------- --------- Total operating expenses 9,462 6,849 --------- --------- Operating loss (2,773) (1,805) Interest income 949 357 Interest expense (222) (115) --------- --------- Net loss $ (2,046) $ (1,563) --------- --------- --------- --------- Net loss per share $ (0.14) $ (0.15) --------- --------- --------- --------- Shares used in computing net loss per share 14,898 10,404 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 4 ARRIS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, --------------------- 1997 1996 --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,046) $ (1,563) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 1,052 1,017 Changes in assets and liabilities: Prepaid expenses and other current assets (1,091) (728) Other assets (89) 59 Accounts payable, accrued liabilities and deferred revenue (2,189) 977 --------- -------- Net cash and cash equivalents used in operating activities (4,363) (238) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Held-to-maturity securities Purchases (9,683) (8,857) Maturities 12,220 -- Purchase of restricted investments (2,000) -- Expenditures for property and equipment (1,860) (1,583) --------- -------- Net cash and cash equivalents used in investing activities (1,323) (10,440) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 428 36,653 Proceeds from notes payable and lease financing 2,000 1,664 Principal payments on notes payable and capital leases (398) (1,218) --------- -------- Net cash and cash equivalents provided by financing activities 2,030 37,099 --------- -------- Net (decrease) increase in cash and cash equivalents (3,656) 26,421 Cash and cash equivalents, beginning of period 10,822 21,706 --------- -------- Cash and cash equivalents, end of period $ 7,166 $ 48,127 --------- -------- --------- --------
See accompanying notes to consolidated financial statements. 5 ARRIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Arris Pharmaceutical Corporation, a Delaware corporation ("Arris" or the "Company"), uses an integrated drug discovery approach combining structure-based drug design, combinatorial chemistry and its proprietary Delta Technology to discover and develop a number of diverse synthetic small molecule therapeutics for commercially important disease categories where existing therapies have significant limitations. Arris' product development includes protease discovery programs targeting the inhibition of enzymes implicated in asthma, inflammatory disease, blood clotting disorders, infectious disease, osteoporosis, cancer and autoimmune disease. The Company's technology platform also includes receptor-based discovery programs designed to discover small molecule drugs that mimic important therapeutic proteins that are already successful products. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Arris Protease, Inc., and Arris Pharmaceuticals Canada, Inc. ("Arris Canada"). All significant intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION The unaudited consolidated financial statements included herein have been prepared by the Company according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three month period ended March 31, 1997 are not necessarily indicative of the results to be expected for subsequent quarters or the full fiscal year. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 6 ARRIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NOTE PAYABLE In September, 1996, the Company obtained a line of credit agreement to borrow up to $12 million by December 1997. During the three months ended March 31, 1997, the Company borrowed an additional $2.0 million under this line of credit. Borrowing terms remain the same as December 31, 1996, except that the interest rate at March 31, 1997 was a combination of the LIBOR rate plus 1.5% and the bank's reference rate, which were 7.5% and 7.0%, respectively. At March 31, 1997, $3.6 million remains available under this line of credit. 3. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to have no effect on earnings per share for the first quarters ended March 31, 1997 and March 31, 1996. The impact of Statement 128 on the calculation of diluted earnings per share for these quarters is also expected to have no effect. 7 ARRIS PHARMACEUTICAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "CERTAIN BUSINESS RISKS" BELOW AS WELL AS ELSEWHERE HEREIN, TOGETHER WITH THOSE DISCUSSED IN "ITEM 1. BUSINESS", INCLUDING "BUSINESS RISKS" ON FORM 10-K, FILED MARCH 31, 1997. OVERVIEW Since its inception in April 1989, the Company has devoted substantially all of its resources to its research and development programs. To date, the Company's only source of revenue has been its corporate collaborations with Pharmacia & Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"), Bayer AG ("Bayer"), SmithKline Beecham Corporation ("SB") and Merck & Co. ("Merck"). Its collaborations have taken a variety of forms including in each case certain of the following elements: payments to the Company of an up-front fee, purchase of the Company's common stock (PNU human growth hormone collaboration only), research funding payments, milestone payments, if and when milestones are achieved, and royalties upon the sale of any resulting products. Where appropriate, the up-front fees have been recorded as deferred revenue until earned. The Company has not been profitable since inception and expects to incur substantial losses for at least the next several years, primarily due to the cost of its research and development programs, including preclinical studies and human clinical trials. The Company expects that losses will fluctuate from quarter to quarter, that such fluctuations may be substantial, and that results from prior quarters may not be indicative of future operating results. As of March 31, 1997 the Company's accumulated deficit was approximately $64.9 million. RESULTS OF OPERATIONS Contract revenue The Company's revenues increased to $6.7 million for the three-month period ended March 31, 1997 as compared to $5.0 million for the same period in 1996. All of the Company's revenues presently are attributable to collaborations with PNU, Amgen, Bayer, SB and Merck. The increase in 1997 was primarily due to: (i) the second portion of the license fee and research funding for the collaboration with SB to develop inhibitors using Arris' proprietary Delta technology targeting intracellular viral proteases, which commenced in June 1996, (ii) the research funding for the collaboration with Merck to develop small molecule inhibitors of proteases involved in osteoporosis, which commenced in November 1996 and (iii) the full effects of research funding and the initial shipment of 25,000 small molecule synthetic organic compounds under the combinatorial chemistry collaboration with PNU, (250,000 total compounds are due under the three year agreement), which commenced in March 1996. These increases were partially offset by lower revenues recognized under the erythropoetin collaboration with Amgen, in which the research funded portion ended during the first quarter 8 ARRIS PHARMACEUTICAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of 1997 and the human growth hormone collaboration with PNU, in which the research funded portion will end in mid-1997. Research and development Research and development expenses increased to $7.8 million of total operating expenses for the three-month period ended March 31, 1997 as compared to $5.6 million in the same period in 1996. This increase was primarily due to the expansion of the Company's research efforts in new and existing programs. Research and development expenses as a percentage of total operating expenses represents 83% in 1997, compared to 82% in 1996. The Company expects research and development costs will be incurred at increased levels for the remainder of 1997 when compared to 1996 as a result of further expansion of its research programs and conduct of preclinical studies and clinical trials. General and administrative The Company's general and administrative expenses increased to $1.6 million for the three- month period ended March 31, 1997 as compared to $1.2 million in the same period in 1996. The increase in expenses for the three-month period was primarily due to the addition of general and administrative personnel in support of the Company's expanded research and development efforts. General and administrative expenses as a percentage of total expenses represents 17% in 1997, as compared to 18% in 1996. The Company expects its general and administrative costs will be incurred at increased levels for the remainder of 1997 when compared to 1996 as a result of additional support necessary for expanded research and development. Interest income and expense Interest income increased to $949,000 for the three-month period ended March 31, 1997 as compared to $357,000 in the same period in 1996. The increase was largely due to the higher average cash balances during the period in 1997 resulting from receipt of net proceeds of approximately $36 million from the follow-on offering of 3,000,000 shares of the Company's common stock which closed on March 27, 1996, approximately $5.5 million from the exercise on April 24, 1996 by the underwriters of the over allotment option in the offering of 450,000 shares and to the receipt of up-front fees collected under new collaborations during the latter half of 1996. Interest expense increased to $222,000 for the three-month period ended March 31, 1997 as compared to $115,000 in the same period of 1996 as a result of higher average debt balances incurred to finance the expansion of the Company's facilities and acquisition of lab equipment. 9 ARRIS PHARMACEUTICAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through private and public offerings of its capital stock and through corporate collaborations. As of March 31, 1997, the Company had realized approximately $91.4 million in net proceeds from offerings of its capital stock. In addition, the Company has realized $65.2 million from its corporate collaborations (excluding the $5.4 million equity investment in the Company made by PNU). The Company's principal sources of liquidity are its cash and investments, which totaled $62.5 million as of March 31, 1997. In September 1996, the Company arranged for a $12 million line of credit from Bank of America. As of March 31, 1997 the Company had borrowed $8.4 million and had $3.6 million remaining available under this line of credit. Net cash used by operating activities during the three-month period ended March 31, 1997 was $4.4 million compared to $238,000 in the same period in 1996. This increase is primarily due to an increase in net loss for the 3 months ended March 31, 1997 and the timing of cash received under the Company's collaboration agreements with PNU, Amgen, Bayer, SB, and Merck. Cash used in operating activities is expected to fluctuate from quarter to quarter depending, in part, upon the timing and amounts, if any, of cash received from existing and any new collaboration agreements. The Company also spent approximately $1.9 million for the purchase of property, plant and equipment during the three-month period ended March 31, 1997. Additional equipment will be needed as the Company increases its research and development activities. The Company received net financing of $1.6 million, which was comprised of borrowings under existing credit instruments and payments under lease agreements, during the three-months ended March 31, 1997. The Company's revenues presently are attributable to collaborations with PNU, Amgen, Bayer, SB and Merck. The PNU human growth hormone collaboration extends through mid-1997. The research phase of the Amgen erythropoetin collaboration ended in February 1997. The proof of concept phase of the SB collaboration ends in June 1997 and can be extended by SB beyond that into a research phase. All of the Company's other collaborations extend beyond the next 12 months. If the Company is unable to renew any of these collaborations or extend the SB collaboration into the research phase, such events may have a material adverse effect on the Company's business and financial condition. The Company expects that its existing capital resources, including research and development revenues from existing collaborations, will enable the Company to maintain current and planned operations through at least the next 48 months. The Company may need to raise substantial additional capital to fund its operations before the end of such period. The Company expects that it will seek such additional funding through new collaborations, through the extension of existing collaborations or through public or private equity or debt financing. 10 ARRIS PHARMACEUTICAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) There can be no assurance that additional financing will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to stockholders may result. If adequate funds are not available, the Company may be required to delay, to reduce the scope of or to eliminate one or more of its research or development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself. CERTAIN BUSINESS RISKS The Company is at an early stage of development. The Company's technologies are, in many cases, new and still under development. All of the Company's proposed products are in research or development and will require significant additional research and development efforts prior to any commercial use, including extensive preclinical and clinical testing as well as lengthy regulatory approval. There can be no assurance that the Company's research and development efforts will be successful, that any of its proposed products will prove to be safe and efficacious in the clinical trials or that any commercially successful products will ultimately be developed by the Company. In addition, many of the Company's currently proposed products are subject to development and licensing arrangements with the Company's collaborators. Therefore, the Company is dependent on the research and development efforts of these collaborators. Moreover, the Company is entitled only to a portion of the revenues, if any, realized from the commercial sale of any of the proposed products covered by the collaborations. The Company has experienced significant operating losses since its inception and expects to incur significant operating losses over at least the next several years. The development of the Company's technology and proposed products will require a commitment of substantial funds to conduct these costly and time consuming activities. All of the Company's revenues to date have been received pursuant to the Company's collaborations. Should the Company or its collaborators fail to perform in accordance with the terms of any of their agreements, any consequent loss of revenue under the agreements could have a material adverse effect on the Company's results of operations. The proposed products under development by the Company have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. The Company has no sales, marketing or distribution capability. If any of its products subject to collaborative agreements are successfully developed, the Company must rely on its collaborators to market such products. 11 ARRIS PHARMACEUTICAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) If the Company develops any products which are not subject to collaborative agreements, it must either rely on other large pharmaceutical companies to market such products or must develop a marketing and sales force with technical expertise and supporting distribution capability in order to market such products directly. The foregoing risks reflect the Company's early stage of development and the nature of the Company's industry and products. Also inherent in the Company's stage of development is a range of additional risks, including competition, uncertainties regarding protection of patents and proprietary rights, government regulation and uncertainties regarding health care reform. These risks and uncertainties are discussed further in "Item 1. -Business - Business Risks" on Form 10-K, filed by the Company March 31, 1997. 12 ARRIS PHARMACEUTICAL CORPORATION PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None 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 27 Financial Data Schedule. b) Reports on Form 8-K The Company filed no reports on Form 8-K for the quarter ended March 31, 1997. 13 ARRIS PHARMACEUTICAL CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARRIS PHARMACEUTICAL CORPORATION Date: May 14, 1997 By: /s/ John P. Walker -------------------------------------- John P. Walker President, Chief Executive Officer and Director Date: May 14, 1997 By: /s/ Frederick J. Ruegsegger -------------------------------------- Frederick J. Ruegsegger Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 14 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 7,166 39,406 0 0 0 49,881 21,635 (10,337) 78,627 14,810 0 0 0 14,939 51,282 78,627 0 6,689 0 0 7,847 0 222 (2,046) 0 (2,046) 0 0 0 (2,046) (.14) (.14)
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