AVI BIOPHARMA, INC.
(A Development Stage
Company)
BALANCE
SHEETS
(unaudited)
|
|
June 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
9,263,512
|
|
$
|
20,159,201
|
|
Short-term securitiesavailable-for-sale
|
|
10,056,789
|
|
12,992,931
|
|
Accounts
receivable
|
|
1,119,780
|
|
51,498
|
|
Other current
assets
|
|
775,179
|
|
736,283
|
|
Total Current
Assets
|
|
21,215,260
|
|
33,939,913
|
|
|
|
|
|
|
|
Property and
Equipment, net of accumulated depreciation and amortization of $11,034,187 and
$10,174,712
|
|
7,189,503
|
|
4,329,583
|
|
Patent Costs,
net of accumulated amortization of $1,580,130 and $1,496,699
|
|
2,769,042
|
|
2,558,541
|
|
Other Assets
|
|
34,709
|
|
34,709
|
|
Total Assets
|
|
$
|
31,208,514
|
|
$
|
40,862,746
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,348,603
|
|
$
|
1,401,584
|
|
Accrued employee
compensation
|
|
1,132,036
|
|
1,371,353
|
|
Long-term debt,
current portion
|
|
69,434
|
|
|
|
Warrant
liability
|
|
2,938,568
|
|
5,192,576
|
|
Other
liabilities
|
|
1,336,821
|
|
377,908
|
|
Total Current
Liabilities
|
|
7,825,462
|
|
8,343,421
|
|
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt,
non-current portion
|
|
2,106,675
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Preferred stock,
$.0001 par value, 20,000,000 shares authorized; none issued and outstanding
|
|
|
|
|
|
Common stock,
$.0001 par value, 200,000,000 shares authorized; 53,654,200 and 53,182,841 issued
and outstanding
|
|
5,365
|
|
5,318
|
|
Additional
paid-in capital
|
|
236,466,429
|
|
231,685,419
|
|
Accumulated
other comprehensive income
|
|
|
|
18,418
|
|
Deficit
accumulated during the development stage
|
|
(215,195,417
|
)
|
(199,189,830
|
)
|
Total
Shareholders Equity
|
|
21,276,377
|
|
32,519,325
|
|
Total Liabilities
and Shareholders Equity
|
|
$
|
31,208,514
|
|
$
|
40,862,746
|
|
See accompanying notes to
financial statements.
2
AVI BIOPHARMA, INC.
(A Development Stage
Company)
STATEMENTS
OF OPERATIONS
(unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
July 22, 1980
(inception) through
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
June 30, 2007
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
license fees, grants and research contracts
|
|
$
|
2,351,424
|
|
$
|
18,558
|
|
$
|
2,887,466
|
|
$
|
84,520
|
|
$
|
12,868,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
9,160,816
|
|
5,921,929
|
|
15,478,457
|
|
12,685,174
|
|
163,125,672
|
|
General and
administrative
|
|
2,030,796
|
|
1,515,711
|
|
6,334,681
|
|
4,337,437
|
|
47,155,209
|
|
Acquired
in-process research and development
|
|
|
|
|
|
|
|
|
|
19,545,028
|
|
|
|
11,191,612
|
|
7,437,640
|
|
21,813,138
|
|
17,022,611
|
|
229,825,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income,
net
|
|
303,568
|
|
517,053
|
|
666,077
|
|
974,912
|
|
8,115,619
|
|
Gain (loss) on
warrant liability
|
|
755,317
|
|
13,801,693
|
|
2,254,008
|
|
(393,683
|
)
|
6,785,434
|
|
Realized gain on
sale of short-term securities available-for-sale
|
|
|
|
|
|
|
|
|
|
3,862,502
|
|
Write-down of
short-term securities available-for-sale
|
|
|
|
|
|
|
|
|
|
(17,001,348
|
)
|
|
|
1,058,885
|
|
14,318,746
|
|
2,920,085
|
|
581,229
|
|
1,762,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(7,781,303
|
)
|
$
|
6,899,664
|
|
$
|
(16,005,587
|
)
|
$
|
(16,356,862
|
)
|
$
|
(215,195,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share - basic
|
|
$
|
(0.15
|
)
|
$
|
0.13
|
|
$
|
(0.30
|
)
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share - diluted
|
|
$
|
(0.15
|
)
|
$
|
0.13
|
|
$
|
(0.30
|
)
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
outstanding for
computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
(loss) per share
|
|
53,560,360
|
|
52,946,054
|
|
53,381,256
|
|
52,333,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income
(loss) per share
|
|
53,560,360
|
|
54,060,830
|
|
53,381,256
|
|
52,333,952
|
|
|
|
See accompanying notes to
financial statements.
3
AVI BIOPHARMA, INC.
(A Development Stage
Company)
STATEMENTS
OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Six months ended June 30,
|
|
(Inception) to
|
|
|
|
2007
|
|
2006
|
|
June 30, 2007
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,005,587
|
)
|
$
|
(16,356,862
|
)
|
$
|
(215,195,417
|
)
|
Adjustments to
reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
968,091
|
|
1,037,924
|
|
13,788,330
|
|
Loss on disposal
of assets
|
|
58,239
|
|
190,989
|
|
373,417
|
|
Realized gain on
sale of short-term securities available-for-sale
|
|
|
|
|
|
(3,862,502
|
)
|
Write-down of
short-term securitiesavailable-for-sale
|
|
|
|
|
|
17,001,348
|
|
Issuance of
common stock to vendors
|
|
500,000
|
|
700,000
|
|
1,875,000
|
|
Compensation
expense on issuance of common stock and partnership units
|
|
|
|
|
|
861,655
|
|
Compensation
expense to non-employees on issuance of options and warrants to purchase
common stock or partnership units
|
|
312,637
|
|
525,126
|
|
2,955,690
|
|
Stock-based
compensation
|
|
3,154,836
|
|
2,943,271
|
|
8,036,306
|
|
Conversion of
interest accrued to common stock
|
|
|
|
|
|
7,860
|
|
Acquired
in-process research and development
|
|
|
|
|
|
19,545,028
|
|
(Gain) loss on
warrant liability
|
|
(2,254,008
|
)
|
393,683
|
|
(6,785,434
|
)
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
(1,107,178
|
)
|
974,423
|
|
(1,894,959
|
)
|
Other assets
|
|
|
|
2,900
|
|
(34,709
|
)
|
Net increase
(decrease) in accounts payable, accrued employee compensation, and other
liabilities
|
|
1,642,932
|
|
(308,152
|
)
|
5,088,777
|
|
Net cash used in
operating activities
|
|
(12,730,038
|
)
|
(9,896,698
|
)
|
(158,239,610
|
)
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(796,960
|
)
|
(462,752
|
)
|
(16,095,471
|
)
|
Patent costs
|
|
(349,999
|
)
|
(297,113
|
)
|
(4,825,029
|
)
|
Purchase of
marketable securities
|
|
(110,417
|
)
|
(3,205,522
|
)
|
(112,976,213
|
)
|
Sale of
marketable securities
|
|
3,028,141
|
|
2,953,998
|
|
107,828,578
|
|
Acquisition
costs
|
|
|
|
|
|
(2,377,616
|
)
|
Net cash
provided by (used in) investing activities
|
|
1,770,765
|
|
(1,011,389
|
)
|
(28,445,751
|
)
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds from
sale of common stock, warrants, and partnership units, net of offering costs,
and exercise of options and warrants
|
|
63,584
|
|
8,074,736
|
|
196,334,310
|
|
Buyback of
common stock pursuant to rescission offering
|
|
|
|
|
|
(288,795
|
)
|
Withdrawal of
partnership net assets
|
|
|
|
|
|
(176,642
|
)
|
Issuance of
convertible debt
|
|
|
|
|
|
80,000
|
|
Net cash
provided by financing activities
|
|
63,584
|
|
8,074,736
|
|
195,948,873
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
(10,895,689
|
)
|
(2,833,351
|
)
|
9,263,512
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Beginning of
period
|
|
20,159,201
|
|
34,597,734
|
|
|
|
End of period
|
|
$
|
9,263,512
|
|
$
|
31,764,383
|
|
$
|
9,263,512
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING
|
|
|
|
|
|
|
|
ACTIVITIES AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Short-term
securitiesavailable-for-sale received in connection with the private
offering
|
|
$
|
|
|
$
|
|
|
$
|
17,897,000
|
|
Change in
unrealized gain (loss) on short-term securitiesavailable-for-sale
|
|
$
|
(18,418
|
)
|
$
|
4,232
|
|
$
|
|
|
Issuance of
common stock and warrants in satisfaction of liabilities
|
|
$
|
|
|
$
|
175,000
|
|
$
|
545,000
|
|
Issuance of
common stock for building purchase
|
|
$
|
750,000
|
|
$
|
|
|
$
|
750,000
|
|
Assumption of
long-term debt for building purchase
|
|
$
|
2,199,792
|
|
$
|
|
|
$
|
2,199,792
|
|
See accompanying notes to
financial statements.
4
AVI BIOPHARMA, INC.
NOTES TO
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The
financial information included herein for the three and six-month periods ended
June 30, 2007 and 2006 and the financial information as of June 30, 2007 is
unaudited; however, such information reflects all adjustments consisting only
of normal recurring adjustments, which, in the opinion of management, are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. The financial information as
of December 31, 2006 is derived from AVI BioPharma, Inc.s (the Companys)
Form 10-K. The interim financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Companys Form
10-K. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
Stock-based compensation costs are generally based on the fair value
calculated from the Black-Scholes option-pricing model on the date of grant for
stock options and on the date of enrollment for the Plan. The fair value of
stock grants is amortized as compensation expense on a straight-line basis over
the vesting period of the grants. Stock options granted to employees are
service-based and typically vest over four years
.
The fair market values of stock options granted during the periods
presented were measured on the date of grant using the Black-Scholes
option-pricing model, with the following weighted average assumptions:
Three and Six Months Ended June 30,
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
4.83
|
%
|
4.14
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
8.0 years
|
|
9.3 years
|
|
Expected
volatility
|
|
89
|
%
|
91
|
%
|
The risk-free interest rate
is estimated using an average of treasury bill interest rates. The expected
dividend yield is zero as the Company has not paid any dividends to date and
does not expect to pay dividends in the future. The expected lives are
estimated using expected and historical exercise behavior. The expected
volatility is estimated using historical calculated volatility and considers
factors such as future events or circumstances that could impact volatility.
As part of the requirements of FSAS 123R, the Company is required to
estimate potential forfeiture of stock grants and adjust compensation cost
recorded accordingly. The estimate of forfeitures will be adjusted over the
requisite service period to the extent that actual forfeitures differ, or are
expected to differ, from such estimates. Changes in estimated forfeitures will
be recognized through a cumulative catch-up in the period of change and will
also impact the amount of stock compensation expense to be recognized in future
periods
.
5
A summary of the Companys
stock option compensation activity with respect
to the six months ended June 30, 2007
follows:
Stock Options
|
|
Shares
|
|
Weighted
Average
Exercisable
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2007
|
|
5,571,470
|
|
$
|
5.12
|
|
|
|
|
|
Granted
|
|
1,197,548
|
|
$
|
2.79
|
|
|
|
|
|
Exercised
|
|
(9,537
|
)
|
$
|
2.50
|
|
|
|
|
|
Canceled or
expired
|
|
(295,385
|
)
|
$
|
6.13
|
|
|
|
|
|
Outstanding at
June 30, 2007
|
|
6,464,096
|
|
$
|
4.65
|
|
5.65
|
|
$
|
(11,634,015
|
)
|
|
|
|
|
|
|
|
|
|
|
Vested at June
30, 2007 and expected to vest
|
|
6,425,097
|
|
$
|
4.65
|
|
5.63
|
|
$
|
(11,586,764
|
)
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
June 30, 2007
|
|
4,514,151
|
|
$
|
4.90
|
|
4.32
|
|
$
|
(9,271,446
|
)
|
The weighted average fair value per share of
stock-based payments granted to employees during the six months ended June 30,
2007 and June 30, 2006 was $2.26 and $6.09, respectively. During the same
periods, the total intrinsic value of stock options exercised were $4,677 and
$763,905, and the total fair value of stock options that vested were $2,097,464
and $2,109,771, respectively.
As of June 30, 2007, there was $4,288,506 of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plan. These costs are expected to
be recognized over a weighted-average period of 2.1 years.
During the six
months ended June 30,
2007
, $23,817 was received for
the exercise of stock options. The Company is obligated to issue shares from
the 2002 Equity Incentive Plan upon the exercise of stock options. The Company
does not currently expect to repurchase shares from any source to satisfy its
obligations under the Plan.
The following are the stock-based
compensation costs recognized in the Companys statements of operations:
|
|
Three Months Ended
June 30, 2007
|
|
Six Months Ended
June 30, 2007
|
|
Research and
development
|
|
$
|
487,648
|
|
$
|
884,685
|
|
General and
administrative
|
|
306,418
|
|
1,212,779
|
|
Total
|
|
$
|
794,066
|
|
$
|
2,097,464
|
|
|
|
Three Months Ended
June 30, 2006
|
|
Six Months Ended
June 30, 2006
|
|
Research and
development
|
|
$
|
638,584
|
|
$
|
1,178,081
|
|
General and
administrative
|
|
367,416
|
|
931,690
|
|
Total
|
|
$
|
1,006,000
|
|
$
|
2,109,771
|
|
6
The
2000 Employee Stock Purchase Plan
(ESPP) provides that eligible employees may contribute, through payroll,
deductions, up to 10% of their earnings toward the purchase of the Companys
Common Stock at 85% of the fair market value at specific dates. On January 1,
2006, the Company adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share based payment awards made to
the Companys employees and directors related to the Employee Stock Purchase
Plan, based on estimated fair values.
During the three and six-month periods ended June 30, 2007 the total compensation expense for
participants in the ESPP was $10,865 and $18,714, respectively, using
the Black-Scholes option-pricing model
with a weighted average estimated fair value per share of $1.12, expected life
of six months, risk free interest rate of 4.98%, volatility of 59.53%, and no
dividend yield. During the three and six-month periods ended June 30,
2006 the total compensation expense for
participants in the ESPP was $17,601 and $32,719, respectively, using
the Black-Scholes option-pricing model
with a weighted average estimated fair value per share of $1.35, expected life
of six months, risk free interest rate of 4.12%, volatility of 84.53%, and no
dividend yield. At June 30, 2007, 230,687 shares remain available for
purchase through the plan and there were 90 employees eligible to participate
in the plan, of which 32 were participants.
On March 27, 2007, in connection with
his resignation, the Company entered into a Separation and Release Agreement
with AVIs former Chairman and Chief Executive Officer. Pursuant to this
agreement, he may exercise his previously granted options until the
earlier of the termination date specified in the respective stock option grant
agreements or March 28, 2010. This modification of these stock options in the
first quarter of 2007 increased compensation costs by $1,057,372.
On March 15, 2006 unvested stock options for
nine employees in the Companys Colorado facility were accelerated. These
employees joined Cook Group Inc. in April 2006. The acceleration of these stock
options in the first quarter of 2006 increased compensation costs by $833,500.
During the
three and six-month periods
ended June 30, 2007
the total
compensation expense for stock-based compensation was $794,066 and $3,154,836,
respectively. During the three and six-month periods ended June 30, 2006 the total compensation expense for
stock-based compensation was $1,006,000 and $2,943,271, respectively.
The Company records the fair value of stock options granted to
non-employees in exchange for services in accordance with EITF 96-18
Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services
.
The fair value of the options granted is expensed when the measurement date is
known. The performance for services was satisfied on the grant date for stock
options granted to non-employees. The total fair value of the options granted
to non-employees during the six months ended June 30, 2007 and June 30, 2006
was $312,637 and $525,126, respectively,
which was expensed to research and development.
Warrants
. Certain of the Companys
warrants issued in connection with financing arrangements are classified as
liabilities in accordance with EITF 00-19,
Accounting for derivative
financial instruments indexed to, and potentially settled in, a companys own
stock.
7
The fair market value of these warrants is recorded on the balance sheet
at issuance and marked to market at each financial reporting period. The change
in the fair value of the warrants is recorded in the Statement of Operations as
a non-cash gain (loss) and is estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Three and Six Months Ended June 30,
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
4.8
|
%
|
5.0
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
1.4-2.9 years
|
|
2.4-3.9 years
|
|
Expected
volatility
|
|
82.7%-89.5
|
%
|
70.9%-83.6
|
%
|
The risk-free interest
rate is estimated using an average of treasury bill interest rates. The
expected dividend yield is zero as the Company has not paid any dividends to
date and does not expect to pay dividends in the future. The expected lives are
based on the remaining contractual lives of the related warrants. The expected
volatility is estimated using historical calculated volatility and considers
factors such as future events or circumstances that could impact volatility.
For warrants classified
as permanent equity in accordance with EITF 00-19, the fair value of the
warrants is recorded in shareholders equity and no further adjustments are
made.
Commitments
and Contingencies
.
In the normal course of business, the
Company may be named as a party to various legal claims, actions and
complaints, including matters involving employment, intellectual property,
effects from the use of drugs utilizing our technology, or others. It
is impossible to predict with certainty whether any resulting liability would
have a material adverse effect on the Companys financial position, results of
operations or cash flows.
Financial Instruments
.
The carrying
amounts reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable, and other current monetary assets and liabilities
approximate fair value because of the immediate or short-term maturity of these financial instruments.
License
Arrangements.
License
arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive licensed rights to patented or
patent pending compounds, technology access fees, various performance or sales
milestones and future product royalty payments. Some of these arrangements are
multiple element arrangements.
The Company defers recognition of
non-refundable upfront fees if it has continuing performance obligations
without which the technology, right, product or service conveyed in conjunction
with the non-refundable fee has no utility to the licensee that is separate and
independent of Company performance under the other elements of the arrangement.
In addition, if the Company has continuing involvement through research and
development services that are required because its know-how and expertise
related to the technology is proprietary to the Company, or can only be
performed by the Company, then such up-front fees are deferred and recognized
over the period of continuing involvement.
8
Payments related to substantive,
performance-based milestones in a research and development arrangement are
recognized as revenue upon the achievement of the milestones as specified in
the underlying agreements when they represent the culmination of the earnings
process.
Government
Research Contract Revenue.
The Company recognizes revenues from federal research
contracts during the period in which the related expenditures are incurred. The
Company presents these revenues and related expenses at gross in the
consolidated financial statements in accordance with EITF 99-19
Reporting Revenue Gross as a Principal versus Net as an Agent
.
See Note 2.
Income
Taxes.
In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The provisions of FIN 48 are effective for
the Company as of January 1, 2007, with cumulative effect, if any, of applying
FIN 48 recorded as an adjustment to opening retained earnings in the year of
adoption. The Company adopted FIN 48 on January 1, 2007, which did not have a
material impact on the consolidated financial statements. See Note 7.
Note 2. Restatement of Prior Financial
Information:
In
December 2003, January 2004, January 2005 and November 2005, the Company issued
warrants in connection with various financing transactions in registered
offerings. Previously, the Company had classified these warrants in the
shareholders equity section of the Companys balance sheet. In accordance with
EITF 00-19, if a financial instrument requires settlement in registered shares,
the financial instrument cannot be classified within equity, as the companys
ability to maintain an effective registration statement is outside that companys
control. The warrants issued by the Company require settlement in registered
shares and accordingly, should be recorded as a liability at fair value at the
date of grant, and marked to market at each reporting period.
The Company has evaluated the financial
statement impact in each of the previously filed reporting periods effected,
and concluded that the changes are quantitatively material to its previously
filed financial statements. The amounts previously recorded in each of the
three and six month periods ended June 30, 2007 and 2006 have been adjusted to
reduce equity and increase liabilities for the issued warrants, and changes in
fair value will be recorded on their own line item.
9
The effect of the correction of this error on
the balance sheet as of June 30, 2007 and the statement of operations for the
three month period ended June 30, 2007 is summarized as follows:
|
|
June 30, 2007
As Previously
Reported
|
|
Adjustments
|
|
June 30, 2007
As Restated
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
|
|
2,938,568
|
|
2,938,568
|
|
Total Current Liabilities
|
|
4,886,894
|
|
2,938,568
|
|
7,825,462
|
|
Additional
paid-in capital
|
|
246,190,431
|
|
(9,724,002
|
)
|
236,466,429
|
|
Deficit
accumulated during the development stage
|
|
(221,980,851
|
)
|
6,785,434
|
|
(215,195,417
|
)
|
Total
Shareholders Equity
|
|
24,214,945
|
|
(2,938,568
|
)
|
21,276,377
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
755,317
|
|
755,317
|
|
Net loss
|
|
(8,536,620
|
)
|
755,317
|
|
(7,781,303
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(basic and diluted)
|
|
(0.16
|
)
|
0.01
|
|
(0.15
|
)
|
The
effect of the correction of this error on the statement of operations for the
six month period ended June 30, 2007 is summarized as follows:
|
|
June 30, 2007 As
Previously
Reported
|
|
Adjustments
|
|
June 30, 2007 As
Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
2,254,008
|
|
2,254,008
|
|
Net loss
|
|
(18,259,595
|
)
|
2,254,008
|
|
(16,005,587
|
)
|
Net loss per share (basic and diluted)
|
|
(0.34
|
)
|
0.04
|
|
(0.30
|
)
|
The
effect of the correction of this error on the balance sheet as of December 31,
2006 is summarized as follows:
|
|
December 31,
2006 As
Previously
Reported
|
|
Adjustments
|
|
December 31,
2006 As Restated
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
|
|
5,192,576
|
|
5,192,576
|
|
Total Current
Liabilities
|
|
3,150,845
|
|
5,192,576
|
|
8,343,421
|
|
Additional
paid-in capital
|
|
241,409,421
|
|
(9,724,002
|
)
|
231,685,419
|
|
Deficit
accumulated during the development stage
|
|
(203,721,256
|
)
|
4,531,426
|
|
(199,189,830
|
)
|
Total
Shareholders Equity
|
|
37,711,901
|
|
(5,192,576
|
)
|
32,519,325
|
|
The
effect of the correction of this error on the statement of operations for the
three month period ended June 30, 2006 is summarized as follows:
10
|
|
June 30, 2006
As Previously
Reported
|
|
Adjustments
|
|
June 30, 2006
As Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
13,801,693
|
|
13,801,693
|
|
Net income (loss)
|
|
(6,902,029
|
)
|
13,801,693
|
|
6,899,664
|
|
Net income (loss) per share basic
|
|
(0.13
|
)
|
0.26
|
|
0.13
|
|
Net income (loss) per share diluted
|
|
(0.13
|
)
|
0.26
|
|
0.13
|
|
The
effect of the correction of this error on the statement of operations for the
six month period ended June 30, 2006 is summarized as follows:
|
|
June 30, 2006
As Previously
Reported
|
|
Adjustments
|
|
June 30, 2006
As Restated
|
|
|
|
|
|
|
|
|
|
Loss on warrant liability
|
|
|
|
(393,683
|
)
|
(393,683
|
)
|
Net loss
|
|
(15,963,179
|
)
|
(393,683
|
)
|
(16,356,862
|
)
|
Net loss per share (basic and diluted)
|
|
(0.31
|
)
|
0.00
|
|
(0.31
|
)
|
The
effect of the correction of this error on the statement of operations from July
22, 1980 (Inception) through June 30, 2007 is summarized as follows:
|
|
July 22, 1980
(Inception)
through June 30,
2007
As Previously
Reported
|
|
Adjustments
|
|
July 22, 1980
(Inception)
through June 30,
2007
As Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
6,785,434
|
|
6,785,434
|
|
Net loss
|
|
(221,980,851
|
)
|
6,785,434
|
|
(215,195,417
|
)
|
The correction of this error did not impact
cash used in operating activities, cash provided by (used in) investing activities,
or cash provided by financing activities.
Note 3. Liquidity
The Company is in the development stage. Since its inception in 1980
through June 30, 2007, the Company has incurred losses of approximately
$215 million, substantially all of which resulted from expenditures related to
research and development, general and administrative expenses, non-cash
write-downs in 2002 of $4,478,260 and in 2001 of $12,523,088 on short-term
securitiesavailable-for-sale that had an other than temporary impairment as defined
by SEC accounting rules and a one-time charge of $19,545,028 for acquired
in-process research and development reflecting the acquisition of ImmunoTherapy
Corporation. The Company has not generated any material revenue from product
sales to date, and there can be no assurance that revenues from product sales
will be achieved. Moreover, even if
the Company does achieve revenues from product sales, the Company
expects to incur operating losses over the next several years.
11
The financial statements have been prepared assuming that the Company
will continue as a going concern. The Companys ability to achieve a profitable
level of operations in the future will depend in large part on completing
product development of its antisense products, obtaining regulatory approvals
for such products, and bringing these products to market. During the period
required to develop these products, the Company will require substantial
additional financing. There is no assurance that such financing will be
available when needed or that the Companys planned products will be
commercially successful. The Company believes it has sufficient cash to fund
operations through 2007. For 2007, the Company expects expenditures for
operations, net of government funding, including collaborative efforts and GMP
facilities to be approximately $24 to $26 million. Expenditures for 2007 could
increase if the Company undertakes additional collaborative efforts. If
necessary, however, the Companys management has the ability to curtail certain
expenditures because a significant amount of the Companys costs are variable.
In December 2006, the Company announced the
execution of a two-year $28 million research contract with the Defense Threat
Reduction Agency (DTRA), an agency of the United States Department of Defense
(DoD). The contract is directed toward funding the Companys development of
antisense therapeutics to treat the effects of Ebola, Marburg and Junin
hemorrhagic viruses, which are seen by DoD as potential biological warfare and
bioterrorism agents. Funding under this contract is expected over two years,
with approximately $18.0 million committed in the first year, and the remainder
anticipated in the second year. In the first half of 2007, the Company recognized
$1,740,157 in research contract revenue from this contract.
In January 2006, the Company announced that the final version of the
2006 defense appropriations act had been approved, which included an allocation
of $11.0 million to fund the Companys ongoing defense-related programs. Net of
government administrative costs, it is anticipated that the Company will
receive up to $9.8 million under this allocation. The Companys NEUGENE
®
technology is expected to be used to continue developing therapeutic agents
against Ebola, Marburg and dengue viruses, as well as to continue developing
countermeasures for anthrax exposure and antidotes for ricin toxin. The Company
has received signed contracts for three of the projects, with government
expenditures of $7.1 million. The Company continues to work with the government
to define the scope of work to be performed on the fourth project, dengue
viruses. The Company expects that funding under these signed contracts will be
received over the next 12 months
. In the second quarter of 2007, the Company recognized $1,060,028 in
research contract revenue from this contract.
The likelihood of the long-term success of
the Company must be considered in light of the expenses,
difficulties
and delays frequently encountered in the development and commercialization of
new pharmaceutical products, competitive factors in the marketplace as well as
the burdensome regulatory environment in which the Company operates. There can
be no assurance that the Company will ever achieve significant revenues or
profitable operations.
Note 4. Earnings Per Share
Basic EPS is calculated using the weighted average number of common
shares outstanding for the period and diluted EPS is computed using the
weighted average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position for the three and six
month periods ended June 30, 2007 and the six month
12
period ended June 30, 2006, there is no difference between basic EPS
and diluted EPS since the common stock equivalents would be antidilutive.
Three Months Ended June 30,
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Net income
(loss)
|
|
$
|
(7,781,303
|
)
|
$
|
6,899,664
|
|
Weighted average
number of shares of common stock and common stock equivalents outstanding:
|
|
|
|
|
|
Weighted average
number of common shares Outstanding for computing basic earnings per share
|
|
53,560,360
|
|
52,946,054
|
|
Dilutive effect
of warrants and stock options after application of the treasury stock method
|
|
*
|
|
1,114,776
|
|
Weighted average
number of common shares outstanding for computing diluted earnings per share
|
|
53,560,360
|
|
54,060,830
|
|
Net income
(loss) per share - basic
|
|
$
|
(0.15
|
)
|
$
|
0.13
|
|
Net income
(loss) per share - diluted
|
|
$
|
(0.15
|
)
|
$
|
0.13
|
|
Six Months Ended June 30,
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Net loss
|
|
$
|
(16,005,587
|
)
|
$
|
(16,356,862
|
)
|
Weighted average
number of shares of common stock and common stock equivalents outstanding:
|
|
|
|
|
|
Weighted average
number of common shares outstanding for computing basic earnings per share
|
|
53,381,256
|
|
52,333,952
|
|
Dilutive effect
of warrants and stock options after application of the treasury stock method
|
|
*
|
|
*
|
|
Weighted average
number of common shares outstanding for computing diluted earnings per share
|
|
53,381,256
|
|
52,333,952
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.30
|
)
|
$
|
(0.31
|
)
|
* Warrants and stock options to
purchase 14,972,199 shares of common stock as of June 30, 2007 and warrants and
stock options to purchase 14,242,647 shares of common stock for the six months
ended June 30, 2006, were excluded from the earnings per share calculation as
their effect would have been antidilutive.
Note 5. Comprehensive Income and securities
available for sale
Comprehensive income (loss) includes charges
or credits to equity that did not result from transactions with shareholders.
The Companys only component of other comprehensive income (loss) is
unrealized gain (loss) on cash equivalents and short-term securitiesavailable-for-sale.
Accordingly, such investment securities are stated on the balance sheet at
their fair market value. The Company classifies its investment securities with
an original maturity of three months or less from the date of purchase as cash
equivalents. The Company classifies its investment securities with an original
maturity
13
of more than three months from the date of
purchase as short-term securitiesavailable-for-sale
. At June 30, 2007
and December 31, 2006, the Companys investments in marketable securities had
gross unrealized gains of $0 and $
18,418,
respectively. The unrealized difference between the adjusted cost and the fair
market value of these securities has been reflected as a separate component of
shareholders equity. The following table sets forth the calculation of
comprehensive income for the periods indicated:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
(Restated)
|
|
(Restated)
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net income
(loss)
|
|
$
|
(7,781,303
|
)
|
$
|
6,899,664
|
|
$
|
(16,005,587
|
)
|
$
|
(16,356,862
|
)
|
Unrealized gain
(loss) on marketable securities
|
|
(16,377
|
)
|
2,342
|
|
(18,418
|
)
|
4,232
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
$
|
(7,797,680
|
)
|
$
|
6,902,006
|
|
$
|
(16,024,005
|
)
|
$
|
(16,352,630
|
)
|
Note 6. Significant Agreements
On January 8, 2007, the Company announced
that it had entered into a cross-license agreement with Eleos Inc. for the
development of antisense drugs targeting p53, a well-studied human protein that
controls cellular response to genetic damage. Under the terms of the agreement,
the Company granted Eleos Inc. an exclusive license to the Companys NEUGENE
®
third-generation antisense chemistry to treat cancer with p53-related drugs. In
return, Eleos Inc. granted an exclusive license to its patents to the Company
for treatment of most viral diseases with drugs that target p53. The companies
are sharing rights in other medical fields where targeting p53 may be
therapeutically useful. Each company will make milestone payments and royalty
payments to the other on development and sales of products that utilize
technology licensed under the agreement. In addition, Eleos Inc. made an
upfront payment of $500,000 to the Company. The Company recognized $62,500 in
license fees in the first half of 2007; the remaining $437,500
has been
classified as deferred revenue
.
In February 2007, the Company issued 100,000
shares of the Companys common stock with a market value of $300,000 for
consulting services, which was expensed as a component of research and
development.
On March 27, 2007, the Board of Directors
appointed K.Michael Forrest as interim Chief Executive Officer and set his
compensation as follows: (a) annual salary - $385,000 and (b) options to
acquire 300,000 shares of the Companys common stock. The stock options
granted to Mr. Forrest become exercisable starting one month after the grant
date, with one-twelfth of the options becoming exercisable at that time and an
additional one-twelfth of the options becoming exercisable each month
thereafter. The exercise price is $2.45 per share.
On March 27, 2007, in connection with
the resignation of AVIs Chairman and Chief Executive Officer, the Company
entered into a Separation and Release Agreement, pursuant to which the former
Chairman and CEO is entitled to receive his base compensation for 18
months ($562,500 in the aggregate) and medical insurance for the same
18 month period and may exercise his previously granted options until the
earlier of the termination date of the respective stock option grant agreements
or March 28, 2010. The Company recognized
14
$1,619,872 in total compensation expense to
general and administrative in the first quarter of 2007, including $562,500 in
cash compensation and $1,057,372 in SFAS 123R expenses.
On April 19, 2007, the Company entered into a real property purchase
agreement with WKL Investments Airport, LLC (WKL) to purchase a parcel of
real property, including improvements situated on the land and intangibles
related to the land, for $3,300,000. The Company paid the purchase price as
follows: $350,208 in cash, assumption of two loans secured by the property in
the amount of $2,199,792, and issuance of 270,758 shares of AVI common stock
(at $2.77 per share or $750,000 in the aggregate).
On May 2, 2007, the Company entered into a
cross-license and collaboration agreement with Ercole Biotech, Inc. (Ercole)
to develop drugs that may prove effective in treating the genetic diseases Duchenne
muscular dystrophy and beta thalassemia and a stock purchase agreement in
connection therewith. Under the terms of the stock purchase
agreement, Ercole issued AVI shares of
Ercole Series A2 Preferred Stock, and the Company issued to Ercole 73,607 shares of the Companys common
stock with a market value of $200,000 and which was expensed to research and
development.
Note 7. Other current assets
Amounts included in other
current assets are as follows:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
394,499
|
|
$
|
480,003
|
|
Prepaid rents
|
|
103,503
|
|
100,838
|
|
Restricted cash
|
|
277,177
|
|
155,442
|
|
|
|
|
|
|
|
Other current
assets
|
|
$
|
775,179
|
|
$
|
736,283
|
|
Starting in April 2006, the Company was required to pledge $150,000 as
collateral for company credit cards issued to certain employees. Starting in
April 2007, the Company was required to pledge $125,000 as collateral for
payments on long-term debt. The Company classifies these amounts as restricted
cash. As of June 30, 2007, restricted cash including accrued interest was
$277,177. The remaining components of other current assets include normally
occurring prepaid expenses and rents.
Note 8. Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007, which
did not materially impact its consolidated financial statements. No
unrecognized tax benefits were recorded as of the date of adoption. As a result
of the implementation of FIN 48, the Company did not recognize any liability
for unrecognized tax benefits. There are no unrecognized tax benefits included
in the balance sheet that would, if recognized, affect the effective tax rate.
The Companys policy is to recognize interest and/or penalties related
to income tax matters in income tax expense. The Company had no accrual for
interest or penalties on its balance sheet at June 30, 2007 and at December 31,
2006, and has not recognized interest and/or penalties in the statement of
operations for the six months ended June 30, 2007.
15
At January 1, 2007, the Company had net deferred tax assets of
$79,398,000. The deferred tax assets are primarily composed of federal and
state tax net operating loss carryforwards, federal and state R&D credit
carryforwards, share-based compensation expense and intangibles. Due to
uncertainties surrounding its ability to generate future taxable income to
realize these assets, a full valuation allowance has been established to offset
its net deferred tax asset. Additionally, the Internal Revenue Code rules under
Section 382 could limit the future use of its net operating loss and R&D
credit carryforwards to offset future taxable income based on ownership changes
and the value of the Companys stock.
Item 2.
Managements
Discussion and Analysis or Plan of Operations
This section should be read in conjunction with the same titled section
contained in our Annual Report on Form 10-K as filed with the SEC for the year
ended December 31, 2006 and the Risk Factors contained in such report.
Forward-Looking Information
The
discussion in this Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act. Forward looking statements are identified by such words as believe,
expect, anticipate and words and phrases of similar import. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Such forward-looking
statements involve risks and uncertainties, including, but not limited to, the
results of research and development efforts, the success of raising funds in
the current offering or future offerings under our current shelf registration,
the results of pre-clinical and clinical testing, the effect of regulation by
FDA and other agencies, the impact of competitive products, product
development, commercialization and technological difficulties, and other risks
detailed in the Companys Securities and Exchange Commission filings, that
could cause actual results to differ materially from the expected results
reflected in such forward looking statements.
Overview
From our inception in 1980, we have devoted
our resources primarily to fund our research
and development efforts. We have been unprofitable since inception and, other
than limited interest, license fees, grants and research contracts, we have had
no material revenues from the sale of products or other sources and we do not
expect material revenues for the foreseeable future. We expect to continue to
incur losses for the foreseeable future as we continue to expand our research
and development efforts and enter into additional collaborative efforts.
As of June 30, 2007, the Companys accumulated deficit was $215,195,417.
Results of Operations
Revenues, from license fees, grants and research contracts, increased
to $2,351,424 in the second quarter of 2007 from $18,558 in the second quarter
of 2006, primarily due to increases in research contract revenues of $2,310,013
and license fees of $31,250, partially offset by decreases in grant revenues of
$8,397. Revenues, from license fees, grants and
16
research contracts, increased to $2,887,466 in the first half of 2007
from $84,520 in the comparable period in 2006, due to increases in research
contracts revenues of $2,795,305 and license fees of $62,500, partially offset
by decreases in grants revenues of $54,859.
Operating expenses increased to $11,191,612 in the second quarter of
2007 from $7,437,640 in the second quarter of 2006 and to $21,813,138 for the
six months ended June 30, 2007 from $17,022,611 for the comparable period of
2007 primarily due to increases in research and development, which increased to
$9,160,816 in the second quarter of 2007 from $5,921,929 in the second quarter
of 2006 and to $15,478,457 for the six months ended June 30, 2007 from
$12,685,174 in the comparable period in 2006. This research and development
increase in the second quarter of 2007 was due primarily to increases in
clinical expenses from the expansion of clinical programs of approximately
$1,400,000. Also, approximately $1,750,000 was expensed for government research
contracts. The research and development increase for the six months ended June
30, 2007 was due primarily to increases in net clinical expenses of
approximately $700,000 and approximately $170,000 was due to contracting costs
for the production of GMP subunits, which are used by the Company to
manufacture compounds for future clinical trials. Approximately $2,100,000 was
expensed for government research contracts. In addition, research and
development increases in chemical and lab supply costs increased approximately
$390,000, professional consultant costs increased approximately $240,000, and
leasehold and patent amortization expenses increased approximately $50,000.
These research and development increases were partially offset by decreases in
employee costs of approximately $980,000, of which approximately $430,000 was
related to the acceleration of the vesting of certain stock options in the
first quarter of 2006 and decreases in SFAS 123R expenses of approximately
$290,000 and salaries and bonuses of approximately $250,000.
The remaining increase in operating expenses was due to general and
administrative costs increasing to $2,030,796 in the second quarter of 2007
from $1,515,711 in the second quarter of 2006 and to $6,334,681 for the six
months ended June 30, 2007 from $4,337,437 for the comparable period of 2006.
This general and administrative increase in the second quarter of 2007 was due
primarily to increases in legal expenses of approximately $315,000 and
salaries, bonuses, and other compensation costs of approximately $225,000,
partially offset by decreases in SFAS 123R expenses of approximately $75,000.
This general and administrative increase for the six months ended June 30, 2007
was due primarily to increases in salaries, bonuses, and other compensation
costs of approximately $1,400,000, of which approximately $1,620,000 (including
$562,500 in cash compensation and $1,057,372 in SFAS 123R expenses) was related
to the Separation and Release Agreement with the Companys former Chief
Executive Officer, partially offset by decreases in SFAS 123R expenses of
approximately $200,000. General and administrative also includes increases in
legal expenses of approximately $545,000 and accounting expenses of
approximately $60,000.
Net interest income decreased to $303,568 in the second quarter of 2007
from $517,053 in the second quarter of 2006 and to $666,077 for the six months
ended June 30, 2007 from $974,912 for the comparable period in 2006 due to
decreases in average cash, cash equivalents and short-term securities,
partially offset by increases in average interest rates of the Companys
interest earning investments.
17
Gain (loss) on warrant liability was a gain of $755,317 in the second
quarter of 2007 compared to a gain of $13, 801,693 in the second quarter of
2006. Gain (loss) on warrant liability was a gain of $2,254,008 for the six
months ended June 30, 2007 compared to a loss of $393,683 for the six months
ended June 30, 2006.
The
gain (loss) on warrant liability is a function of the Companys stock price and
fluctuates as the market price of the Companys stock fluctuates.
Liquidity and Capital Resources
The Company does not expect any material revenues
in 2007 or 2008 from its business activities other than from potential
government grants and research contracts. The Company
expects that its
cash requirements through 2007 will be satisfied by existing cash resources. To
fund its operations beyond 2007, the Company will need to secure additional funds.
Such funds could come from technology license fees, government grants and
research contracts, and the capital markets.
In December 2006, the Company announced the
execution of a two-year $28 million research contract with the Defense Threat
Reduction Agency (DTRA), an agency of the United States Department of Defense
(DoD). The contract is directed toward funding the Companys development of
antisense therapeutics to treat the effects of Ebola, Marburg and Junin
hemorrhagic viruses, which are seen by DoD as potential biological warfare and
bioterrorism agents. Funding under this contract is expected over two years,
with approximately $18.0 million committed in the first year, and the remainder
anticipated in the second year. In the first half of 2007, the Company
recognized $1,740,157 in research contract revenue from this contract.
In January 2006, the Company announced that
the final version of the 2006 defense appropriations act had been approved,
which included an allocation of $11.0 million to fund the Companys ongoing
defense-related programs. Net of government administrative costs, it is
anticipated that the Company will receive up to $9.8 million under this
allocation. The Companys NEUGENE
®
technology is expected to be used
to continue developing therapeutic agents against Ebola, Marburg and dengue
viruses, as well as to continue developing countermeasures for anthrax exposure
and antidotes for ricin toxin. The Company has received signed contracts for
three of the projects, with government expenditures of $7.1 million. The
Company continues to work with the government to define the scope of work to be
performed on the fourth project, dengue viruses. The Company expects that
funding under these signed contracts will be received over the next 12 months.
In the second quarter of 2007, the Company recognized $1,060,028 in research
contract revenue from this contract
.
The Companys cash, cash equivalents and short-term securities were
$19,320,301 at June 30, 2007, compared with $33,152,132 at December 31, 2006.
The decrease of $13,831,831 was due primarily to $12,730,038 used in operations
and $1,146,959 used for purchases of property and equipment and patent related
costs
, partially offset
by the receipt of $63,584 from the exercise of options and sales under
the Companys employee stock purchase plan during the first half of 2007.
The Companys short-term securities include certificates of deposit,
commercial paper and other highly liquid investments with original maturities
in excess of 90 days at the time of
18
purchase and less than one year from the balance sheet date. The
Company classifies its investment securities as available-for-sale and,
accordingly, such investment securities are stated on the balance sheet at
their fair market value with unrealized gains (losses) recorded as a separate
component of shareholders equity and comprehensive income (loss).
The Companys future expenditures and capital requirements depend on
numerous factors, most of which are difficult to project beyond the short term,
including without limitation, the progress of its research and development
programs, the progress of its pre-clinical and clinical trials, the time and
costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, its ability
to establish collaborative arrangements and the terms of any such arrangements,
and the costs associated with commercialization of its products. The Companys
cash requirements are expected to continue to increase each year as the Company
expands its activities and operations. There can be no assurance, however, that
the Company will ever be able to generate product revenues or achieve or
sustain profitability.
In addition, the Companys Chief Executive Officer recently resigned.
There can be no assurance that the Company will be able to find and employ a
permanent CEO that will be able to lead the Company successfully in the near
term. The failure to secure a permanent replacement may adversely affect the
Companys research and development efforts.
The Company expects to continue to incur losses as it
expands its research and development activities and related regulatory work and
increases its collaborative efforts.
For 2007, the Company expects expenditures for operations,
net of government funding, including collaborative efforts and GMP facilities
to be approximately $24 to $26 million. Expenditures for 2007 could increase if
the Company undertakes additional collaborative efforts. If necessary, however,
the Companys management has the ability to curtail certain expenditures
because a significant amount of the Companys costs are variable
.
Critical Accounting Policies and Estimates
The discussion and analysis of the Companys financial condition and
results of operations are based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. The Companys critical accounting policies and
estimates are consistent with the disclosure in the Companys Form 10-K, with
the exception of FIN 48, see Note 7.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
There has been no material change in the Companys market risk exposure
since the filing of our 2006 Annual Report on Form 10-K.
19
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In connection with the preparation of our Quarterly Report on Form
10-Q, for the period ending June 30, 2007, originally filed on August 9, 2007,
an evaluation was performed under the supervision of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded at that time
that our disclosure controls and procedures were effective as of the end of the
period covered by that Quarterly Report. Subsequently, as reported in Item 9A
of our Amended Annual Report on Form 10-K/A as of December 31, 2006, the Company
determined that it was necessary to restate certain of its previously issued
consolidated financial statements and that such previously issued financial
statements should no longer be relied upon.
In connection with the restatement, as of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures (as such terms are defined in Rules
13a-15(c) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)). Based upon that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were not effective as of June 30, 2007.
Internal Controls and Procedures
There were no changes in our internal control over financial reporting
that occurred during the three months ended June 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
As described in Item 9A of our Amended Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2006, management conducted an assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2006, based upon the Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management concluded that, as of December 31, 2006,
the Company did not maintain effective internal control over financial
reporting. The Company identified the following material weakness in internal
control over financial reporting as of December 31, 2006:
Management lacked adequate technical expertise
to ensure the proper application, at inception, of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and EITF 00-19 Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock related to certain stock warrants. As a result, the
Company failed to identify that certain warrants should be liability
classified. This material weakness resulted in a misstatement requiring the restatement
of the Companys financial statements for the years ended December 31, 2006,
2005 and 2004 and for each of the interim periods in 2006 and 2005.
20
During the fiscal year ending December 31, 2007, we developed a
remediation plan that would result in the implementation of significant changes
in our internal control over financial reporting, including the following:
The Company has adopted additional controls
wherein if the issuance of warrants or other derivative financial instruments
is contemplated, legal counsel and an independent accountant will be consulted
as to the financial statement impact that the issuance of such warrants or
other derivative financial instruments may have, prior to issuance.
The Company began to execute these remediative measures above in the
third quarter of 2007. Additional measures may be forthcoming as the Company
evaluates the effectiveness of these efforts. We cannot assure you that these
remediation efforts will be successful or that our internal control over
financial reporting will be effective in accomplishing all control objectives
all of the time.
21