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, 2003
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 January 29, 2004, the registrant had 28,561,964 shares of common stock, par value $.001 per share, outstanding.
ARRAY BIOPHARMA INC.
TABLE OF CONTENTS
2
Item 1. Financial Statements
ARRAY BIOPHARMA INC.
CONDENSED BALANCE SHEETS
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December 31, |
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June 30, |
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(Unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
28,714,208 |
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$ |
23,071,992 |
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Marketable securities |
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6,190,876 |
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11,058,458 |
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Accounts receivable, net |
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7,699,493 |
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1,643,746 |
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Inventories, net |
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9,313,883 |
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9,064,548 |
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Prepaid expenses, advances and deposits |
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631,845 |
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730,679 |
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Total current assets |
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52,550,305 |
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45,569,423 |
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Property, plant and equipment |
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54,892,174 |
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53,938,905 |
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Less accumulated depreciation |
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(19,775,302 |
) |
(15,758,221 |
) |
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Property, plant and equipment, net |
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35,116,872 |
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38,180,684 |
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Other assets |
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80,246 |
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80,246 |
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Total assets |
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$ |
87,747,423 |
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$ |
83,830,353 |
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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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$ |
2,085,494 |
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$ |
2,522,871 |
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Advance payments from customers |
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17,147,359 |
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2,102,346 |
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Accrued compensation and benefits |
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954,591 |
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1,054,779 |
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Other current liabilities |
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522,341 |
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436,840 |
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Total current liabilities |
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20,709,785 |
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6,116,836 |
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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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28,516 |
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28,221 |
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Additional paid-in capital |
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124,512,388 |
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124,050,659 |
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Accumulated deficit |
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(56,353,894 |
) |
(44,155,945 |
) |
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Accumulated other comprehensive income |
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3,640 |
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21,856 |
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Deferred compensation |
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(1,153,012 |
) |
(2,231,274 |
) |
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Total stockholders’ equity |
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67,037,638 |
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77,713,517 |
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Total liabilities and stockholders’ equity |
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$ |
87,747,423 |
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$ |
83,830,353 |
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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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2003 |
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2002 |
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2003 |
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2002 |
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Revenue |
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Collaboration revenue |
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$ |
6,907,414 |
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$ |
9,011,492 |
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$ |
13,917,785 |
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$ |
19,235,422 |
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License, royalty and milestone revenue |
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687,499 |
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490,947 |
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872,600 |
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770,763 |
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Total revenue |
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7,594,913 |
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9,502,439 |
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14,790,385 |
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20,006,185 |
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Costs and expenses |
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Cost of revenue* |
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5,009,306 |
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5,670,321 |
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10,031,047 |
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11,669,970 |
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Research and development expenses: |
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for collaborations* |
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2,220,166 |
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2,343,706 |
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4,450,863 |
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4,182,505 |
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for proprietary drug discovery |
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4,565,158 |
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2,411,299 |
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8,597,414 |
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4,461,086 |
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Selling, general and administrative expenses* |
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2,138,577 |
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2,201,345 |
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4,078,342 |
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4,287,504 |
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Total operating expenses |
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13,933,207 |
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12,626,671 |
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27,157,666 |
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24,601,065 |
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Loss from operations |
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(6,338,294 |
) |
(3,124,232 |
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(12,367,281 |
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(4,594,880 |
) |
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Interest income |
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77,084 |
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230,335 |
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169,332 |
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486,780 |
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Net loss |
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$ |
(6,261,210 |
) |
$ |
(2,893,897 |
) |
$ |
(12,197,949 |
) |
$ |
(4,108,100 |
) |
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Basic and diluted net loss per share |
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$ |
(0.22 |
) |
$ |
(0.10 |
) |
$ |
(0.43 |
) |
$ |
(0.15 |
) |
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Number of shares used to compute per share data |
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28,388,261 |
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27,720,183 |
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28,324,384 |
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27,639,234 |
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* Includes compensation related to option grants |
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Cost of revenue |
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$ |
245,793 |
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$ |
264,902 |
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$ |
491,584 |
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$ |
529,804 |
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Research and development for collaborations |
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163,863 |
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176,602 |
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327,724 |
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353,204 |
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||||
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Selling, general and administrative expenses |
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129,477 |
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134,061 |
|
258,954 |
|
268,122 |
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Total |
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$ |
539,133 |
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$ |
575,565 |
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$ |
1,078,262 |
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$ |
1,151,130 |
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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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2003 |
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2002 |
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Operating activities |
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Net loss |
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$ |
(12,197,949 |
) |
$ |
(4,108,100 |
) |
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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|
|
|
|
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Depreciation |
|
4,026,489 |
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3,169,491 |
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||
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Compensation related to stock option grants |
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1,078,262 |
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1,151,130 |
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Changes in operating assets and liabilities |
|
8,386,701 |
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(6,751,854 |
) |
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Net cash provided by (used in) operating activities |
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1,293,503 |
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(6,539,333 |
) |
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Investing activities |
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Purchases of property, plant and equipment and long-term assets |
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(962,677 |
) |
(7,571,377 |
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Purchases of marketable securities |
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(6,175,634 |
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(31,965,847 |
) |
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Proceeds from sale or maturity of marketable securities |
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11,025,000 |
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32,000,000 |
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Net cash provided by (used in) investing activities |
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3,886,689 |
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(7,537,224 |
) |
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Financing activities |
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Proceeds from repayment of notes receivable for common stock |
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— |
|
157,183 |
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Proceeds
from exercise of stock options and shares issued |
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462,024 |
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907,773 |
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Net cash provided by financing activities |
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462,024 |
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1,064,956 |
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Net increase (decrease) in cash and cash equivalents |
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5,642,216 |
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(13,011,601 |
) |
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Cash and cash equivalents, beginning of period |
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23,071,992 |
|
35,385,675 |
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Cash and cash equivalents, end of period* |
|
$ |
28,714,208 |
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$ |
22,374,074 |
|
* Excludes marketable securities totaling $6,190,876 and $24,209,953 as of December 31, 2003 and 2002, respectively.
See notes to condensed financial statements
5
ARRAY BIOPHARMA INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three- and six-month month periods ended December 31, 2003, are not necessarily indicative of the results that may be expected for the year ending June 30, 2004. For further information, refer to the financial statements and footnotes thereto as of and for the year ended June 30, 2003, included in the Annual Report on Form 10-K of Array BioPharma Inc. (the “Company” or “Array”) filed on September 26, 2003, with the Securities and Exchange Commission.
Note 2: Inventory Components
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December 31, |
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June 30, |
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Fine chemicals |
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$ |
3,853,656 |
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$ |
3,463,230 |
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Lead Generation Libraries, custom libraries and Optimer building blocks |
|
10,087,354 |
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11,252,962 |
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Total inventories at cost |
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13,941,010 |
|
14,716,192 |
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||
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Less reserves |
|
(4,627,127 |
) |
(5,651,644 |
) |
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Total inventories, net |
|
$ |
9,313,883 |
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$ |
9,064,548 |
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Note 3: Comprehensive Loss
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 |
|
||||||||
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|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
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Net loss |
|
$ |
(6,261,210 |
) |
$ |
(2,893,897 |
) |
$ |
(12,197,949 |
) |
$ |
(4,108,100 |
) |
|
Change in unrealized gain (loss) on marketable securities |
|
(440 |
) |
36,200 |
|
(18,216 |
) |
32,030 |
|
||||
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Total comprehensive loss |
|
$ |
(6,261,650 |
) |
$ |
(2,857,697 |
) |
$ |
(12,216,165 |
) |
$ |
(4,076,070 |
) |
6
Note 4: Common Stock
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’s founders.
Note 5: Revenue Recognition
The Company recognizes revenue from fees under its collaboration agreements on a monthly basis as work 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 expected period of the related research program. Royalty revenue is recorded when earned. Portions of milestone payments are recognized as revenue when the Company has met the contracted performance criterion of the related milestone, while the balance of the payment is recognized ratably over the remainder of the research program. Revenue recognition related to license fees, up-front payments and milestone payments could be accelerated in the event of early termination of programs, or extended over longer periods in the event of extensions to programs.
In general, contract provisions include predetermined payment schedules or the submission of appropriate billing detail. Payments received in advance of performance are recorded as advanced payments from customers until the revenue is 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. 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: Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements under the provisions of Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense is recognized when stock options are granted with exercise prices equal to or greater than market value on the date of grant.
The Company adopted the disclosure requirements of FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends the disclosure provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and Accounting Principle Board Opinion No. 28, Interim Financial Reporting, to require disclosure of the method of accounting used for stock-based compensation and the effects of this method on reported net income and earnings per share for annual and interim financial statements. The following table illustrates the effect on net loss and net loss per share assuming the estimated fair value of the options granted is amortized to expense over the option-vesting period as required by SFAS 123.
7
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss applicable to common stockholders, as reported |
|
$ |
(6,261,210 |
) |
$ |
(2,893,897 |
) |
$ |
(12,197,949 |
) |
$ |
(4,108,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Add:
Stock-based employee compensation |
|
539,133 |
|
575,565 |
|
1,078,262 |
|
1,151,130 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Less:
Total stock-based employee |
|
(1,941,819 |
) |
(2,215,740 |
) |
(3,847,875 |
) |
(4,410,598 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma net loss applicable to common stockholders |
|
$ |
(7,663,896 |
) |
$ |
(4,534,072 |
) |
$ |
(14,967,562 |
) |
$ |
(7,367,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic and diluted - as reported |
|
$ |
(0.22 |
) |
$ |
(0.10 |
) |
$ |
(0.43 |
) |
$ |
(0.15 |
) |
|
Basic and diluted - pro forma |
|
$ |
(0.27 |
) |
$ |
(0.16 |
) |
$ |
(0.53 |
) |
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Number of shares used to compute per share data |
|
28,388,261 |
|
27,720,183 |
|
28,324,384 |
|
27,639,234 |
|
||||
Note 8: Financial Guarantees
At December 31, 2003 and June 30, 2003, the Company included in cash and cash equivalents restricted cash of $1.3 million and $1.1 million, respectively, as compensating balances to support outstanding standby letters of credit. The standby letters of credit were issued during the fiscal years of 2003 and 2002 to secure the Company’s obligations under its facilities leases.
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, including statements about our expectations related to realizing new revenue streams and obtaining future collaboration agreements that include milestone and/or royalty payments, the success of our internal proprietary drug discovery activities and our future headcount requirements. These statements 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 extent to which the pharmaceutical and biotechnology industries are willing to collaborate with and fund third parties on their drug discovery activities, the ability of our collaborators and of Array to meet drug discovery objectives tied to milestones and royalties, our ability to continue to fund and successfully progress internal research efforts and to create effective, commercially viable drugs, 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 26, 2003. 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 creating the next generation of orally active drugs by integrating the latest advances in chemistry, biology and informatics. Our drug development pipeline is focused primarily in cancer and inflammatory disease and includes many promising small molecule drugs that affect disease pathways with well-validated targets. Array also collaborates with leading pharmaceutical and biotechnology companies to invent and optimize drug candidates across a broad range of therapeutic areas.
We have incurred net losses since inception and expect to incur losses in the near future as we continue to expand our proprietary drug discovery programs. To date, we have funded our operations primarily through the issuance of equity securities and revenue from our collaborators. As of December 31, 2003, we had an accumulated deficit of $56.4 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 services, 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 services, including structural biology and screening compound libraries, to invent lead candidates for our collaborators and lead optimization services to refine and optimize potential drug candidates. We also design, synthesize and provide
9
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 preclinical and clinical testing. We also produce chemical compounds in our cGMP manufacturing facility that meet cGMP requirements for Phase I clinical testing. In fiscal 2003, we first used this facility to produce bulk material for clinical testing of ARRY-142886, our most advanced proprietary development program.
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 Optimerâ 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, eight of our current, and six of our past, collaboration agreements provide for additional payments upon the achievement of certain drug development milestones, and seven of our collaboration agreements provide for royalty payments based on sales of products created as a result of these collaborations. Two of our current, and three of our past, collaboration agreements provided an up-front license or technology access fee. In general, our collaborators may terminate their collaboration agreement with us on 30 to 90 days’ prior notice. We earned our first milestone payment from ICOS Corporation in November 2001 with the commencement of a Phase I clinical trial on a jointly identified drug candidate. In August 2003, we received our first milestone payment from a major Japanese pharmaceutical company for Array’s successes in creating a series of small molecule drug leads against a proprietary target.
Although we have increased the number of our collaboration agreements, our top 20 collaborators contributed over 95% of our total revenue for the first six months of fiscal 2004, and our current top two collaborators, Merck & Co., Inc. and Eli Lilly and Company, accounted for 20% and 14%, respectively, of our total revenue. Future revenue from our newly announced collaborations with AstraZeneca AB and Genentech, Inc., is expected to position these companies as our top two collaborators for fiscal year 2004. During fiscal year 2003, ICOS Corporation, Merck and Eli Lilly accounted for 21%, 15% and 12%, respectively, of our total revenue.
We recognize revenue from fees under our collaboration agreements on a monthly basis as work 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 expected period of the related research program. Royalty revenue is recorded when earned. Portions of milestone payments are recognized as revenue when we have met the contracted performance criterion of the related milestone, while the balance of the payment is recognized ratably over the remainder of the research program. Revenue recognition related to license fees, up-front payments and milestone payments could be accelerated in the event of early termination of programs, or extended over longer periods in the event of extensions to programs.
In general, contract provisions include predetermined payment schedules or the submission of appropriate billing detail. Payments received in advance of performance are recorded as advanced payments from customers until the revenue is earned. We report revenue from collaboration agreements, which include lead generation and lead optimization research, custom synthesis and process research and
10
the development and sale of chemical compounds, as collaboration revenue. License, royalty and milestone revenue are combined and reported separately from collaboration revenue.
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. We review inventories periodically and reduce items considered to be slow moving or obsolete to estimated net realizable value through an appropriate reserve.
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 administration costs, including recruiting and relocation, consulting and professional services, travel and meals, advertising, sales commissions, facilities, depreciation and other office expenses. In addition, termination related costs of approximately $541,000 associated with a reduction in workforce completed during the prior fiscal year in March 2003 were recorded as selling, general and administrative expenses.
We currently license or sell our compounds and enter into collaborations directly with pharmaceutical and biotechnology companies through opportunities identified by our business development group, senior management, scientists and customer referrals. In addition, we license or sell our compounds and collaborations in Japan through an agent. International revenue represented 26% of our total revenue during the first six months of fiscal year 2004, up from 14% for the full fiscal year of 2003. Our international revenue is attributed to European, Canadian and Japanese collaborations. All of our collaboration agreements and purchase orders are denominated in United States dollars.
We plan to continue to increase our investment in our proprietary research programs and to seek additional collaborations in which we participate in the success of our proprietary potential drug candidates through a combination of licensing fees, payments for continued research and down-stream payments that include milestone and/or royalty payments. We also intend 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 recorded approximately $539,000 and $1.1 million of stock compensation expense for the three- and six-month periods ended December 31, 2003. This stock compensation is related to the vesting of stock options that were granted prior to our initial public offering in November 2000. The stock compensation expense 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, 2003, we had a total of $1.2 million of deferred stock compensation remaining to be amortized. We expect to amortize this deferred stock compensation through March 31, 2005, as follows: $1.0 million during the remainder of fiscal year 2004 and approximately $200,000 in fiscal year 2005.
11
Three and Six Months Ended December 31, 2003 and 2002
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
(in thousands) |
|
(in thousands) |
|
||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
||||
|
Collaboration revenue |
|
$ |
6,907 |
|
$ |
9,011 |
|
$ |
13,918 |
|
$ |
19,235 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
License, royalty and milestone revenue |
|
687 |
|
491 |
|
873 |
|
771 |
|
||||
|
Total revenue |
|
$ |
7,594 |
|
$ |
9,502 |
|
$ |
14,791 |
|
$ |
20,006 |
|
Revenue. Revenue from collaboration agreements for the three and six months ended December 31, 2003 decreased by $2.8 million and $4.8 million, respectively, compared with the same periods of the prior year primarily due to the expiration of four significant lead optimization programs during the last quarter of fiscal 2003 and the beginning of fiscal 2004. In addition, revenue from subscriptions and sales of chemical compounds from our Array Discovery Platform decreased by approximately $331,000 and $1.2 million for the three- and six-month periods ended December 31, 2003, respectively, compared with the same periods of the prior year. Partially offsetting these decreases were collaboration revenue generated from our new agreements with InterMune, Inc. and GenPath Pharmaceuticals, Inc., and our newly announced collaborations with AstraZeneca AB and Genentech, Inc.
During December 2003, we signed agreements containing up-front license fees related to the AstraZeneca and Genentech collaborations for a combined amount of $16.0 million. In December, we recorded approximately $667,000 in license fee revenue while the remaining $15.3 million was recorded as advance payments from customers. We anticipate license fee revenue to increase in future periods as three full months of the remaining license fee revenue is recognized each quarterly period through the expected term of each related research program.
Cost of revenue. Cost of revenue decreased by $0.7 million and $1.7 million for the three and six months ended December 31, 2003, respectively, primarily due to the decrease in lead optimization collaboration revenue over these same periods. Cost of revenue increased to 66% of revenue for the three months ended December 31, 2003, from 60% in the same period of the prior year. Cost of revenue increased to 68% of revenue for the six months ended December 31, 2003, from 58% in the same period of the prior year. The increased cost of revenue as a percentage of revenue for the three and six months ended December 31, 2003, was due primarily to a lower revenue base against which to apply certain fixed costs as well as lower revenue being generated from subscriptions and sales of chemical compounds from our Array Discovery Platform.
12
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
(in thousands) |
|
(in thousands) |
|
||||||||
|
Research and development expenses: |
|
|
|
|
|
|
|
|
|
||||
|
for collaborations |
|
$ |
2,220 |
|
$ |
2,344 |
|
$ |
4,451 |
|
$ |
4,183 |
|
|
for proprietary drug discovery |
|
4,565 |
|
2,411 |
|
8,597 |
|
4,461 |
|
||||
|
Total research and development |
|
$ |
6,785 |
|
$ |
4,755 |
|
$ |
13,048 |
|
$ |
8,644 |
|
Research and development expenses. The increases in research and development expenses of 43% and 51% for the three and six months ended December 31, 2003, respectively, over the same periods of the prior year were directly the result of our expanded proprietary drug discovery efforts. These expanded research efforts required additional scientific staff and associated salaries and benefits, and included increased costs associated with pharmacology and drug metabolism testing. We plan to continue increasing our research and development efforts related to the discovery of additional intellectual property, which will result in increased research and development expenses in future periods.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $2.1 million for the three months ended December 31, 2003, compared with $2.2 million in the same period of the prior year. For the six-month period ended December 31, 2003, selling, general and administrative expenses decreased to $4.1 million from $4.3 million in the same period of the prior year. These decreases were attributed to cost savings associated with the elimination of certain administrative positions affected by our March 2003 reduction in workforce.
Compensation related to stock option grants. Compensation expense related to certain stock options that were granted prior to our November 2000 initial public offering, for the three- and six-month periods ended December 31, 2003 were approximately $539,000 and $1.1 million, respectively. During the comparable three- and six-month periods of the prior year this expense was approximately $576,000 and $1.1 million, respectively. 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 to approximately $77,000 and $169,000 for the three and six months ended December 31, 2003, respectively, from approximately $230,000 and $487,000, respectively, in the same periods of the prior year primarily due to lower investment interest rates earned on a lower average cash balance.
We have historically funded our operations through revenue from our collaborations and the issuance of equity securities. As of December 31, 2003, cash, cash equivalents and marketable securities totaled $34.9 million compared with $34.1 million at June 30, 2003. Net cash provided by operating activities was $1.3 million for the six months ended December 31, 2003, compared with net cash used of $6.5 million for the same period in fiscal 2003. During the first six months of fiscal year 2004, our net loss of $12.2 million was reduced by noncash charges of $5.1 million associated with depreciation and compensation related to stock option grants, and our working capital, excluding cash and marketable securities, decreased by $8.4 million. The decrease in working capital was primarily related to the $15.0 million increase in advance payments from customers, partially offset by the $6.1 million increase in
13
accounts receivable. These changes were largely the result of our executing agreements during the current quarter to receive up-front license fees from two collaborators for a combined amount of $16.0 million. As of December 31, 2003, $10.0 million of these up-front license fees had been received and the outstanding $6.0 million remained in accounts receivable. We recognized approximately $667,000 of these up-front license fees as revenue during December 2003, while the remaining $15.3 million was recorded as advance payments from customers.
During the six months ended December 31, 2003, we invested approximately $963,000 in capital equipment and leasehold improvements primarily associated with equipping and commencing operations in our new pharmacology and drug metabolism facilities. Financing activities provided approximately $462,000 of cash from the exercise of stock options under our stock option plan and the issuance of stock under our employee stock purchase plan.
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;
• our ability to enter into agreements to co-develop our proprietary drug candidates;
• 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, 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, in securing agreements for the co-development of our proprietary drug candidates, 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.
14
There has been no material change in our obligations and commitments during the first six months of fiscal year 2004.
At December 31, 2003, we had restricted cash of $1.3 million as a compensating balance to support outstanding letters of credit we issued during prior fiscal years to secure our obligations under our facilities leases.
We believe the policies identified below are critical to the understanding of our results of operations and require our management to make significant judgments in preparing the financial statements included in this report. Management has made estimates and assumptions based on these policies. We do not believe that there is a great likelihood that materially different amounts would be reported if different assumptions were used. However, the application of these policies involves judgments and assumptions as to future events and, as a result, actual results could differ. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
Revenue Recognition
We believe our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. We follow the guidance of Staff Accounting Bulletin No. 101, which requires that a series of criteria be met in order to recognize revenue related to the performance of services or the shipment of products. If these criteria are not met, the associated revenue is deferred until the criteria are met. We recognize revenue when (a) persuasive evidence of an arrangement exists, (b) products are delivered or services are rendered, (c) the sales price is fixed or determinable and (d) collectibility is assured.
We recognize revenue from fees under our collaboration agreements on a monthly basis as work 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 expected period of the related research program. Royalty revenue is recorded when earned. Portions of milestone payments are recognized as revenue when we have met the contracted performance criterion of the related milestone, while the balance of the payment is recognized ratably over the remainder of the research program. Revenue recognition related to license fees, up-front payments and milestone payments could be accelerated in the event of early termination of programs, or extended over longer periods in the event of extensions to programs.
In general, contract provisions include predetermined payment schedules or the submission of appropriate billing detail. Payments received in advance of performance are recorded as advanced payments from customers until the revenue is earned. 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. License, royalty and milestone revenue are combined and reported separately from collaboration revenue.
15
Inventory Valuation
Our inventories are a significant component of our total assets. In addition, the value at which we carry our inventory directly impacts our results of operations. Our inventories primarily consist of individual chemical compounds in the form of Optimer building blocks, our Lead Generation Libraries, custom libraries and commercially available fine chemicals. Our inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. We design and produce chemical compounds comprising our Lead Generation Libraries, custom libraries and Optimer building blocks and for our proprietary research activities, and begin capitalizing costs into inventory only after technological feasibility has been established. We review inventories periodically and reduce items considered to be slow moving or obsolete to estimated net realizable value through an appropriate reserve.
In January 2003, the Emerging Issues Task Force (“EITF”) issued EITF Statement No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverables contains more than one unit of accounting for purposes of revenue recognition and how the revenue arrangement consideration should be measured and allocated to the separate units of accounting. EITF 00-21 applies to all revenue arrangements that are executed in fiscal periods beginning after June 15, 2003. Array adopted EITF 00-21 during the quarter ended September 30, 2003. The adoption of this statement is not expected to have a significant impact on our financial statements.
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.
16
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 December 31, 2003, 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.
There has been no change in our internal control for financial reporting that occurred during our second quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The annual meeting of the Company’s stockholders was held on October 30, 2003. At that meeting, two proposals were submitted to a vote of the Company’s stockholders. Proposal 1 was a proposal to elect two Class III directors to serve a three-year term of office expiring on the date of the 2006 annual meeting of stockholders. The two nominees for Class III director were Francis J. Bullock, Ph.D. and Kevin Koch, Ph.D. Proposal 2 was a proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending June 30, 2004. 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, 2003. The stockholders approved all proposals as follows:
|
|
|
Number of Votes |
|
||||
|
Proposal |
|
For |
|
Against |
|
Abstain/ Withhold |
|
|
|
|
|
|
|
|
|
|
|
Proposal 1 - Election of Class III directors |
|
|
|
|
|
|
|
|
Francis J. Bullock, Ph.D. |
|
25,075,267 |
|
— |
|
340,198 |
|
|
Kevin Koch, Ph.D. |
|
25,368,349 |
|
— |
|
47,116 |
|
|
|
|
|
|
|
|
|
|
|
Proposal
2 - Ratification of the appointment of |
|
25,360,383 |
|
47,860 |
|
7,222 |
|
17
(a) Exhibits
10.1 (1) Collaboration and License Agreement by and between the Company and AstraZeneca AB, dated December 18, 2003
10.2 (1) Drug Discovery Collaboration Agreement by and between the Company and Genentech, Inc., dated December 22, 2003
31.1 Certification of Robert E. Conway pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of R. Michael Carruthers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0 Certifications of Robert E. Conway and R. Michael Carruthers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Confidential treatment of redacted portions has been applied for
(b) Reports on Form 8-K during the second quarter of Fiscal 2004
The Company filed a Current Report on Form 8-K dated November 3, 2003, to file a press release reporting financial results for the first quarter of fiscal 2004.
The Company filed a Current Report on Form 8-K dated December 18, 2003, to file a press release announcing a licensing and collaboration agreement between the Company and AstraZeneca AB.
Items 1, 2, 3 and 5 are not applicable and have been omitted.
18
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.
|
|
|
ARRAY BIOPHARMA INC. |
||
|
|
|
|
||
|
|
|
|
||
|
Dated: February 2, 2004 |
By: |
/s/ Robert E. Conway |
|
|
|
|
|
Robert E. Conway |
||
|
|
|
Chief Executive Officer |
||
|
|
|
|
||
|
|
|
|
||
|
Dated: February 2, 2004 |
By: |
/s/ R. Michael Carruthers |
|
|
|
|
|
R. Michael Carruthers |
||
|
|
|
Chief Financial Officer |
||
|
|
|
(Principal Financial Officer and |
||
|
|
|
Principal Accounting Officer) |
||
19