U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
or
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-31979
Array BioPharma Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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84-1460811 |
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(State or Other Jurisdiction of |
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(I.R.S. Employer Identification No.) |
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3200 Walnut Street, Boulder, CO |
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80301 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(303) 381-6600 |
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(Registrant’s Telephone Number, Including Area Code) |
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Check 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 ý No o
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
As of February 7, 2003, the registrant had 27,909,066 shares of common stock, par value $.001 per share, outstanding.
ARRAY BIOPHARMA INC.
TABLE OF CONTENTS
2
ARRAY BIOPHARMA INC.
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December
31, |
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June 30, |
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(Unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
22,374,074 |
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$ |
35,385,675 |
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Marketable securities |
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24,209,953 |
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24,212,076 |
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Accounts receivable, net |
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2,240,652 |
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2,491,749 |
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Inventories, net |
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11,066,178 |
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8,469,663 |
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Prepaid expenses, advances and deposits |
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1,036,785 |
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805,244 |
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Total current assets |
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60,927,642 |
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71,364,407 |
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Property, plant and equipment, net |
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40,151,369 |
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35,788,062 |
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Other assets |
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801,095 |
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762,516 |
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Total assets |
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$ |
101,880,106 |
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$ |
107,914,985 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable trade |
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$ |
3,994,957 |
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$ |
6,369,541 |
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Advance payments from customers |
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4,345,727 |
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5,897,467 |
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Accrued compensation and benefits |
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1,010,271 |
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1,102,402 |
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Other current liabilities |
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489,657 |
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644,539 |
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Total current liabilities |
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9,840,612 |
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14,013,949 |
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Stockholders’ equity |
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Preferred stock |
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— |
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— |
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Common stock |
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27,832 |
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27,520 |
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Additional paid-in capital |
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124,182,210 |
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123,274,749 |
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Accumulated deficit |
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(28,689,993 |
) |
(24,581,893 |
) |
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Notes receivable for common stock - related party |
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— |
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(155,625 |
) |
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Accumulated other comprehensive income |
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65,330 |
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33,300 |
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Deferred compensation |
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(3,545,885 |
) |
(4,697,015 |
) |
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Total stockholders’ equity |
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92,039,494 |
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93,901,036 |
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Total liabilities and stockholders’ equity |
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$ |
101,880,106 |
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$ |
107,914,985 |
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See notes to condensed financial statements
3
ARRAY BIOPHARMA INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three
Months Ended |
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Six Months
Ended |
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2002 |
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2001 |
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2002 |
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2001 |
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Revenue |
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Collaboration revenue |
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$ |
9,011,492 |
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$ |
7,941,666 |
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$ |
19,235,422 |
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$ |
14,857,646 |
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License, royalty and milestone revenue |
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490,947 |
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416,647 |
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770,763 |
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692,986 |
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Total revenue |
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9,502,439 |
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8,358,313 |
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20,006,185 |
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15,550,632 |
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Costs and expenses |
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Cost of revenue* |
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5,670,321 |
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5,004,023 |
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11,669,970 |
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9,537,473 |
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Research and development expenses* |
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4,755,005 |
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3,262,430 |
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8,643,591 |
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6,047,477 |
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Selling, general and administrative expenses* |
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2,201,345 |
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1,719,704 |
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4,287,504 |
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3,548,732 |
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Total operating expenses |
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12,626,671 |
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9,986,157 |
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24,601,065 |
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19,133,682 |
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Loss from operations |
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(3,124,232 |
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(1,627,844 |
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(4,594,880 |
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(3,583,050 |
) |
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Interest income |
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230,335 |
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350,946 |
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486,780 |
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812,171 |
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Net loss |
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$ |
(2,893,897 |
) |
$ |
(1,276,898 |
) |
$ |
(4,108,100 |
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$ |
(2,770,879 |
) |
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Basic and diluted net loss per share |
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$ |
(0.10 |
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$ |
(0.05 |
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$ |
(0.15 |
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$ |
(0.12 |
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Number of shares used to compute per share data |
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27,720,183 |
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23,516,378 |
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27,639,234 |
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23,433,623 |
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* Includes compensation related to option grants |
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Cost of revenue |
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$ |
264,902 |
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$ |
270,755 |
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$ |
529,804 |
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$ |
541,510 |
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Research and development expenses |
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176,602 |
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180,503 |
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353,204 |
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361,006 |
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Selling, general and administrative expenses |
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134,061 |
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193,024 |
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268,122 |
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441,615 |
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Total |
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$ |
575,565 |
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$ |
644,282 |
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$ |
1,151,130 |
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$ |
1,344,131 |
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See notes to condensed financial statements
4
ARRAY BIOPHARMA INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months
Ended |
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2002 |
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2001 |
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Operating activities |
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Net loss |
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$ |
(4,108,100 |
) |
$ |
(2,770,879 |
) |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation |
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3,169,491 |
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1,993,400 |
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Compensation related to stock option grants |
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1,151,130 |
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1,344,131 |
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Changes in operating assets and liabilities |
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(6,751,854 |
) |
(50,148 |
) |
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Net cash provided by (used in) operating activities |
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(6,539,333 |
) |
516,504 |
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Investing activities |
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Purchases of property, plant and equipment and long-term assets |
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(7,571,377 |
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(11,967,600 |
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Purchases of marketable securities |
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(31,965,847 |
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(15,238,849 |
) |
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Proceeds from sale or maturity of marketable securities |
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32,000,000 |
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20,781,000 |
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Net cash used in investing activities |
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(7,537,224 |
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(6,425,449 |
) |
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Financing activities |
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Proceeds from exercise of stock options, shares issued under the employee stock purchase plan and repayment of notes receivable |
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1,064,956 |
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619,056 |
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Net cash provided by financing activities |
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1,064,956 |
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619,056 |
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Net decrease in cash and cash equivalents |
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(13,011,601 |
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(5,289,889 |
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Cash and cash equivalents, beginning of period |
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35,385,675 |
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17,961,699 |
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Cash and cash equivalents, end of period* |
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$ |
22,374,074 |
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$ |
12,671,810 |
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* Excludes marketable securities totaling $24,209,953 and $24,152,469 as of December 31, 2002 and 2001, respectively. |
See notes to condensed financial statements
5
ARRAY BIOPHARMA INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended December 31, 2002, are not necessarily indicative of the results that may be expected for the year ending June 30, 2003. For further information, refer to the financial statements and footnotes thereto as of and for the year ended June 30, 2002, included in the Annual Report on Form 10-K of Array BioPharma Inc. (the “Company” or “Array”) filed on September 30, 2002, with the Securities and Exchange Commission.
Note 2: Inventory Components
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December
31, |
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June 30, |
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Fine chemicals |
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$ |
3,002,361 |
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$ |
2,624,354 |
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Lead Generation Libraries, custom libraries and Optimer building blocks |
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8,845,177 |
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6,464,234 |
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Total inventories at cost |
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11,847,538 |
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9,088,588 |
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Less reserves |
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(781,360 |
) |
(618,925 |
) |
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Total inventories, net |
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$ |
11,066,178 |
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$ |
8,469,663 |
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Note 3: Comprehensive Loss
The Company is required to disclose, in addition to net loss, comprehensive income (loss) and its components. A reconciliation of net loss to comprehensive loss is as follows:
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|
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Three
Months Ended |
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Six Months
Ended |
|
||||||||
|
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
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Net loss |
|
$ |
(2,893,897 |
) |
$ |
(1,276,898 |
) |
$ |
(4,108,100 |
) |
$ |
(2,770,879 |
) |
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Change in unrealized gain (loss) on marketable securities |
|
36,200 |
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(101,670 |
) |
32,030 |
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(55,536 |
) |
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Total comprehensive loss |
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$ |
(2,857,697 |
) |
$ |
(1,378,568 |
) |
$ |
(4,076,070 |
) |
$ |
(2,826,415 |
) |
6
Note 4: Preferred and Common Stock
On November 17, 2000, the Company completed an initial public offering of 7,475,000 shares of its common stock, including 975,000 shares for the exercise of the underwriters’ over-allotment option. Concurrent with the initial public offering, all of the 11,501,666 shares of convertible preferred stock outstanding automatically converted into common stock at a one-to-one ratio. The Company received net proceeds of $50.8 million from its initial public offering, net of $5.3 million in expenses and underwriters’ discount relating to the issuance and distribution of the securities.
On February 12, 2002, the Company completed a follow-on public offering of 3,450,000 shares of its common stock, including 450,000 shares for the exercise of the underwriters’ over-allotment option. The Company received net proceeds of $31.8 million from this public offering, net of $2.7 million in expenses and underwriters’ discount relating to the issuance and distribution of the securities.
In September 2002, the Company received $157,183 from a Company founder as full repayment of an outstanding note receivable balance, including accrued interest, payable in connection with the purchase by the founder of shares of the Company’s common stock in May 1998. All notes receivable for common stock have been fully repaid by the Company founders.
Note 5: Revenue Recognition
The Company recognizes revenue from fees under its collaboration agreements on a monthly basis as research is performed. Development and fixed-fee revenue is recognized on a percentage-of-completion basis. Per-compound revenue is recognized as compounds are shipped. Revenue from license fees and up-front fees is recognized over the term of the license or over the expected term of the collaboration agreement. Royalty revenue is recorded when earned. Milestone payments are recognized as revenue based upon the stage of completion of the Company’s performance obligations under the related contract.
In general, contract provisions include predetermined payment schedules or the submission of appropriate billing detail. Any payments received in advance from these agreements are recorded as deferred revenue until earned. The Company reports revenue from collaboration agreements, which include lead generation and lead optimization research, custom synthesis and process research and the development and sale of chemical compounds, as collaboration revenue in its statement of operations. License, royalty and milestone revenue are combined and reported separately from collaboration revenue.
Note 6: Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. The Company has excluded the effects of outstanding stock options from the calculation of diluted net loss per share because all such securities are anti-dilutive for all applicable periods presented.
Note 7: Stockholder Rights Plan
In August 2001, the Company adopted a Stockholder Rights Plan designed to ensure that the Company’s stockholders receive fair and equal treatment in the event of an unsolicited attempt to take control of the Company and to deter coercive or unfair tactics by potential acquirers. The Stockholder Rights Plan imposes a significant penalty upon any person or group that acquires 15% or more of the
7
Company’s outstanding common stock without the approval of the Company’s Board of Directors. Under the Stockholder Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the close of business on August 27, 2001. Each right entitles the holder to purchase 1/100th of a share of Series A Junior Participating Preferred Stock for an exercise price of $70.00 per share. The rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15% or more of the Company’s common stock. In that event, each right will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase upon the payment of the exercise price a number of shares of the Company’s common stock having a value of two times the exercise price. If the Company is not the surviving entity in a merger or stock exchange, or 50% or more of the Company’s assets or earning power are sold in one or more related transactions, each right would entitle the holder thereof to purchase for the exercise price a number of shares of common stock of the acquiring company having a value of two times the exercise price. The rights expire on August 2, 2011.
Note 8: Collaboration Agreement
In September 2002, the Company entered into a drug discovery collaboration agreement with InterMune, Inc. to create small molecule therapeutics for hepatitis. InterMune will fund drug discovery research conducted by the Company based on the number of Company scientists working on the research phase of the agreement. InterMune will be responsible for all development and commercialization. The Company will be entitled to receive milestone payments based on the selection and progress of clinical drug candidates, as well as royalties on net sales of products derived from the collaborative efforts.
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve significant risks and uncertainties, including those discussed below and those described more fully in other reports filed by Array BioPharma with the Securities and Exchange Commission. Because these statements reflect our current expectations concerning future events, our actual results could differ materially from those anticipated in these forward-looking statements. The factors that could cause actual results to differ from our expectations include, but are not limited to, our ability to achieve and maintain profitability, the willingness of the pharmaceutical and biotechnology industries to collaborate with third parties, particularly Array, on their drug discovery activities, our ability to create successful drug candidates, and our ability to attract and retain experienced scientists and management, and the risk factors contained in the Annual Report on Form 10-K filed by Array with the Securities and Exchange Commission on September 30, 2002. We are providing the information in this quarterly report filed on Form 10-Q as of the date of this report. We undertake no duty to update any forward-looking statements to reflect the effect on those statements of subsequent events or changes in our expectations or assumptions.
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included elsewhere in this report.
Array BioPharma is a drug discovery company creating new small molecule drugs through the integration of chemistry, biology and informatics. Our experienced scientists use the Array Discovery Platform, our integrated set of drug discovery technologies, to invent novel small molecule drugs in collaboration with leading pharmaceutical and biotechnology companies and to build our own pipeline of proprietary drug candidates.
We have incurred net losses since inception and expect to incur losses in the near future as we expand our scientific staff, continue to scale-up our operations and increase our investment in our own proprietary drug candidates. To date, we have funded our operations primarily through the issuance of equity securities and revenue from our collaborators. As of December 31, 2002, we had an accumulated deficit of $28.7 million.
We generate revenue by researching, designing, synthesizing and screening chemical compounds for the invention of drug candidates for our collaborators. We report revenue from collaboration agreements, which include lead generation and lead optimization research, custom synthesis and process research and the development and sale of chemical compounds, as collaboration revenue in our statement of operations. License, royalty and milestone revenue are combined and reported separately from collaboration revenue.
Our collaborations include lead generation, lead optimization, custom synthesis and process research and development. We provide lead generation capabilities, including structural biology and screening compound libraries, to invent lead candidates for our collaborators and lead optimization capabilities to refine and optimize potential drug candidates. We also design, synthesize and provide libraries of chemical compounds or single compounds to our collaborators on a custom basis, with either an exclusive or non-exclusive license to use the compounds. We assist collaborators in process research and development, which involves developing the processes to make, and synthesizing for delivery, the larger quantities of chemical compounds required for clinical testing. We have completed construction of a
9
manufacturing facility, which will allow us to produce chemical compounds that meet current good manufacturing practices (cGMP) requirements for Phase I clinical testing. We recently completed validation of this capability in accordance with FDA regulations and anticipate being able to initiate our first cGMP manufacturing campaign during fiscal year 2003.
We license our Lead Generation Libraries, which are a collection of structurally related chemical compounds that may have the potential of becoming drug candidates, on a non-exclusive basis to our collaborators for internal research purposes. We retain all other rights to the compounds, which permits us to license the same compounds to other customers. Some of our agreements allow our collaborators to obtain exclusive rights to commercialize particular compounds upon the payment of additional fees. We sell our Optimer building blocks, which are the starting materials used to create more complex chemical compounds in the drug discovery process, on a per-compound basis without any restrictions on use. We are also paid under our collaboration agreements based on the number of full-time equivalent employees contractually assigned to a project, plus certain expenses. Custom collections of chemical compounds we create and custom chemical syntheses we perform under our collaboration agreements are typically charged on a per-compound basis, plus a charge for research and development services. In addition, nine of our collaboration agreements provide for additional payments upon the achievement of certain drug development milestones, and nine of our collaboration agreements provide for royalty payments based on sales of products created as a result of these collaborations. Three of our collaboration agreements provide for an up-front license or technology access fee, and one of our collaboration agreements currently generates a low level of royalty payments. In general, our collaborators may terminate their collaboration agreement with us on 30 to 90 days’ prior notice. During November 2001, we earned our first milestone payment from ICOS Corporation with the commencement of a Phase I clinical trial on a jointly identified drug candidate.
We have increased the number of our collaboration agreements, which has diversified our revenue base. During the six months ended December 31, 2002, ICOS Corporation, Merck & Co., Inc., Amgen Inc., and Eli Lilly and Company accounted for 18%, 17%, 11% and 11%, respectively, of our total revenue. During fiscal year 2002, ICOS, Pfizer Inc, Merck and Eli Lilly accounted for 17%, 16%, 15% and 14%, respectively, of our total revenue.
We recognize revenue from fees under our collaboration agreements on a monthly basis as research is performed. Development and fixed-fee revenue is recognized on a percentage-of-completion basis. Per-compound revenue is recognized as compounds are shipped. Revenue from license fees and up-front fees is recognized over the term of the license or over the expected term of the collaboration agreement. Royalty revenue is recorded when earned. Milestone payments are recognized as revenue based upon the stage of completion of our performance obligations under the related contract.
Cost of revenue consists mainly of compensation, associated fringe benefits and other collaboration-related costs, including recruiting and relocation, fine chemicals, supplies, small tools, facilities, depreciation and other direct and indirect chemical handling and laboratory support costs, excluding any costs related to research and development.
Research and development expenses consist of the same type of scientific expenditures that comprise cost of revenue, except that the expenses are related to the development of our early-stage intellectual property and compounds where we have not yet proven technological feasibility. Costs associated with activities where technological feasibility has been proven are charged directly to cost of revenue.
Selling, general and administrative expenses consist mainly of compensation and associated fringe benefits and other management, business development, accounting, information technology and
10
administration costs, including recruiting and relocation, consulting and professional services, travel and meals, advertising, sales commissions, facilities, depreciation and other office expenses.
We currently license or sell our compounds and enter into collaborations directly with pharmaceutical and biotechnology companies through opportunities identified by our senior management, scientists and customer referrals. In addition, we license or sell our compounds and collaborations in Japan through an agent. International revenue represented 9% and 12% of our total revenue during fiscal years 2001 and 2002, respectively, and 12% for the first six months of fiscal year 2003. During fiscal year 2001, as well as the first six months of fiscal year 2003, the majority of international revenue was attributed to Japanese sales. During fiscal year 2002, the majority of international revenue was attributed to both European and Japanese sales. All of our collaboration agreements and purchase orders are denominated in United States dollars.
We plan to continue to grow revenue with our existing collaborators and realize new revenue streams through collaborations with a diversified group of pharmaceutical and biotechnology companies. In addition, we expect to enter into additional agreements that allow us to participate in the success of potential drug candidates with our collaborators through milestone and/or royalty payments. We also expect to enter into agreements to participate in the success of our proprietary potential drug candidates through a combination of licensing fees, milestone and/or royalty payments. We expect our growth to require significant ongoing investment in facilities, scientific personnel and business development resources.
During fiscal years 2000 and 2001, we recorded deferred stock compensation totaling $12.9 million. We recorded compensation expense related to stock option grants of $1.1 million for fiscal year 2000, $4.7 million for fiscal year 2001, $2.4 million for fiscal year 2002 and $1.2 million for the six months ended December 31, 2002. The compensation expense related to stock option grants is charged to cost of revenue, research and development expenses, and selling, general and administrative expenses, based on the functional responsibility of the associated employee. As of December 31, 2002, we had a total of $3.5 million of remaining deferred stock compensation to be amortized. We expect to amortize deferred stock compensation recorded through December 31, 2002, as follows: $1.1 million during the remainder of fiscal year 2003; $2.2 million in fiscal year 2004; and approximately $183,000 in fiscal year 2005.
Six Months Ended December 31, 2002 and 2001
Revenue. Total revenue increased to $20.0 million for the six months ended December 31, 2002, up 29% from $15.6 million in the same period of the prior year. This increase was primarily the result of $5.1 million of additional revenue generated from our lead optimization collaborations with ICOS, Vertex Pharmaceuticals Incorporated, Takeda Chemical Industries, Ltd., Japan Tobacco Inc., Syrrx, Inc. and InterMune, Inc., and our custom library collaboration with Merck. In addition, revenue from subscriptions and sales of chemical compounds from our Array Discovery Platform decreased by approximately $703,000 for the six months ended December 31, 2002, compared to the same period in the prior year. This decrease is attributable to the sale of $1.7 million of chemical compounds to a single major pharmaceutical company during the six-month period ended December 31, 2001 compared to approximately $45,000 to this same company for the six months ended December 31, 2002.
Cost of revenue. Cost of revenue increased to $11.7 million for the six months ended
11
December 31, 2002, from $9.5 million in the same period of the prior year. This increase reflects the increased cost to support our revenue growth over the same period. The cost increase was primarily attributed to additional scientific staff, associated salaries and benefits, and the expenditures associated with equipping and commencing operations in our new and expanded facilities. Cost of revenue was 58% of revenue for the six months ended December 31, 2002, compared to 61% in the same period of the prior year. This decreased cost of revenue as a percentage of revenue for the six months ended December 31, 2002 was due primarily to relatively stable recruiting and relocation and other fixed costs.
Research and development expenses. Research and development expenses increased to $8.6 million for the six months ended December 31, 2002, from $6.0 million in the same period of the prior year. The increase in research and development expenses was primarily attributed to expansion of our own proprietary drug discovery efforts. These expanded research efforts required the recruitment and relocation of additional scientific staff and associated salaries and benefits, and the expenditures associated with equipping and commencing operations in our new and expanded facilities. Research and development expenses related to our Lead Generation Libraries, Optimer building blocks and custom library collaborations increased slightly for the six months ended December 31, 2002, compared to the same period in the prior year.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $4.3 million for the six months ended December 31, 2002, compared to $3.5 million in the same period of the prior year. This increase was primarily attributed to increased staffing levels and expanded management.
Compensation related to stock option grants. Compensation expense related to certain stock option grants was $1.2 million for the six months ended December 31, 2002, compared to $1.3 million in the same period of the prior year. This noncash charge is recognized on a straight-line basis over the vesting periods of the related options, which are generally four years, except for options with performance-based vesting provisions.
Interest income. Interest income decreased by approximately $325,000, to approximately $487,000, during the six months ended December 31, 2002, over the same period of the prior year primarily due to lower interest rates earned on investments, which more than offset our increased average cash balance.
We have historically funded our operations through revenue from our collaborations and the issuance of equity securities. As of December 31, 2002, cash, cash equivalents and marketable securities totaled $46.6 million compared to $59.6 million at June 30, 2002. Net cash used in operating activities was $6.5 million for the six months ended December 31, 2002, compared to net cash provided by operating activities of approximately $517,000 for the same period in 2001. During the first six months of fiscal year 2003, our net loss of $4.1 million was reduced by noncash charges of $4.3 million, and our working capital increased by $6.8 million to account for the majority of net cash used in operations. Working capital rose due to increases in inventory, while accounts payable and advance payments from customers declined. The increase in these operating assets reflects the continued expansion of our business during the current fiscal year.
During the six months ended December 31, 2002, we invested $7.6 million in capital equipment and leasehold improvements associated with equipping and commencing operations in our new and expanded facilities. Financing activities provided approximately $908,000 of cash from the exercise of
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stock options under our stock option plan and the issuance of stock under our employee stock purchase plan. Approximately $157,000 was received from one of Array’s founders as full repayment of an outstanding note receivable balance, including accrued interest.
Our future capital requirements will depend on a number of factors, including the rate at which we grow our business and our investment in proprietary research activities, the ability of our current and future collaborators to fund outside research and development activities, our success in increasing sales of both existing and new products and collaborations, expenses associated with unforeseen litigation, regulatory changes, competition, technological developments, general economic conditions and potential future merger and acquisition activity. We believe that our existing cash, cash equivalents and marketable securities and anticipated cash flow from existing collaboration agreements will be sufficient to support our current operating plan for at least the next 12 months. This estimate of our future capital requirements is a forward-looking statement that is based on assumptions that may prove to be wrong and that involve substantial risks and uncertainties. Our actual future capital requirements could vary as a result of a number of factors, including:
• the progress of our research activities;
• the number and scope of our research programs;
• the progress of our preclinical and potential clinical development activities;
• the progress of the development efforts of our collaborators;
• our ability to establish and maintain current and new collaboration agreements;
• the ability of our collaborators to fund research and development programs;
• the costs involved in enforcing patent claims and other intellectual property rights;
• the costs and timing of regulatory approvals; and
• the costs of establishing business development and distribution capabilities.
Future capital requirements will also depend upon the extent to which we acquire or invest in other businesses, products and technologies. Until we can generate sufficient levels of cash from our operations to fund the planned investment in our capital equipment and leasehold improvements, which we do not expect to achieve in the foreseeable future, we expect to continue to utilize our existing cash and marketable securities resources that were primarily generated from the proceeds of our equity offerings. In addition, we may finance future cash needs through the sale of equity securities, strategic collaboration agreements and debt financing. We cannot assure that we will be successful in obtaining new or in retaining existing collaboration agreements, or in receiving milestone and/or royalty payments under those agreements, that our existing cash and marketable securities resources will be adequate or that additional financing will be available when needed or that, if available, this financing will be obtained on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose, or may adversely affect our ability to operate as an ongoing concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result.
There has been no material change in the obligations and commitments of Array during the first six months of fiscal year 2003.
Our obligation under the March 2002 drug discovery collaboration agreement with Aptus Genomics to make an investment in Aptus preferred stock of up to $1.5 million terminated as of December 31, 2002 because certain conditions to our investment were not met.
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At December 31, 2002, the Company had restricted cash of approximately $970,000 as a compensating balance to support outstanding letters of credit that were issued during the prior fiscal year in relation to the Company’s facilities leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Short-term investments. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since a significant portion of our investments are and will be in short-term marketable securities. Due to the nature and maturity of our short-term investments, we have concluded that there is no material market risk exposure.
Foreign currency rate fluctuations. All of our collaboration agreements and purchase orders are denominated in United States dollars. Therefore, we are not exposed to changes in foreign currency exchange rates.
Inflation. We do not believe that inflation has had a material impact on our business or operating results during the periods presented.
Item 4. Controls and Procedures.
Within 90 days prior to the date of this report, we evaluated, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and other senior management personnel, the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that, as of the date of the evaluation, Array’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file with the SEC under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.
Subsequent to the date management conducted its evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls. There were no significant deficiencies or material weaknesses identified in the evaluation; therefore, no corrective actions were taken.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company’s stockholders was held on October 31, 2002. At that meeting, five proposals were submitted to a vote of the Company’s stockholders. Proposal 1 was a proposal to elect three Class II directors to serve a three-year term expiring on the date of the 2005 annual meeting of stockholders. The three nominees for Class II director were Robert E. Conway, Kyle Lefkoff and Marvin H. Caruthers, Ph.D. Proposal 2 was a proposal to amend the Amended and Restated Array BioPharma Inc. Stock Option and Incentive Plan increasing the number of shares of common stock reserved for grant thereunder by 2,750,000 shares. Proposal 3 was a proposal to amend the Array
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BioPharma Inc. Employee Stock Purchase Plan (the “ESPP”) increasing the number of shares of common stock reserved for issuance thereunder by 400,000 shares. Proposal 4 was a proposal to amend the ESPP removing an eligibility requirement prohibiting employees whose customary employment is less than 20 hours per week from participating in the ESPP. Proposal 5 was a proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending June 30, 2003. For further information regarding the annual meeting, please see the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 1, 2002. The stockholders approved all proposals as follows:
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Number of Votes |
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Proposal |
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For |
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Against |
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Abstain/ |
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Not Voted |
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Proposal 1 — Election of Class II directors |
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Robert E. Conway |
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21,425,576 |
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— |
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3,347,900 |
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— |
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Kyle Lefkoff |
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24,210,309 |
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— |
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563,167 |
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— |
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Marvin H. Caruthers, Ph.D. |
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24,471,924 |
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— |
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301,552 |
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— |
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Proposal 2 — Amendment to the Amended and Restated Stock Option and Incentive Plan |
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13,798,525 |
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6,851,083 |
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17,249 |
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4,106,619 |
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Proposal 3 — Amendment to the Employee Stock Purchase Plan increasing the number of shares |
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20,291,026 |
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365,791 |
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10,040 |
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4,106,619 |
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Proposal 4 — Amendment to the Employee Stock Purchase Plan removing an eligibility requirement |
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24,236,939 |
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258,036 |
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278,501 |
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— |
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Proposal 5 — Ratification of the appointment of Ernst & Young LLP |
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24,573,542 |
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189,098 |
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10,836 |
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— |
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K during the second quarter of Fiscal 2003
The Company filed a Current Report on Form 8-K dated November 13, 2002 to file the certifications required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, related to the Company’s Annual Report on Form 10-K.
The Company filed a Current Report on Form 8-K dated December 19, 2002 to file a press release announcing adjusted growth expectations for fiscal year 2003.
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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, in the City of Boulder, State of Colorado.
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ARRAY BIOPHARMA INC. |
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Dated: |
February 13, 2003 |
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By: |
/s/ Robert E. Conway |
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Robert E. Conway |
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Chief Executive Officer |
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Dated: |
February 13, 2003 |
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By: |
/s/ R. Michael Carruthers |
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R. Michael Carruthers |
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Chief Financial Officer and Secretary |
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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CERTIFICATIONS
I, Robert E. Conway, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Array BioPharma Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: February 13, 2003 |
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/s/ |
Robert E. Conway |
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Robert E. Conway |
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Chief Executive Officer |
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I, R. Michael Carruthers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Array BioPharma Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: February 13, 2003 |
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/s/ |
R. Michael Carruthers |
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R. Michael Carruthers |
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Chief Financial Officer |
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