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 March 31, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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: 13,550,546 as of May 10, 2004.
Transitional Small Business Disclosure Format (Check one): Yes No X
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page(s)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 2004 (unaudited) 3
Consolidated Statement of Operations for the quarter ended
March 31, 2004 (unaudited) 4
Consolidated Statement of Shareholders' Equity for the quarter 5
ended March 31, 2004 (unaudited)
Consolidated Statement of Cash Flows for the quarter ended 6
March 31, 2004 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 7-10
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS AND PLAN OF OPERATION 11
ITEM 3. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
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
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ARROWHEAD RESEARCH CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
ASSETS
Cash and cash equivalents $10,330,701
Marketable securities 807,628
Other receivables 145
Prepaid expenses 360,855
Office equipment,
net of accumulated depreciation of $616 9,602
------------
TOTAL ASSETS $11,508,931
============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 31,552
Other accrued expenses 6,862
------------
TOTAL LIABILITIES 38,414
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 50,000,000 shares authorized,
13,550,546 shares issued and outstanding 13,551
Additional paid-in capital 11,934,019
Accumulated deficit during the development stage (477,053)
------------
TOTAL STOCKHOLDERS' EQUITY 11,470,517
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $11,508,931
============
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ARROWHEAD RESEARCH CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
MARCH 31, 2004
COSTS AND EXPENSES
Salaries $ 25,000
Consulting 33,475
General and administrative expenses 331,323
Research and development 141,660
----------
TOTAL COSTS AND EXPENSES 531,458
OTHER INCOME AND (LOSSES)
Loss on disposition of building and equipment (23,331)
Interest income 8,668
Unrealized gains on marketable securities 370,238
----------
TOTAL OTHER INCOME AND (LOSSES) 355,575
----------
NET INCOME (LOSS) $(175,883)
==========
EARNINGS (LOSSES) PER SHARE $ (0.02)
==========
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ARROWHEAD RESEARCH CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 2004
Accumulated
Deficit
Common Stock Additional During the
------------------- Paid-in Development
Shares Amount Capital Stage Totals
--------------------------------------------------------------
BALANCES AS OF DECEMBER 31, 2003 5,730,000 $ 5,730 $ 2,402,770 $ (301,170) $ 2,107,330
Common stock issued for cash at $1.50 per share 6,608,788 6,609 9,906,573 - 9,913,182
Common stock issued in a reverse acquisition of Interactive
Group, Inc. (see Note 2) 705,529 706 (127,844) - (127,138)
Common stock issued as gifts at $1 per share 150,000 150 149,850 150,000
Common stock issued for services at $1.50 per share 356,229 356 533,988 - 534,344
Additional paid-in capital issued for services - - 60,000 - 60,000
Stock issuance costs charged to additional paid-in capital - - (991,318) - (991,318)
Net income (loss) - - - (175,883) (175,883)
--------------------------------------------------------------
BALANCES AS OF MARCH 31, 2004 13,550,546 $13,551 $11,934,019 $ (477,053) $11,470,517
==============================================================
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ARROWHEAD RESEARCH CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (175,883)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 346
Unrealized gain (loss) on marketable securities (370,238)
Common stock issued as gift 150,000
Change in assets and liabilities net of effects from acquisition of InterActive:
Decrease in building and equipment 23,617
Decrease in account payable and accrued expenses (150,755)
(Increase) decrease in:
Other receivables (145)
Prepaid expenses (100,980)
(Decrease) increase in:
Income taxes payable (1,600)
Accounts payable and accrued expenses 19,683
------------
Total adjustments (430,072)
------------
NET CASH AND CASH EQUIVALENTS USED IN OPERATING ACTIVITIES (605,955)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment (8,103)
------------
NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (8,103)
NET CASH FLOWS FROM FINANCING ACTIVITIES
Additional paid-in capital issued for services 60,000
Proceeds from issuance of common stock 6,609
Proceeds from additional paid-in capital, net 9,449,599
------------
NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES 9,516,208
------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,902,150
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 1,428,551
------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $10,330,701
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ -
Income taxes $ 1,600
NON-CASH TRANSACTIONS
The Company issued 150,000 shares of Common Stock to the California Institute of
Technology to further research and development.
The Company issued 75,000 options for services which were exercised at $0.20
each. The resulting difference between the exercise price and fair market value
was recorded as outside services.
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ARROWHEAD RESEARCH CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004
In connection with the reverse acquisition (see Note 2), the Company issued
705,529 shares of Common Stock and 658,583 Common Stock Purchase Warrants for
the net assets valued at ($127,138) of InterActive Group, Inc. The Company also
assumed $150,000 in liabilities, associated with this acquisition. The Company
subsequently disposed of all the fixed assets of InterActive, recognizing a loss
on disposition of $23,331.
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ARROWHEAD RESEARCH CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Arrowhead Research
Corporation (a Delaware Corporation), formally InterActive Group, Inc., and
Arrowhead Research Corporation (a California Corporation), a wholly-owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.
GENERAL
On January 12, 2004, the Company, a Delaware corporation then known as
"InterActive Group, Inc.", acquired all of the issued and outstanding securities
of Arrowhead Research Corporation, a California corporation (the "California
corporation"). As a result of this transaction, control of the Company was
changed, with the former shareholders of the California corporation acquiring
approximately 88.9% of the Company's Common Stock outstanding immediately
following the transaction. In addition, all of the officers and directors of
the Company prior to the transaction were replaced by designees of the former
shareholders of the California corporation, and the Company's corporate name was
changed to "Arrowhead Research Corporation."
The Company currently is engaged in funding research at universities in
pioneering scientific areas, primarily nanotechnology, in return for exclusive
rights to commercialize technologies and associated intellectual property and
patents developed as a result of this research. The Company has entered into
agreements with the California Institute of Technology and three of its faculty,
and is actively pursuing other potential partners at Caltech and other leading
research institutions and universities. Commercial applications that arise from
Company-sponsored research projects are expected to be developed and marketed by
the Company through a series of diversified subsidiaries representing each
product or application, or through third-party licensing. In that regard, the
Company has recently formed, or entered into agreements to form, or make
investments in what are, or expected to be, majority-owned subsidiaries.
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.
On January 31, 2004, the Company completed a private placement of 6,608,788
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. The Company paid $991,318 of finder's fees and issued 660,878
finder warrants in connection with the sale of these securities.
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,
3,000,000 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 the formation of the company, private placements of Common
Stock, and the acquisition of Interactive Group, Inc., the Company issued
13,837,749 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, equals
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The presentation of consolidated 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 consolidated 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 consist of corporate stocks, and 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
reflected in earnings.
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For purposes relating to the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
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 March 31, 2004, their effect is anti-dilutive.
In October 2003, in connection with an initial private placement of Common
Stock, the Company accepted 80,255 shares of Acacia Research Corporation, valued
at $500,000, and $500,000 cash in exchange for 1,000,000 units. The shares are
carried on the financial statements as marketable securities. See Note 3.
Rent expense was $2,804 for the quarter ended March 31, 2004.
Prepaid expenses consist of $360,855 incurred under contract agreements with
Caltech. See Note 5.
NOTE 2: BASIS OF CONSOLIDATION - REVERSE ACQUISITION ACCOUNTING
-------------------------------------------------------------
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. In addition, all of the officers and
directors of the Company prior to the transaction were replaced by designees of
the former shareholders of the California corporation, and the Company's
corporate name was changed to "Arrowhead Research Corporation." Since the
transaction resulted in such a significant change in control of the Company, it
has been accounted for as a "reverse acquisition," as though the California
corporation acquired the Company, through a purchase of the net assets of the
Company by the California corporation,
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with no goodwill being recognized. Therefore, the financial statements of the
Company are deemed to be those of the California corporation from its inception,
and reflect consolidated assets and operations of the two entities only from and
after January 12, 2004.
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.
NOTE 3: MARKETABLE SECURITIES
----------------------
Marketable securities consist of trading securities at quoted market values, as
follows:
Corporate stocks $ 807,628
===========
The Company included $370,238 in unrealized gains on these securities in other
income and losses at March 31, 2004.
NOTE 4: OFFICE EQUIPMENT, NET
-----------------------
The office equipment is recorded at cost.
Depreciable
Life Years
-----------
Office equipment $10,218 3-7
--------
10,218
Less accumulated depreciation (616)
--------
Net office equipment $ 9,602
========
Depreciation expense for the quarter ended March 31, 2004 was $346.
NOTE 5: COMMITMENTS AND CONTINGENCIES
-------------------------------
On September 24, 2003, the Company entered into a contract agreement to sponsor
research in the laboratories of Dr. Charles Patrick Collier at the California
Institute of Technology (Caltech). The research is to be conducted during the
period of October 1, 2003 to September 30, 2008. The agreement originally called
for the Company to pay Caltech $162,000 per year to subsidize all direct and
indirect costs incurred in the performance of the research, with a total project
cost of $810,000 over the five year period. This agreement was subsequently
modified on February 26, 2004, to increase the annual
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contract amount to $235,894 for the first year and $263,218 in each of the next
four years. Total project cost is not to exceed $1,288,764 over the five year
period.
On November 12, 2003, the Company entered into a second contract agreement with
Caltech, to sponsor research in the laboratories of Dr. Marc Bockrath. The
research is to be conducted during the period of January 1, 2004 to December 31,
2008. The Company will pay Caltech $162,000 per year to subsidize all direct and
indirect costs incurred in the performance of the research, with a total project
cost not to exceed $810,000 over the five year period.
On February 23, 2004, the Company entered into a third contract agreement with
Caltech, to sponsor research in the laboratories of Dr. Harry Atwater. The
research shall be conducted during the period of January 1, 2004 to December 31,
2008. The Company will pay Caltech $242,640 to subsidize all direct and indirect
costs incurred in the performance of the research, and slightly lesser amounts
in each of the next three years. Total project cost will not exceed $870,793
over a four year period.
If any of these agreements are extended, the dollar value of costs that will be
reimbursed may be modified by mutual agreement to cover additional work
performed during the extension.
As of March 31, 2004, the Company had advanced Caltech a total of $566,640 for
research and development costs. These costs are expensed as incurred. Research
expense related to these costs was $141,660 for the quarter ended March 31,
2004. Financial accounting standards require the capitalization of certain
software costs after technological feasibility is established. These costs are
not applicable to the Company.
On April 20, 2004, the Company finalized the formation of Aonexx Technologies,
Inc. and provided $2,000,000 in initial capitalization, and agreed to contribute
up to an additional $3,000,000 over a two year period as certain milestones in
the development of its business are met. See Note 6, "Subsequent Events."
On April 13, 2004, the Company agreed to commit $5,000,000 to acquire a majority
interest in Insert Therapeutics, Inc., of which $1,000,000 is to be provided
initially at the time of acquisition with an additional $1,000,000 to be
provided in six months, and an additional $3,000,000 based upon the attainment
of certain milestones in the further development of its business. See Note 6,
"Subsequent Events."
On April 21, 2004, the Company agreed to form Nanokinetics, Inc. and to provide
it with a total of $20,000,000 of equity capital, with $2,000,000 to be provided
at the time of its formation and an additional $18,000,000 to be contributed
over an 18 month period as specified milestones in the development of its
business are met. See Note 6, "Subsequent Events."
The Company maintains several bank accounts at various financial institutions.
These accounts are insured by the Federal Deposit Insurance Corporation (FDIC),
up to $100,000. At March 31, 2004 the Company had deposits with these financial
institutions with uninsured cash balances totaling $10,130,701. 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.
NOTE 6: SUBSEQUENT EVENTS
------------------
On April 20, 2004, the formation and organization of Aonexx Technologies, Inc.
was completed, with the Company making its contribution of $2,000,000 to the
capital of Aonexx in exchange for Preferred Stock representing 80% of the voting
securities of the company, and committing to inject an additional
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$3,000,000 if certain milestones are met. If all options outstanding and
available under an option pool were granted and exercised, the Company's
ownership of voting securities would decline but not below 50%. Moreover, as
owner all of the outstanding Preferred Stock, the Company will have the right at
all times to elect a majority of the members of the Board of Directors.
On April 13, 2004, the Company agreed to provide $2,000,000 to purchase shares
of Preferred Stock that will represent approximately 64% of the voting
securities of Insert Therapeutics, Inc. and to contribute up to $3,000,000 of
additional capital as certain milestones in the further development of its
business are met. In the event that options available under an option pool were
granted and exercised, the ownership of the Company in the Insert Therapeutics
would be reduced, but not below 50% of the then outstanding voting securities.
Moreover, as owner all of the outstanding Preferred Stock, the Company will have
the right at all time to elect a majority of the members of the Board of
Directors.
On April 21, 2004, the Company entered into an agreement to form Nanokinetics,
Inc. with Dr. Michael Roukes and the California Institute of Technology. The
Company has agreed to provide $2,000,000 of initial funding to Nanokinetics to
purchase shares of Preferred Stock, and to contribute up to $18,000,000 of
additional capital as certain milestones in the development of its business are
met. The Company initially will own 80% of the voting securities of the new
company. In the event that all options outstanding or available under an option
pool were granted and exercised, the Company's ownership would be reduced to
approximately 45.5% of the then outstanding voting securities. However, as
owner of all outstanding Preferred Stock, the Company at all times will have the
right to elect a majority of the members of the Board of Directors.
NOTE 7: 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 consolidated 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 consolidated 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 its 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
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adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.
NOTE 8: 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.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
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 OPERATION
- -------------------
On January 12, 2004, the Company, a Delaware corporation then known as
"InterActive Group, Inc.", acquired all of the issued and outstanding securities
of Arrowhead Research Corporation, a California corporation (the "California
corporation"), pursuant to the terms and conditions set forth in a "Stock
Purchase and Exchange Agreement" originally entered into on December 10, 2003
(the "Exchange Agreement"). As a result of this transaction, control of the
Company was changed, with the former shareholders of the California corporation
acquiring approximately 88.9% of the Company's Common Stock outstanding
immediately following the transaction. In addition, all of the officers and
directors of the Company prior to the transaction were replaced by designees of
the former shareholders of the California corporation, and the Company's
corporate name was changed to "Arrowhead Research Corporation."
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 funding research at
universities in pioneering scientific areas, primarily nanotechnology, in return
for exclusive rights to commercialize technologies and associated intellectual
property and patents developed as a result of this research. The goal of the
Company in providing financing for research projects 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.
Commercial applications that arise from Company-sponsored research projects
are expected to be developed and marketed by Arrowhead Research through a series
of diversified subsidiaries representing each product or application, or through
third-party licensing. The National Nanotechnology Initiative ("NNI"),
sponsored by the federal government, has defined nanotechnology as "research and
technology development at the atomic, molecular or macromolecular levels, in the
length scale of approximately 1 - 100 nanometer range." Nanoscale materials are
used in electronic, magnetic and optoelectronic, biomedical, pharmaceutical,
cosmetic, energy, catalytic and materials applications. According to NNI, areas
producing the greatest revenue for nanoparticles reportedly are
chemical-mechanical polishing,
- 14 -
magnetic recording tapes, sunscreens, automotive catalyst supports, biolabeling,
electroconductive coatings and optical fibers. The U.S. government predicts a $1
trillion global market for nanotechnology in little over a decade.
Through the end of March 2004, the Company had entered into three
arrangements with the California Institute of Technology ("Caltech"), and three
corresponding individual professors on the faculty of Caltech, Charles Patrick
Collier, Marc W. Bockrath and Harry D. Atwater, with respect to the financing of
research projects in various aspects of nanotechnology development. In each
case, 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 three research agreements currently being financed at Caltech are:
- NANOELECTRONICS: Professor Marc Bockrath and his team of scientists at
Caltech are investigating the behavior of electronic circuits
comprised of nanoscale materials, and exploiting their unique
properties for a variety of applications. The Bockrath group is
researching the transport phenomena of nanometer scale systems to
create devices such as memories and logic gates that operate on these
new principles. In particular they are examining the nature of carbon
nanotubes.
Carbon nanotubes have several attractive qualities: they are
chemically stable, have the electrical conductivity of copper, the
thermal conductivity of diamond, and are mechanically flexible with an
extremely high strength-to-weight ratio. Based on these remarkable
properties, many potential applications have been proposed for carbon
nanotubes. Research by the Bockrath group is focused on development of
more powerful electromechanical devices, including faster memory
chips, switches, and signal processors, and the creation of arrays of
sensors that can be individually tailored to detect particular
chemical species, enabling on-chip, artificial-nose chemical
identification.
- BIOMOLECULAR TOOLS: Professor C. Patrick Collier's group is developing
new technologies that will make possible the study and control of
biomolecular materials at the nanometer scale. Specific tools and
applications being created involve an atomic force microscope
(AFM)-based writing technique called Dip-Pen Nanolithography,
combinatorial chemical methods, and the construction of
molecule-specific switches and manipulators integrated onto AFM tips.
Dip-Pen Nanolithography (DPN) involves the construction of nano-arrays
of biologically active enzymes on glass surfaces and uses chemically
modified AFM tips to pattern biological molecules on a surface of
interest with nanoscale resolution and precision as well as control
over biological activity of the resulting nanostructures.
Molecule-specific switches have shown great promise in becoming
powerful screening tools for genomics, proteomics and the
pharmaceutical industry. Specific benefits include reduced and denser
feature sizes. The AFM tips research includes development of methods
to exploit the unique molecular capabilities, mechanical and
electrical properties, and length scale of single-wall carbon
nanotubes (SWNTs). So far, robust, high-yield production methods have
been developed for fabricating SWNT probes for AFMs that can image
individual molecules in both wet and dry environments. The opportunity
here is enormous; conventional structure-based pharmaceutical design
is hampered by the lack of high-resolution structural information for
most protein-coupled receptors.
- 15 -
- NANOFILMS: Professor Harry A. Atwater's group is developing methods of
engineering nanofilm materials. These ultra-thin films have properties
that mirror those of larger, single-crystal bulk materials at the
macroscopic level with the added advantage that they can be placed on
inexpensive substrates and/or possibly integrated alongside different
materials in a single device. Nanofilms currently under investigation
include high performance semiconductor materials (useful in such
applications as LEDs, solar cells, and wireless communication devices)
and so-called active oxides (useful for active optical devices and
electro-optical integration).
The Atwater group is pursuing two approaches to creating these
nanofilms. The first, thin-film growth, has the potential to create
piezoelectric devices that approach the quality of single crystal
devices, but at much lower manufacturing costs and greater potential
for integration into MEMS-based devices. The second approach, wafer
bonding and layer transfer, could enable the development of low-cost,
high performance laminate substrates (e.g., InP on Si) that will
reduce manufacturing costs, improve device performance, and enable the
integration of multiple device types into a single chip - an industry
trend termed system-on-a-chip (SoC). In addition, this latter process
has, for the first time, yielded ferroelectric thin films with
properties that are as good as those of bulk materials.
In addition to funding research, the Company has recently formed, or
entered into agreements to form or acquire controlling interest in three
companies that will operate as majority-owned subsidiaries of the Company:
- AONEXX TECHNOLOGIES, INC. On April 20, 2004, the Company formed its
first majority owned subsidiary, Aonexx Technologies, Inc. with Dr.
Harry A Atwater and members of his research group at Caltech. Aonexx
was formed to commercialize a patented method for transferring
nano-layers of semiconductor materials (e.g., indium phosphide,
germanium, and gallium arsenide) and oxides (e.g., barium titanate,
lithium niobate, and PMNPT) onto low-cost substrates (e.g., silicon,
sapphire, and glass), with no adhesives and with controlled stress.
The Company has provided $2,000,000 of initial funding to Aonexx, with
a commitment to inject an additional $3,000,000 if certain milestones
are met.
Applications expected to be targeted by Aonexx include the development
of inexpensive laminate wafers (e.g., indium phosphide on silicon and
germanium on silicon) that could replace expensive, homogenous
compound semiconductor substrates. These 'replacement' wafers are
expected to reduce manufacturing costs and improve performance for
devices such as LEDs, power amplifiers for wireless communications,
and high-efficiency solar cells. Aonexx is currently scheduled to have
limited samples available for evaluation purposes by qualified parties
within three months.
Aonexx is also exploring the use of the technology to support the
integration of different semiconductor materials onto a single
substrate. Such a technology would enable optical, logical, and high
frequency power amplification devices to be integrated into single
dies - an industry trend termed 'system on a chip' (SoC) - and bring
with it opportunities for significant cost savings and performance
improvements. Ultimately, the company hopes to enable the optical and
electrical properties of device active regions to be engineered
independently of the underlying substrate's thermal, dielectric, and
mechanical properties.
- NANOKINETICS, INC. On April 21, 2004, the Company entered into an
agreement with Dr. Michael Roukes and Caltech to form a new
corporation, Nanokinetics, Inc., that will
- 16 -
focus on the development of the processes and devices needed to
commercialize various nanotechnology applications. Pursuant to this
agreement, Caltech would grant to Nanokinetics a fully-paid,
worldwide, exclusive license to use for commercial purposes certain
technology developed by Dr. Roukes and his research group at Caltech.
As payment in full for the technology license, Caltech will be granted
a Warrant to purchase, for a nominal consideration, shares of the new
company's Common Stock. The Company has committed to provide a total
of $20,000,000 in capital to finance the operations of Nanokinetics as
specified milestones are met over an initial 12-month period.
To date, nanoscience has been directed to the development of
individual devices. Nanokinetics has been formed to build upon
intellectual property developed by Dr. Roukes and his group at
Caltech. Nanokinetics will focus on the incorporation of various
nanoscience discoveries to produce integrated systems of nanotech
devices that can provide the basis of products to be manufactured in
commercial quantities. Nanokinetics intends to implement this
technological base by establishing the facilities, processes, and
techniques required for commercial production of one or more nanotech
products to be developed by Nanokinetics for target markets. For
example, one application under development by Dr Roukes and his team
is a microfluidic-based electronic biosensor based upon BioNEMS
(biofunctionalized nanoelectromechanical systems). In the near term,
nanosystems such as this, with nanoscale sensor elements numbering in
the hundreds and thousands, are expected to provide powerful new
approaches to bio-threat detection, drug screening, and medical
diagnostics -- with sensitivity approaching the single molecule level.
- INSERT THERAPEUTICS, INC. The Company has also agreed to acquire a
majority interest in Insert Therapeutics, Inc., a Pasadena-based
company focused on designing, developing and commercializing
delivery-enhanced therapeutics using its patented class of polymeric
delivery systems. Pursuant to this Agreement, the Company initially
would provide $1,000,000 to Insert Therapeutics, and a second
$1,000,000 six months later, with up to $3,000,000 of additional
capital if specified milestones are met.
Under the direction of Dr. Mark Davis, a professor of chemical
engineering at Caltech, Insert Therapeutics is currently expanding and
leveraging its platform technology, Cyclosert(TM), through an internal
small-molecule drug development program, a gene-therapy collaboration
with San Diego-based Canji, Inc., a subsidiary of Schering-Plough, and
grants in both areas from the National Cancer Institute. Insert has
designed a novel class of nanoscale cyclodextrin polymers that
incorporate optimal properties for intracellular systemic delivery of
a broad range of therapeutics. These polymers can be designed to fit
the size of the molecule or drug to be delivered. Cyclosert's linear
cyclodextrin-containing polymers can be designed to be neutral,
positively charged or negatively charged. This feature is unique to
Cyclosert technology and provides great flexibility for formulation
and delivery. Cyclosert polymers have been synthesized at molecular
weights ranging up to 150 kD, allowing for systemic drug delivery with
the potential to slow renal clearance, enhance circulation time and
improve passive accumulation of active drug at the target tissue.
As is the case with any research and development undertaking, it is
possible that no commercially viable technology will be developed as a result of
any one or more of the projects and/or subsidiaries 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
- 17 -
traditional venture capital firms that focus in the high tech arena.
Consequently, the Company is engaged in negotiations with Caltech and additional
members of its faculty pertaining to additional research agreements, and it is
anticipated that the Company will enter into comparable arrangements with a
number of researchers in the nanotechnology field, both at Caltech and at other
universities. The Company also may seek to identify and finance the research and
development activities of other entrepreneurs who are working in the
nanotechnology arena outside of a university setting.
On April 29, 2004, John C. Miller, a managing editor of Nanotechnology Law
& Business, a quarterly journal that is a recognized source of information on
important developments and the latest trends in nanotechnology law, business and
policy, joined the Company as Vice President, Intellectual Property. Mr. Miller,
who has published a number of articles on legal and policy issues in
nanotechnology, is expected to help guide the Company in the areas of business
development, focusing on patent and intellectual property issues. Among other
things, he will be responsible for implementation of an agreement between the
Company and 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 nanotechnology. Pursuant to this
agreement, the Company has the right to retain 50% of any and all amounts that
may be recovered from third parties who may be infringing upon one or more of
the patents in the portfolio.
In connection with the transactions that resulted in the change in the
Company's ownership and business, the Company acquired certain technology from
San Diego Magnetics, Inc. ("SDM"), whose principal shareholder, TPR Group, Inc.,
owned approximately 90% of the Company's Common Stock prior to January 12, 2004.
There were no pre-existing relationships between the California corporation or
its management and either SDM or TPR Group, Inc. SDM was formed in 1998 to
purchase from Eastman Kodak Company ("Kodak") the assets and properties then
employed by Kodak in the ownership and activities of the Kodak San Diego
Laboratories, a research and development operation in San Diego, California. The
intellectual property acquired by the Company from SDM includes all know-how
developed by SDM relating to thin film fabrication and design of thin film
devices for magnetic sensing, nanoscale optical coatings and other thin film
sensors (excluding know-how related to the sensing of currency or other
documents containing stored monetary value). It also includes SDM's rights under
a non-exclusive license from Kodak to use a total of 71 patents relating to thin
film coatings, magnetic detectors, systems and other devices fabricated using
thin film fabrication technologies. Management of the Company is continuing to
evaluate, in consultation with members of its Scientific Advisory Board, whether
any of the SDM technology may prove to have any meaningful value to the Company.
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
- 18 -
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 aggregate net proceeds from the two private placements totaled $11,302,363.
See Part II, Item 2, "Changes in Securities."
As of May 10, 2004, the Company had used approximately $564,000 of its cash
resources to fund the three research projects it has already undertaken, and an
additional $2,600,000 has been committed to meet the Company's future
obligations under the three research projects over 4-5 year periods.
In connection with the formation of Aonexx Technologies, Inc., the Company
has provided $2,000,000 in initial capitalization, and has agreed to contribute
up to an additional $3,000,000 over a two year period as certain milestones in
the development of its business are met.
The Company has agreed to provide a total of $20,000,000 of equity capital
to Nanokinetics Inc., with $2,000,000 to be provided at the time of its
formation and an additional $18,000,000 to be contributed to capital over an
18-month period as specified milestones in the development of its business are
met.
An additional $5,000,000 has been committed by the Company to acquire a
majority interest in Insert Therapeutics, Inc., of which $1,000,000 is to be
provided initially at the time of acquisition with an additional $1,000,000 to
be provided in six months, and an additional $3,000,000 based upon the
attainment of certain milestones in the further development of its business.
As of May 10, 2004, the Company retained approximately $8,800,000 of the
$11,302,363 net proceeds from the two private placements which could be used to
meet the Company's commitments under its existing agreements to fund research
projects and provide capital to majority owned subsidiaries. Since the Company
has committed a total of approximately $30,600,000 for these purposes over the
next two years, the Company will be required to raise substantial additional
capital over this period to meet its funding obligations. It is anticipated
that the Company will seek to raise the additional capital required to meet its
commitments through the sale of additional equity securities.
For these reasons, it should be anticipated that the Company may call the
outstanding Warrants for redemption in the near term, in the expectation that
the holders of the Warrants would exercise them prior to redemption at a nominal
price per Warrant. If the Warrants were called for redemption, and all of the
Warrants were exercised rather than redeemed, the Company would realize an
additional $20,756,624 in gross proceeds.
In addition, the Company may seek to raise additional capital through the
sale of Common Stock and/or Warrants in one or more private placements, or in a
registered public offering. Assuming that the Company's pending application for
the listing of its Common Stock and Warrants on The NASDAQ Small Cap Market is
approved, the Company will be subject to a NASDAQ rule that would require
approval of the Company's stockholders before the Company could raise additional
capital by conducting further private placements if additional Common Stock were
to be offered at a price below the prevailing market price for the Common Stock.
- 19 -
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:
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
by prior management 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 is still in the development stage, with only a limited number of
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 a new business
venture. For this reason, the intended business and operations of the Company
may not prove to 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 which could 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, it is possible that no 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 unproven technology
research, it should be expected that the Company would not realize significant
revenue in the foreseeable future, if at all.
NEED FOR ADDITIONAL CAPITAL. The Company has entered into agreements
pursuant to which it is committed to provide substantial amounts of research
project funding and financial support for majority owned subsidiaries over an
extended period of time. As of May 10, 2004, these commitments, including
approximately $28,600,000 that will be required over the next two years, exceed
the Company's available cash resources by more than $21,000,000. Accordingly,
the Company will need to raise additional capital in the near term, and may seek
to do so by calling the outstanding Warrants for redemption, conducting one or
more private placements of equity securities, selling additional securities in a
registered public offering, or through a combination of one or more of such
financing alternatives. There can be no assurance that any additional capital
resources which the Company may need will be available to the Company as and
when required, or on terms that will be acceptable to the Company. If the
Company is unable to raise the capital required on a timely basis, it would not
be able to fulfill its obligations to fund research projects and the development
of the businesses of its majority owned subsidiaries. In such event, the
Company would be required to renegotiate the terms upon which it has agreed to
provide research
- 20 -
funding and capital to its subsidiaries, and may be required to delay or reduce
implementation of certain aspects of its plan of operations. Even if the
necessary funding were available, the issuance of additional securities would
dilute the equity interests of its existing stockholders, perhaps substantially.
DILUTION THROUGH 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
13,550,546 shares of Common Stock have been issued, 13,837,749 are reserved for
issuance upon exercise of outstanding Stock Purchase Warrants, and 3,000,000
shares of Common Stock are reserved for issuance upon exercise of Stock Options
that have been granted or may be granted under the Company's 2000 Stock Option
Plan to employees, consultants and others expected to provide significant
services to the Company. Approximately 20,000,000 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. In addition,
the issuance of additional shares of Common Stock upon exercise of the Warrants,
or even 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.
RELIANCE ON KEY PERSONNEL. The Company's future success will depend to a
significant extent on the continued services of its key employees, particularly
R. Bruce Stewart, who conceived the Company plan of operation and has been most
instrumental in assisting the Company in raising the capital that it needs to
implement the plan of operation. The Company's ability to manage growth will
also depend on its ability to attract and retain qualified technical, sales,
marketing, finance and managerial personnel. If the Company is unable to find,
hire and retain qualified individuals, it may have difficulty implementing
portions of its business strategy in a timely manner, or at all.
POSSIBILITY OF COMPETITION. Management believes that the Company's success
to date in raising capital to finance nanotechnology research projects and
entering into sponsorship agreements with researchers at Caltech is
attributable, in large part, because the plan of operations adopted by the
Company is thought to be a novel one. Although various governmental agencies
provide research funding of various types, and venture capital funds frequently
invest in companies that seek to commercialize more developed technologies,
management is not aware of any companies that sponsor early-stage, purely
scientific research at universities of the type that the Company has been formed
to finance. If the Company continues to be successful in attracting funding and
obtaining research sponsorship agreements with leading scientists in the
nanotechnology arena, it is possible that competitors will emerge to provide
comparable or alternative sources of funding. Should that occur, the Company
could encounter difficulty in raising funds and obtaining the opportunity to
finance research projects that management believes could have significant
potential for commercial returns to the Company.
LIMITED PUBLIC MARKET FOR AND EXTREME FLUCTUATIONS IN THE MARKET PRICE OF
THE COMMON STOCK; EFFECT OF REGISTRATION STATEMENT ON MARKET PRICES. Although
application has been made for listing on The NASDAQ SmallCap Market, the
Company's Common Stock currently is traded in the over-the-counter market and
quoted on the OTC Bulletin Board under the symbol "ARWR." 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 has sold, 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
- 21 -
on January 12, 2004. The Company has filed a registration statement with the
Securities and Exchange Commission, for the purpose of registering for resale
under the Securities Act, all of the Common Stock that was issued without such
registration in connection with the transaction contemplated by the Exchange
Agreement. Upon effectiveness of this pending registration, the number of
shares of the Company's Common Stock in the public "float" will increase
dramatically. Sales of a number of the shares of Common Stock pursuant to the
registration statement, or even the possibility of such sales, could have a
significant depressing effect on the market price for the Company's Common Stock
and Warrants.
MARKET OVERHANG-WARRANTS. The pending registration statement that the
Company has filed with the Securities and Exchange Commission also covers all
the Warrants issued in connection with the transactions contemplated by the
Exchange Agreement, along with all of the shares of Common Stock issuable upon
exercise of the Warrants. 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 the Company's Common Stock trade.
POSSIBLE VOLATILITY OF MARKET PRICES. The public markets for securities
such as the Company's Common Stock and Warrants 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 and Warrants for reasons unrelated to the Company or its
operating performance.
POSSIBLE ISSUANCE OF PREFERRED STOCK HAVING PREFERENCES OVER THE COMMON
STOCK; POSSIBLE CHANGE IN CONTROL PROVISIONS. Although no shares of Preferred
Stock currently are outstanding, and 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 chief executive and financial officer 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
chief executive and financial officer 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.
- 22 -
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 have been or 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.
Pursuant to the Exchange Agreement, an aggregate of 5,730,000 shares of the
Company's Common Stock were issued to acquire, in exchange therefor, all of the
5,730,000 shares of the Common Stock of the California corporation then
outstanding. In addition, Warrants to purchase 5,909,500 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 389,197 shares of
Common Stock were then outstanding. An additional 316,332 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 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 $8,922,000 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.
- 23 -
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.
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 the Company 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. A second Current Report on Form 8-K was filed by Company on March 10,
2004 to report that it entered into an agreement with Dr. Harry A. Atwater and
Caltech to form a new corporation to commercialize an ultrathin crystal film
(nanofilm) technology that has been developed by Dr. Atwater and his research
group at Caltech. On April 6, 2004, the Company
- 24 -
filed a Current Report on Form 8-K to report that an application was being
submitted to The NASDAQ Stock Market for the approval of the Company's Common
Stock and Stock Purchase Warrants for quotation on The NASDAQ SmallCap Market,
and that steps were being taken to meet the listing requirements. A fourth
Current Report on Form 8-K was filed by the Company on April 23, 2004 to report
the Company's commitments and/or investments in its three subsidiaries,
Nanokinetics, Inc., Insert Therapeutics, Inc. and Aonexx Technologies, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has caused this Quarterly Report on Form 10-QSB
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 2004 ARROWHEAD RESEARCH CORPORATION.
BY: /s/ R. Bruce Stewart, President
-------------------------------------------------
R. Bruce Stewart, President
Chief executive, financial and accounting officer
- 25 -
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: May 14, 2004
R. BRUCE STEWART
-----------------------
R. Bruce Stewart, President
Chief executive, financial and accounting officer
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 March 31, 2004, 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: May 14, 2004
R. BRUCE STEWART
------------------
R. Bruce Stewart, President
Chief executive, financial and accounting
officer
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.
