Arrowhead Research Corporation — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013; financial statements are unaudited. The filing describes Arrowhead as a development-stage, clinical-stage therapeutics company with programs in chronic hepatitis B, oncology and obesity, and RNAi and peptide drug-delivery technologies.
Financial performance and position
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $43,750 | $202,766 | $31,250 quarter; $55,208 six months |
| Operating expenses | $5.434 million | $10.403 million | $4.900 million quarter; $8.963 million six months |
| Operating loss | $5.390 million | $10.200 million | $4.869 million quarter; $8.908 million six months |
| Net loss attributable to Arrowhead | $6.758 million | $11.372 million | $5.335 million quarter; $7.821 million six months |
| Basic and diluted loss per share | $0.41 | $0.74 | $0.50 quarter; $0.75 six months |
- Revenue remained minimal relative to operating costs and came from license agreements and services. Profit margins are not meaningful given the company’s development-stage losses and low revenue.
- Six-month research and development expense was $3.702 million, up from $2.128 million. General and administrative expense fell to $1.698 million from $2.198 million; salaries and payroll-related costs were $3.355 million, broadly comparable with $3.338 million.
- Cash and cash equivalents were $3.313 million at March 31, 2013, versus $3.377 million at September 30, 2012. Current assets were $3.740 million and current liabilities $7.164 million, a working-capital deficit of approximately $3.424 million.
- Six-month cash used in continuing operating activities was $8.304 million; investing activities provided $1.258 million and financing activities provided $6.983 million. Cash declined by $63,805 over the period.
- At March 31, notes payable totaled approximately $930,000 and capital lease obligations approximately $1.391 million. Derivative liabilities were $2.536 million. Total stockholders’ equity was $3.761 million.
Changes versus the prior comparable period
- Six-month net loss attributable to Arrowhead increased to $11.372 million from $7.821 million; six-month revenue increased to $202,766 from $55,208.
- Higher R&D spending chiefly reflected ARC-520 hepatitis B studies, including in-vivo toxicology, drug manufacturing, contract research and laboratory activity.
- Six-month other expense was $1.520 million, compared with other income of $638,000 in the prior-year period. The current period included a $1.280 million write-down related to the Wisepower note; the prior period included a $1.576 million gain on the Roche Madison acquisition.
- Common shares issued and outstanding increased to 17,042,764 at March 31 from 13,579,185 at September 30, 2012. The cover reports 31,305,317 shares outstanding as of May 7, 2013.
Outlook, risks and unusual items
- Management said research and development will require significant cash investment for the foreseeable future and that additional equity financing, licensing agreements or other revenue sources will be needed. The filing gives no specific cash-runway estimate or financial forecast.
- Management reported that ARC-520 had completed internal preclinical requirements, with final IND-enabling work, including GMP manufacturing and GLP toxicology, in progress. A hepatitis B clinical trial was expected to begin in summer 2013; the filing says further clinical development will require additional spending.
- After the quarter, Arrowhead closed a financing on May 3, 2013, selling common and Series B convertible preferred stock for gross proceeds of approximately $36.0 million and net proceeds of approximately $35.35 million. The preferred stock converts at $1.83 per share. This improves liquidity but carries potential dilution. The registration agreement provides for cash penalties of up to 10% of the purchase price for specified registration failures.
- The company sold 1.170 million Wisepower shares for approximately $1.2 million before trading was halted on March 22, 2013. It recorded the remaining 400,000 shares at no value and reserved approximately $1.3 million against the note receivable. Trading had not resumed as of May 6, and further proceeds, including a potential second tranche, were uncertain; Arrowhead said it was pursuing its contractual rights.
- Warrants issued in certain financings include exercise-price adjustment provisions. The filing reports subsequent adjustment of certain warrant exercise prices to $1.83 following the May financing, which may affect dilution and derivative valuations.
- The company reported no material change to its previously disclosed risk factors, no material litigation pending, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether the May financing and any further funding are sufficient to support planned clinical development, and the resulting fully diluted share count.
- Whether ARC-520 entered clinical testing on the anticipated timetable and what additional trial and manufacturing costs will be required.
- Whether Wisepower trading resumed, whether any additional note-sale proceeds were received, and whether the reserve or note recovery outlook changed.
- The composition, terms and future fair-value effects of derivative liabilities and warrant exercise-price adjustments.
- Actual quarterly cash burn and liquidity relative to the working-capital deficit and continuing financing needs.