Arrowhead Research Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal quarter and nine months ended June 30, 2011. Arrowhead was a development-stage nanomedicine company whose portfolio included majority-owned Calando Pharmaceuticals and Ablaris Therapeutics, and minority investments in Nanotope and Leonardo Biosystems. The company focused on therapeutics for cancer and obesity and tissue regeneration.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Revenue | $0 | $296,139 |
| Operating expenses | $1.77 million | $7.21 million |
| Operating loss | $1.77 million | $6.92 million |
| Net loss attributable to Arrowhead | $1.82 million | $352,362 |
| Cash used in continuing operating activities | Not separately provided for the quarter | $5.99 million |
- Nine-month revenue was primarily a Calando therapeutic-discovery grant. Reported revenue excludes Unidym, whose pre-sale results are classified as discontinued operations.
- At June 30, cash was $4.32 million and marketable securities were $1.18 million; total current assets were $7.05 million versus current liabilities of $2.16 million. Total assets were $13.29 million and stockholders’ equity was $10.57 million.
- Cash declined $2.53 million during the nine months. Continuing operations used $5.99 million of operating cash, while discontinued operations provided $2.27 million. Financing activities provided $1.78 million.
- Debt included a $560,878 long-term note payable on the balance sheet. The related Calando note has $500,000 principal, bears 10% interest, and is due in November 2013; specified events and maturity can require payment of twice principal.
- Operating margins are not meaningful given the company’s minimal revenue and development-stage losses.
Material changes versus the prior comparable period
- For the quarter, Arrowhead-attributable loss increased from $371,055 to $1.82 million. Nine-month attributable loss narrowed from $3.77 million to $352,362, largely reflecting discontinued-operation results and the Unidym divestiture, rather than improved ongoing operating performance.
- Nine-month operating expenses rose from $4.05 million to $7.21 million. Research and development increased to $2.77 million from $373,000, including a $2.0 million University of Texas M.D. Anderson license payment and higher clinical-trial and Ablaris costs. General and administrative expense increased to $2.10 million from $1.80 million, including higher patent costs.
- Arrowhead sold its Unidym interest to Wisepower in January 2011. Consideration included $2.5 million in Wisepower stock, a $2.5 million convertible bond, and potential revenue-milestone payments up to $140 million over ten years. The company recorded a $3.92 million disposal gain; substantial future consideration depends on milestones.
- Arrowhead invested $9.1 million in Calando in January, comprising $1.0 million cash and conversion of $8.1 million of intercompany debt. It also formed Ablaris, which raised $2.9 million through preferred stock during the nine months.
Outlook, commentary, risks and unusual items
- Management said available cash, expected proceeds from remaining Wisepower shares and other potential liquidity sources should fund operations for at least twelve months under its operating plan. The company nevertheless expects future equity financing, asset sales, licensing or partnerships to be needed. It noted that the timing and availability of these sources are uncertain.
- At June 30, remaining Wisepower shares were valued at approximately $1.2 million, subject to trading limits through October 2011 and market conditions. The bond is convertible beginning January 2012, subject to Wisepower’s then-current share value. Redemption of certain warrants could potentially yield approximately $4.0 million.
- The company reported scaling back subsidiary activity to conserve cash. Calando had curtailed internal R&D, closed laboratory facilities and eliminated technical employees, and was seeking partners to advance its technologies.
- Quarterly results included significant noncash derivative valuation effects and a $498,406 realized and unrealized loss on marketable securities. Nine-month other income also included derivative-related gains; these items can fluctuate with market inputs and should not be treated as recurring operating performance.
- Arrowhead received a Nasdaq deficiency notice for failing the $1.00 minimum bid-price requirement and had until December 5, 2011 to regain compliance. It was seeking approval for a possible reverse stock split. Delisting could impair trading and access to capital.
- Risks include limited cash and revenue, dependence on external financing, potential shareholder dilution, clinical and regulatory uncertainty, reliance on licensing and collaboration partners, contingent transaction milestones, intellectual-property risks, and the Calando note’s repayment terms. Management reported effective disclosure controls; the filing disclosed no material pending litigation.
Important facts for investors to verify
- Cash runway assumptions and the timing, restrictions and realizable value of Wisepower securities, bond conversion and potential warrant-redemption proceeds.
- Whether Arrowhead regained Nasdaq minimum-bid compliance by the December 5, 2011 deadline, and any reverse-split action.
- Calando’s financing needs, partner prospects, clinical-program status and obligations under its 10% note.
- Progress at Ablaris and the terms, costs and expected milestones of its University of Texas license.
- The conditions and likelihood of receiving Unidym’s contingent milestone payments and any future licensing or asset-sale proceeds.
- How much reported earnings and cash flow depend on discontinued operations, divestiture accounting and noncash fair-value changes.