UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 000-21898
ARROWHEAD RESEARCH CORPORATION
(Name of small business issuer in its charter)
Delaware 46-0408024
(State of incorporation) (I.R.S. Employer
Identification No.)
150 S. Los Robles, Suite 480
Pasadena, California 91101
(626) 792-5549
(Address and telephone number of principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by
Section13or15(d) of the Exchange Act during the past 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 X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,338,787, as of February
11, 2004.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
ARROWHEAD RESEARCH CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page(s)
ITEM 1. FINANCIAL STATEMENTS
Balance Sheet as of December 31, 2003 (unaudited). 3
Statement of Operations for the quarter ended
December 31, 2003 (unaudited). 4
Statement of Shareholders' Equity for the quarter 5
ended December 31, 2003 (unaudited).
Statement of Cash Flows for the quarter ended 6
December 31, 2003 (unaudited).
Notes to Financial Statements (unaudited) 7-10
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 11
ITEM 3. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMAYION
ITEM 1. LEGAL PROCEEDINGS. 18
ITEM 2. CHANGES IN SECURITIES. 18-19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 19
ITEM 5. OTHER INFORMATION. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURES 20
- 2 -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
On January 12, 2004, the Company issued shares of Common Stock and Warrants
in exchange for all of the issued and outstanding securities of Arrowhead
Research Corporation, a California corporation (the "California corporation").
As a result of this transaction, the California corporation became a
wholly-owned subsidiary of the Company, and the former shareholders of the
California corporation acquired approximately 88.9% of the Company's Common
Stock outstanding immediately thereafter. Since the transaction resulted in such
a significant change in control of the Company, it has been accounted for as
though the California corporation acquired the Company, through a purchase of
the net assets of the Company by the California corporation. Therefore, the
financial statements of the Company, a Delaware corporation whose name has been
changed to "Arrowhead Research Corporation," are deemed to be those of the
California corporation from its inception, and will reflect consolidated
operations of the two companies only from and after January 12, 2004.
Accordingly, the following financial statements are filed herewith:
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Cash $1,428,551
Marketable securities 437,390
Prepaid expenses,
net of accumulated amortization of $60,750 259,875
Office equipment,
net of accumulated depreciation of $270 1,845
-----------
TOTAL ASSETS 2,127,661
===========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable 14,875
Payroll tax payable 3,856
Income tax payable 1,600
-----------
TOTAL LIABILITIES 20,331
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 20,000,000 shares authorized,
5,730,000 shares issued and outstanding 5,730
Additional paid-in capital 2,402,770
Accumulated deficit during the development stage (301,170)
-----------
TOTAL STOCKHOLDERS' EQUITY 2,107,330
-----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $2,127,661
===========
- 3 -
ARROWHEAD RESEARCH CORPORATION(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2003
COSTS AND EXPENSES
Salaries $ 15,000
Consulting 25,000
General and administrative expenses 41,772
Research and development 60,750
----------
TOTAL COSTS AND EXPENSES 142,522
OTHER LOSSES
Unrealized losses on marketable securities 62,610
----------
NET ORDINARY INCOME (LOSS) BEFORE INCOME TAX PROVISION (205,132)
PROVISION FOR INCOME TAXES 800
----------
NET INCOME (LOSS) $(205,932)
==========
EARNINGS (LOSSES) PER SHARE $ (0.04)
==========
- 4 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED DECEMBER 31, 2003
Accumulated
Deficit
Common Stock Additional During the
------------------ Paid-in Development
Shares Amount Capital Stage Totals
--------- ------- ----------- ---------- -----------
BALANCES AS OF SEPTEMBER 30, 2003 4,680,000 4,680 $1,510,320 $ (95,238) $1,419,762
Common stock issued for cash at $0.20 per share 75,000 75 14,925 - 15,000
Common stock issued for cash at $1 per share 475,000 475 474,525 - 475,000
Common stock issued for marketable securities 500,000 500 499,500 - 500,000
at $1 per share
Stock issuance costs charged to additional - - (96,500) - (96,500)
paid-in capital
Net income (loss) - - - (205,932) (205,932)
--------- ------- ----------- ---------- -----------
BALANCES AS OF DECEMBER 31, 2003 5,730,000 $ 5,730 $2,402,770 $(301,170) $2,107,330
========= ======= =========== ========== ===========
- 5 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED DECEMBER 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (205,932)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 180
Unrealized gain (loss) on marketable securities 62,610
(Increase) decrease in:
Prepaid expenses (101,250)
(Decrease) increase in:
Income taxes payable 800
Accounts payable and accrued expenses (76,646)
-----------
Total adjustments (114,306)
-----------
NET CASH USED BY OPERATING ACTIVITIES (320,238)
CASH FLOW FROM INVESTING ACTIVITIES -
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 550
Proceeds from additional paid-in capital, net 392,950
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 393,500
-----------
NET INCREASE (DECREASE) IN CASH 73,262
CASH AT THE BEGINNING OF PERIOD 1,355,289
-----------
CASH AT THE END OF THE PERIOD $1,428,551
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ -
Income taxes $ -
NON-CASH TRANSACTION
The company accepted 80,255 shares of marketable security, valued at $500,000,
from its shareholder in exchange for 500,000 shares on the Company's common
stock.
- 6 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------
General
Arrowhead Research Corporation (the Company) is a development stage company that
was incorporated under the laws of the State of California on May 7, 2003 for
the primary purpose of seeking favorable opportunities to make investments in,
or acquisitions of, publicly or privately owned businesses. It is anticipated
that most candidates will appear to have the potential, if adequately financed,
for rapid growth in sales and profitability, or possess other attributes that
management believes offer prospects for substantial returns to the Company and
an increase in the value of the Company's investment. The company's principal
executive offices are located in Pasadena, California.
As part of its effort to identify emerging technologies and markets, the Company
has had extensive discussions with various representatives of the California
Institute of Technology and members of its faculty. Management has selected
nano-technology as the Company's initial area of focus. Nano-technology is the
science of building machines and materials at the molecular level. Prospective
applications will impact fields that include information technology, medicine,
manufacturing, advanced material and environmental control. Should one or more
of the projects financed by the Company result in the discovery of technology
having commercial applications, it is anticipated that the Company will either
establish a majority-owned subsidiary to pursue the commercial opportunity or
license the technology to one or more third parties on a royalty-bearing basis.
Arrowhead Research Corporation is in the development stage as its operations
principally involve research and development, and other business planning
activities. The company has no revenue from product sales.
Summary of Significant Accounting Policies
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company's securities investments are held principally for the purpose of
selling in the near term and are classified as trading securities. Trading
securities are recorded at fair value on the balance sheet in current assets,
with the change in fair value during the period in earnings.
Property and equipment are recorded at cost. Depreciation of property and
equipment is recorded on the straight-line method over the respective useful
lives of the assets.
Basic earnings (losses) per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings (losses) per
share is computed using the weighted average number of common shares and
dilutive potential common shares outstanding during the period. Dilutive
potential common shares primarily consist of employee stock options and
warrants. For the quarter ended December 31, 2003, their effect is
anti-dilutive.
On December 1, 2003, the Company initiated a second private placement of units
at $1.50 per unit, with each unit consisting of one share of the Company's
common stock and one warrant exercisable to purchase an additional share of the
common stock at any time prior to June 30, 2013. The securities were offered
pursuant to an exemption provided by Regulation 504 of the Securities Exchange
Act of 1933.
- 7 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------
(CONTINUED)
The Company has a stock option plan (the "Plan") which provides for the granting
of non-qualified stock options or incentive stock options. Under the Plan,
1,200,000 shares of the Company's common stock are reserved for issuance upon
exercise of stock options or stock purchase warrants that may be granted by the
Board of Directors to employees, consultants and others expected to provide
significant services to the Company.
In connection with its initial private placement of common stock, the Company
issued 2,645,000 common stock purchase warrants. Each warrant entitles the
holder to purchase one share of common stock at a price of $1.50 any time
following issuance and prior to June 30, 2013, on which date all unexercised
warrants will expire. The warrants are redeemable by the Company at any time
following issuance, upon 30 days prior written notice, provided that a public
market for the underlying shares of common stock then exists and that the
closing bid price for a share of the Company's common stock, for 20 consecutive
trading days ending not more than 15 days prior to the date of the redemption
notice, equal or exceeds $3.00 per share. Holders will be required to exercise
their warrants within 30 days or accept the $0.001 per warrant redemption price.
On December 11, 2003, the Company announced the execution of the Stock Purchase
and Exchange Agreement with InterActive Group, Inc., a Delaware corporation
whose common stock is traded in the over-the-counter market. Pursuant to the
terms and conditions set forth in the Exchange Agreement, on January 12, 2004,
InterActive acquired all of the issued and outstanding securities of the
Company. As a result, control of InterActive was changed, with the former
shareholders of the Company owning approximately 88.9 percent of the then
outstanding common stock of InterActive immediately following the transaction.
In addition, all of the officers and directors of InterActive prior to the
transaction were replaced by designees of the former shareholders of the Company
and InterActive's corporate name was changed to "Arrowhead Research
Corporation". The Company is subject to the reporting requirements of the
Securities Exchange Act and, as of the date hereof, has filed all reports and
other information required to be filed with the Securities and Exchange
Commission (SEC) pursuant to the rules and regulations of the SEC under the
Securities Exchange Act.
In connection with its initial private placement of common stock, in October
2003, the Company accepted 80,255 shares of Acacia Research, valued at $500,000,
and $475,000 in cash from its shareholders in exchange for 975,000 shares of the
Company's common stock. There were also $96,000 of finder's fees for these
securities.
The Company maintains one bank account at a financial institution. This account
is insured by the Federal Deposit Insurance Corporation (FDIC), up to $100,000.
At December 31, 2003 the Company had deposits with this financial institution
with uninsured cash balances totaling $1,328,551. The Company has not
experienced any losses in such accounts and management believes it places its
cash on deposit with financial institutions which are financially stable.
Rent expense was $2,910 for the quarter ended December 31, 2003.
Prepaid expenses consist of $259,875 incurred under contract agreements with
Caltech. See Note 4
- 8 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2: OFFICE EQUIPMENT, NET
---------------------
The office equipment is recorded at cost.
Depreciable
Life Years
-------------
Office equipment $ 2,115 7
-------------
2,115
Less accumulated depreciation (270)
-------------
Net office equipment $ 1,845
=============
Depreciation expense for the quarter ended December 31, 2003 was $180.
NOTE 3: INCOME TAXES
-------------
The income tax provision consists of the California Franchise Tax Board minimum
of $800, no provision for federal income taxes have been provided as the Company
incurred a loss for the quarter ended December 31, 2003. The Company has elected
to carry forward the loss to offset future taxable income. The loss for the
quarter ended December 31, 2003 can be carried forward until it expires at
December 31, 2023. Thus, the Company has certain deferred tax assets related to
the net operating loss carryforward. There is no assurance that future taxable
income will be sufficient to realize the net asset or utilize the tax
carryforward. The Company has determined that it is more likely than not that
the deferred tax asset may not be realizable. Therefore, a 100% valuation
allowance has been recorded.
NOTE 4 : COMMITMENTS AND CONTINGENCIES
-------------------------------
On September 24, 2003, the Company entered into a contract agreement to use
California Institute of Technology, of Pasadena (Caltech) as an independent
third party to research, develop, and manufacture its nano-scale products. The
research shall be conducted during the period of October 1, 2003 to September
30, 2008. The Company will reimburse Caltech for all direct and indirect costs
incurred in the performance of the research which shall not exceed $162,000 per
year of the total estimated project cost of $810,000. If the Agreement is
extended, the dollar value of costs that will be reimbursed may be increased by
mutual agreement to cover additional work performed during the extension.
In connection with the nano-technology research and development, on November 12,
2003, the company has entered into a second contract agreement with Caltech. The
research shall be conducted during the period of January 1, 2004 to December 31,
2008. The Company will reimburse Caltech for all direct and indirect costs
incurred in the performance of the research, which shall not exceed $162,000 per
year of the total estimated project cost of $810,000.
As of December 31, 2003, the Company had advanced Caltech a total of $320,625
for research and development costs. These costs are expensed as incurred and
consist primarily of product development and application research. Amortization
expense related to these costs was $60,750 for the quarter ended December 31,
2003. Financial accounting standards require the capitalization of certain
software costs after technological feasibility is established. These costs are
not applicable to the Company.
- 9 -
ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 5: SUBSEQUENT EVENTS
------------------
In connection with its second private placement of common stock, the Company
issued an additional 6,608,787 units in exchange for cash at $1.50 per unit,
with each unit consisting of one share of the Company's common stock and one
warrant exercisable to purchase an additional share of common stock at any time
prior to June 30, 2013.
NOTE 6: RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust, or any legal structure used for business purposes that
either (a) does not have interest entity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. Interpretation 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to transactions entered into prior to February 1, 2003 in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
the Interpretation on July 1, 2003 did not have a material impact on the
Company's financial statements.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. The
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of this Statement did not have a material impact on the
Company's financial statements.
In May 2003, The FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristic of both Liabilities and Equity. The Statement
establishes standards for how an issuer classifies and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer clarify a financial instrument that is within it scope as a
liability (or an asset in some circumstances). It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this Statement did not have a material impact on the
Company's financial statements.
NOTE 7: SEGMENT INFORMATION
--------------------
Industry Segment Data
The Company is still in the development stage, and no revenues have been earned.
Geographic Area Data
No revenues have been earned.
- 10 -
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
General
- -------
Statements contained in this Quarterly Report on Form 10-QSB, which are not
purely historical, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including but not limited to statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Actual results could differ materially from those projected in any
forward-looking statements as a result of a number of factors, including those
detailed in "Risk Factors" below and elsewhere in this Quarterly Report on Form
10-QSB. The forward-looking statements are made as of the date hereof, and the
Company assumes no obligation to update the forward-looking statements, or to
update the reasons why actual results could differ materially from those
projected in the forward-looking statements.
Plan of Operations
- --------------------
The Company was incorporated in 1989 to develop multimedia hardware and
software products, and introduced its first software product in July 1991. In
November 1992, the Company introduced its first SoundXchange business audio
hardware product, which was designed to be marketed to large and small
businesses that have existing local and wide area networks of personal
computers, and businesses that plan to connect existing personal computers into
such a network. On July 16, 1993, the Company completed its initial public
offering, selling 1,000,000 Units, each consisting of one share of Common Stock
and one redeemable Common Stock purchase warrant, at the price of $4.50 per
Unit, raising gross proceeds of $4,500,000.
Over the next two years, anticipated sales of SoundXchange products did not
materialize and the Company sustained operating losses. In 1995, without
additional sources of funding, the Company substantially reduced its operations
and, except for sporadic sales of SoundXchange products out of existing
inventories, subsequently did not conduct any significant business activities
for several years.
In 2002, the Company created a Carlsbad Security Products Division in an
effort to develop, market and sell networked monitoring and security systems
that would incorporate third party security components, such as digital video
recorders and video cameras, with the Company's SoundXchange products and
proprietary software. In connection therewith, the Company obtained a $100,000
loan to finance these efforts, and defray general and administrative purposes.
However, through September 30, 2003, the Company had not sold any networked
security products, and had spent substantially all of the proceeds of the loan.
The Company had no significant source of revenue for the past several
years, leading to sustained operating losses and significant working capital
deficiencies. During the year ended September 30, 2003, the Company generated a
loss of approximately $286,000, on revenue of less than $3,000. As of September
30, 2003, the Company's current liabilities exceeded its current assets by
approximately $1,840,000, the Company was not involved in the production of any
products or providing services on a significant level, and it had no direct
employees. At
- 11 -
that time, the Company's management concluded that efforts to develop a
securities products or other viable business were not likely to prove
successful, in the absence of the availability of significant sources of
financing, if at all. Consequently, after devoting more than ten years in
various attempts to develop a profitable, ongoing business, and without
realistic sources of additional financing in sight, management of the Company
was receptive when approached by representatives of the California corporation
concerning a possible business combination on some basis. Subsequent discussions
led to execution of a definitive agreement in December 2003, followed by the
closing of the transactions contemplated thereby on January 12, 2004.
As a consequence of the change in control of the Company resulting from
these transactions, all prior business activities of the Company were completely
terminated, and the Company adopted the business and plan of operations that had
been developed and was in the process of implementation by the California
corporation prior to the transaction.
Consequently, the Company currently is engaged in continuing efforts to
finance research in various aspects in the "nano-technology" field, with a view
toward realizing future revenue and profit from any such technologies that might
result from the Company sponsored research. Fortune Magazine has defined
nano-technology as "the science of building machines and materials at the
molecular level, where key components are measured in nanometers, one-billionth
of a meter." Prospective applications include information technology, medicine,
manufacturing, advanced materials and environmental control. The National
Science Foundation has predicted that the total market for nano-technology
products and services will approach one trillion dollars by the year 2015.
To date, the Company has entered into arrangements with the California
Institute of Technology ("Caltech"), and two individual professors on the
faculty of Caltech, with respect to the financing of research projects in
various aspects of nano-technology development. In consideration of the
financing to be provided, the Company has obtained the exclusive right and
license to commercially exploit any technology developed as a result of the
research, along with any patents that are awarded to Caltech and the
researchers.
The first research project which the Company is funding is under the
direction of C. Patrick Collier, Ph.D. Dr. Collier has described the project as
one that "includes the binding of nano scale synthetic chemical reactions
circuits as a means for controlling complex biochemical reactions dynamics, in
analogy to how digital or analog circuits have provided convenient means for
controlling complex electrical or mechanical systems." The Company has agreed
to provide $810,000 over a 5-year period, at the rate of $162,000 per year,
which Dr. Collier and his team will use to finance direct costs, such as
salaries and benefits for two post-doctoral researchers, purchase items such as
chemical reagents, optical supplies, and other materials used in connection with
the research program, and domestic travel to attend conferences of professional
organizations whose members are involved in comparable research projects. All
other costs, including the salary and benefits of Dr. Collier, and the use of
Caltech facilities, will be borne by Caltech.
The second research project that the Company has agreed to finance is
headed by Marc Bockrath, Ph.D. His applied physics group at Caltech is working
on the application of nano
- 12 -
scale optoelectric components to chemical and biological sensors and electronic
circuits. The five year financing agreement between the Company and Dr. Bockrath
also specifies annual contributions of approximately $162,000, for a total of
$810,000, to be spent on a comparable basis except that this group will use
$5,000 of the funds to purchase a computer and specialized software to perform
transport measurements in connection with the project.
The Company is also engaged in negotiations with Caltech and members of its
faculty pertaining to additional research agreements.
In the case of each project financed by the Company, the respective head of
the research team will be required to provide a technical report to the Company
at each anniversary date of the project, to include details of scientific
progress and results, highlighting those that may be of possible commercial
interest to the Company. In addition, the statement of work to be performed
under each financing agreement will be updated on an annual basis, to reflect
any changes in research goals that the parties may agree upon and/or to identify
new opportunities that the parties mutually agree to pursue. The Company will
also be provided with reprints of any publications in scientific journals
resulting from the work that has been financed by the Company.
The ultimate goal of the Company in providing financing for research
projects such as those described above is to obtain the rights to patentable and
other intellectual property that can be used for commercial purposes. Should one
or more of the projects financed by the Company result in the discovery of a
technology having commercial application, it is anticipated that the Company
would either start a new company, as a majority-owned subsidiary, to pursue the
commercial opportunity, or license one or more third parties to use the
technology for commercial purposes, in exchange for the payment of royalties to
the Company.
As is the case with any research project, there can be no assurance that a
commercially viable technology will be developed as a result of any one or more
of the projects that the Company has agreed to finance to date or may finance in
the future. This is particularly true in the case of the projects that the
Company typically will finance, since most of these projects are in the very
early stages of research, well before they have generated sufficient results to
attract the interest of traditional venture capital firms that focus in the high
tech arena. Consequently, it is anticipated that the Company will enter into
comparable arrangements with a number of researchers in the nano-technology
field, both at Caltech and at other universities. In addition, the Company may
seek to identify and finance the research and development activities of other
entrepreneurs who are working in the nano-technology arena outside of a
university setting.
In addition to financing the research activities of members of the Caltech
faculty, the Company has also entered into another agreement with Caltech
pursuant to which the Company has obtained the right to monitor and enforce a
large portfolio of patents that have previously been issued to Caltech in
various areas, including nano-technology. Pursuant to this agreement, the
Company has the right to retain 50% of any and all amounts that may be recovered
by the Company from third parties who may be infringing upon one or more of the
patents in the portfolio
- 13 -
Given its strategy of financing new, as yet unproved technology research,
it should be expected that the Company would not realize significant revenue in
the foreseeable future, if at all. For this reason, it is anticipated that the
Company will generate the funds needed to finance a growing number of research
projects through future sales of securities, rather than out of profits
generated internally. There can, however, be no assurance that the Company will
be successful in the future in raising the level of additional capital sought,
or on terms currently contemplated, if at all. Should the Company prove
successful in selling securities to raise the additional capital sought to
finance additional research, the current stockholders of the Company will
experience dilution in their percentage ownership of the Company's outstanding
securities.
Although the risks taken by the Company in financing leading edge
technology research may be considered to be great, management of the Company
believes that the rewards to the Company and its stockholders also have the
potential to be great. That is, it is anticipated that the early-stage
investments to be made by the Company should enable the Company to obtain the
right, at a relatively low cost per research project, to exploit one or more
technologies that could have commercial potential well beyond that of a company
that is financed by a traditional venture capitalist. However, as is the case
with any research project, there can be no assurance that a commercially viable
technology will be developed as a result of any one or more of the projects that
the Company has agreed to finance to date or may finance in the future.
Financial Resources
- --------------------
To date, the Company has completed two private placements in which it
issued and sold Units, each consisting of one share of common stock and a
warrant to purchase an additional share of common stock for the price of $1.50.
The net proceeds from these private placements totaled $11,302,363. As of
February 10, 2004, the Company had used approximately $324,000 of its cash
resources to fund research projects, and retained approximately $10,872,000 in
cash and marketable securities that can be used to finance additional research.
Of these retained funds, a total of $1,296,000 has been committed to meet the
Company's future obligations over 4-year periods under the two research projects
that it has already agreed to finance.
As a condition to the transactions that resulted in the change in control
on January 12, 2004, the Company was required to enter into agreements with the
holders of its outstanding debt and other obligations, pursuant to which the
total debt of the Company as of the date of the closing under the Exchange
Agreement would be reduced to not more than $150,000. The funds raised by the
California corporation that became available to the combined companies as a
consequence of the change in control are being used by the Company to satisfy
these remaining debt obligations.
Risk Factors
- -------------
An investment in the Company should be considered speculative, and to
involve a high degree of risk. In addition to the other information contained
in this Quarterly Report on Form 10-QSB, prospective investors should carefully
consider the following risk and speculative factors:
- 14 -
Unproven Plan of Operations. As a consequence of the change in the control
of the Company on January 12, 2004, all efforts that were previously initiated
in an attempt to develop a viable business plan have been abandoned. In place
thereof, the Company has adopted as a new plan of operations the strategy that
was only recently formulated by the California corporation following its
formation in May 2003. To date, implementation of this strategy has been
limited, with only two research projects having been selected for funding.
Accordingly, the Company's business and operations should be considered to be in
the development stage, subject to all of the risks inherent in the establishment
of new business ventures. There can be no assurance that the intended business
and operations of the Company will be successful. Any future success that the
Company might enjoy will depend upon many factors including factors which may be
beyond the control of the Company, or which cannot be predicted at this time.
The Company may encounter unforeseen difficulties or delays in the
implementation of its plan of operations. There can be no assurance that such
difficulties or delays will not have a material adverse effect upon the
financial condition, business prospects and operations of the Company and the
value of an investment in the Company. The value of an investment in the Company
can also be adversely affected by a number of external factors, such as
conditions prevailing in the securities markets and/or the economy generally.
Consequently, an investment in the Company is highly speculative and no
assurance can be given that purchasers of the Company's securities will realize
any return on their investment or that purchasers will not lose their entire
investment.
Risks Inherent in Research Projects. As is the case with any research
project, there can be no assurance that a commercially viable technology will be
developed as a result of any one or more of the projects that the Company has
agreed to finance to date or may finance in the future. This is particularly
true in the case of the projects that the Company typically will finance, since
most of these projects are in the very early stage of research, well before they
have generated sufficient results to attract the interest of traditional venture
capital firms that focus in the high tech arena.
Lack of Revenue; No Assurance of Profitability. To date, the Company has
not generated any revenue as a result of its current plan of operations.
Moreover, given its strategy of financing new, as yet unproved technology
research, it should be expected that the Company would not realize significant
revenue in the foreseeable future, if at all. For this reason, it is
anticipated that the Company will generate the funds needed to finance a growing
number of research projects through future sales of securities, rather than out
of profits generated internally. There can, however, be no assurance that the
Company will be successful in the future in raising the level of additional
capital sought, or on terms currently contemplated, if at all.
Limited Market for the Common Stock. The Company's Common Stock is traded
in the over-the-counter market and quoted on the OTC Bulletin Board under the
symbol "ARWR.OB." However, prior to the change in control of the Company on
January 12, 2004, trading in the Common Stock was very sporadic. Since January
12, 2004, there have been extreme fluctuations in the price at which the
Company's Common Stock, which may be attributable, in large part, to the limited
number of shares of Common Stock available for public sale resulting from the
65-for-1 "reverse split" of the Common Stock on January 12, 2004
- 15 -
Market Overhang; Warrants. The Company has agreed to register for resale
under the Securities Act, all of the shares of Common Stock and warrants issued
in connection with the transactions contemplated by the Exchange Agreement.
Sales of shares pursuant to such registration, or even the potential for such
sales, could have a depressing effect upon the price at which the Common Stock
may be traded in the over-the-counter market. In addition, the issuance of
shares of Common Stock upon exercise of the warrants, or the prospect of such
issuance, may be expected to have an effect on the market for the Common Stock,
and may have an adverse impact on the price at which shares of Common Stock
trade.
Possible Volatility of Market Prices. The over-the-counter markets for
securities such as the Company's Common Stock historically have experienced
extreme price and volume fluctuations during recent periods. These broad market
fluctuations, and other factors such as general economic conditions and trends
in the investment markets, may adversely affect the market price of the
Company's Common Stock for reasons unrelated to the Company or its operating
performance.
Sales of Additional Securities. The Company is authorized to issue an
aggregate of 50,000,000 shares of Common Stock without approval of the Company's
stockholders, on such terms and at such prices as the Board of Directors of the
Company may determine. Of these shares, an aggregate of 12,338,787 shares of
Common Stock have been issued, 12,924,665 are reserved for issuance upon
exercise of stock purchase warrants, and 300,000 are reserved for issuance upon
exercise of stock options that may be granted by the Board of Directors to
employees, consultants and others expected to provide significant services to
the Company. More than 24,000,000 shares of Common Stock remain available for
issuance by the Company to raise additional capital, in connection with
prospective acquisitions, upon exercise of future stock option grants, or for
other corporate purposes. Issuances of additional shares of Common Stock would
result in dilution of the percentage interest in the Company's Common Stock of
all stockholders ratably, and might result in dilution in the tangible net book
value of a share of the Company's Common Stock, depending upon the price and
other terms on which the additional shares are issued.
No Public Market for the Warrants. All of the Company's outstanding
Warrants were issued without registration under the Securities Act, and
therefore are "restricted securities" which can not publicly be resold without
such registration or the availability an exemption therefrom. Consequently, no
public market for the Warrants currently exists. Although the Company has agreed
to register the Warrants for resale under the Securities Act, there can be no
assurance, however, that an active public trading market for the Warrants will
develop or be sustained in the near future, if at all.
Arbitrary Determination of Warrant Exercise Price. The price at which the
Warrants may be exercised to purchase shares of Common Stock was arbitrarily
determined by the Company alone, and bears no relationship to earnings, asset
values, book value or any other recognized criteria of value. No independent
third party, such as an investment banking firm or other expert in the valuation
of businesses or securities, has made an evaluation of the economic potential of
the Company or the value of a share of the Company's Common Stock.
- 16 -
Redeemable Warrants. The Warrants may be redeemed by the Company at any
time following issuance, upon 30 day's prior written notice to the holders
thereof, provided that a public market for the underlying shares of Common Stock
then exists and the closing bid price for a share of the Company's Common Stock
for 20 consecutive trading days ending not more than 15 days prior to the date
of the redemption notice equals or exceeds $3.00 per share. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it might be disadvantageous for the holders to do so, to
sell the Warrants when they might otherwise wish to hold them, or to accept the
redemption price, which may be substantially less than the market value of the
Warrants at the time of redemption. Warrant holders who fail to exercise their
Warrants will experience a corresponding decrease in their interest in the
Company relative to the ownership interest of those Warrant holders who do
exercise their Warrants.
Possible Issuance of Preferred Stock. Although the Company has no present
plan to issue any shares of Preferred Stock, the issuance of Preferred Stock in
the future could provide voting or conversion rights that would adversely affect
the voting power or other rights of the holders of Common Stock and thereby
reduce the value of the Common Stock. In addition, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, or otherwise delay, discourage
or prevent a change in control of the Company.
No Dividends. The Company does not anticipate that it will pay dividends
in the foreseeable future. Instead, the Company intends to apply any earnings
to the development and expansion of its business.
ITEM 3. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Quarterly Report on Form
10-QSB, the executive officers of the Company conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rules 13a-14 and 3a-15 under the Securities Exchange
Act of 1934, as amended. Based upon that evaluation, the executive officers
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company that is
required to be included in its filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date this evaluation was carried out.
- 17 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Prior to the change in control on January 12, 2004, the Company was
delinquent on its interest payments on its secured note and a portion of its
trade accounts payable, and had several judgments against it as a result of its
inability to pay its obligations to its unsecured trade creditors. In
connection with the reduction of its debt as required by the terms and
conditions of the Exchange Agreement, the Company has obtained releases or
otherwise extinguished all claims and liens against it, except for those that
total, in the aggregate, not more than $150,000. These remaining claims and
liens will be paid or otherwise satisfied in full using cash that became
available to the Company as a result of the change in control transactions.
ITEM 2. CHANGES IN SECURITIES.
The transactions that resulted in the change in control of the Company on
January 12, 2004, took place in accordance with a Stock Purchase and Exchange
Agreement that originally was entered into on December 10, 2003 (the "Exchange
Agreement").
Pursuant to the Exchange Agreement, an aggregate of 5,655,000 shares of the
Company's Common Stock were issued to acquire, in exchange therefor, all of the
5,655,000 shares of the common stock of the California corporation then
outstanding. In addition, warrants to purchase 5,645,000 additional shares of
the Company's Common Stock, at the price of $1.50 per share, were issued by the
Company in exchange for warrants to purchase, at the same price per share, the
same number of shares of the California corporation's common stock.
Prior to the issuance of these shares and warrants under the Exchange
Agreement, the Company effected a 1-for-65 "reverse split" of its outstanding
Common Stock and a 1-for-6.5 conversion of its Series A Preferred Stock into
shares of Common Stock. As a result of the "reverse split" of the Common Stock
and conversion of the Series A Preferred Stock, a total of 389,249 shares of
Common Stock were then outstanding. An additional 316,386 shares of the
Company's Common Stock, and warrants to purchase up to an additional 658,583
shares of Common Stock, at $1.50 per share, were issued in connection with a
program to reduce the total debt of the Company to not more than $150,000, and
to acquire certain technology from San Diego Magnetics, Inc., a research and
development operation in San Diego, California involved in the areas of thin
film, specialty micro and nano devices and detectors.
In October 2003, the predecessor California corporation completed a private
placement in which it raised net proceeds of approximately $2,380,000 from the
sale of Units, each consisting of one share of common stock and a warrant to
purchase an additional share of common stock at the price of $1.50. The Units
were issued and sold without registration under the Securities Act of 1933, as
amended (the "Securities Act", in reliance upon the exemptions from such
registration afforded by Section 4(2) of the Securities Act and Regulation D
promulgated by the
- 18 -
Securities and Exchange Commission under the Securities Act. All of the
purchasers of the Units were "accredited investors", as that term is defined in
the rules and regulations of the Securities and Exchange Commission under the
Securities Act. A second private placement, conducted pursuant to the same
exemptions from registration under the Securities Act, was consummated on
January 31, 2004, following the end of the period covered by this Current Report
on Form 10-QSB. In the second private placement, the Company raised net proceeds
of approximately $8,921,863 from the sale of Units, each consisting of one share
of common stock and a warrant to purchase an additional share of common stock at
the price of $1.50.
Pursuant to the Exchange Agreement, the Company agreed to register for
resale under the Securities Act of 1933, as amended (the "Securities Act"), at
the Company's cost and expense, all of the shares of the Company's Common Stock,
and all of the warrants to purchase shares of the Company's Common Stock, that
were issued in connection with the transactions contemplated by the Exchange
Agreement, including the shares and warrants issued to the former shareholders
of the California corporation in the two private placements, the shares and
warrants issued in connection with the Company's debt reduction program, and the
shares and warrants issued to acquire the San Diego Magnetics technology.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting held on January 12, 2004, the Company's stockholders
approved amendments to the Company's Certificate of Incorporation to (i) effect
the 1-for-65 "reverse split" of the Company's outstanding Common Stock and the
1-for-6.5 conversion of the Company's outstanding Series A Preferred Stock into
shares of the Company's Common Stock, and (ii) change the Company's corporate
name from "InterActive Group, Inc." to "Arrowhead Research Corporation." All of
the directors and officers of the Company, who together possessed, directly or
through one or more affiliates, the power to vote at least a majority of all
classes of the issued and outstanding voting securities of the Company as of the
record date for the special meeting, had indicated that they would vote, or
cause to be voted, all of the securities over which they have voting control in
favor of the approval of the proposed amendments. Therefore, approval of the
proposed amendments by the stockholders of the Company was assured, no
additional votes in favor of approval of the amendments were required, and no
proxies were solicited. However, all of the stockholders of record as of the
record date for the special meeting were furnished a copy of the Information
Statement on Schedule 14C dated December 22, 2003, that the Company filed with
the U.S. Securities and Exchange Commission.
ITEM 5. OTHER INFORMATION.
None.
- 19 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Section 302 Certification
32.1 Section 906 Certification
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by registrant on December 15, 2003,
to report the execution and delivery of the Exchange Agreement by and among
registrant and the several share and warrant holders of Arrowhead Research
Corporation, a California corporation, and a second Current Report on Form 8-K
was filed by registrant on January 9, 2004 to report a change in certifying
accountants resulting from the change in control of the Company as a consequence
of the transactions contemplated by the Exchange Agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: February 13, 2004 ARROWHEAD RESEARCH CORPORATION.
BY: /s/ R. BRUCE STEWART
--------------------
R. Bruce Stewart, President
and chief financial and accounting officer
- 20 -
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, R. Bruce Stewart, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Arrowhead
Research Corporation;
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-15(e) and 15d-15(e)), for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 and presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
(c) disclosed in this Quarterly Report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 13, 2004
/s/ R. BRUCE STEWART
----------------------
R. Bruce Stewart
EXHIBIT 31.2
SECTION 906 CERTIFICATION
In connection with the Quarterly Report on Form 10-QSB of Arrowhead
Research Corporation (the "Company") for the quarter ended December 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, R. Bruce Stewart, the chief executive officer and chief financial
officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: February 13, 2004
/s/ R. BRUCE STEWART
---------------------
R. Bruce Stewart
A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.