UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2006
o
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22613
AVI
BIOPHARMA, INC.
(Name of small business
issuer in its charter)
Oregon
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93-0797222
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(State or other
jurisdiction of incorporation
or organization)
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(I.R.S. Employer
Identification No.)
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One SW
Columbia Street, Suite 1105, Portland, Oregon
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97258
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(Address of principal
executive offices)
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(Zip Code)
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Issuers telephone
number, including area code:
503-227-0554
Securities registered
under Section 12(b) of the Exchange Act:
None
Securities registered
under Section 12(g) of the Exchange Act:
Common Stock with $.0001 par
value
(Title of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933. Yes
o
No
x
.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes
o
No
x
.
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act
of 1934 (Check one):
Large
accelerated filer
o
Accelerated
filer
x
Non-accelerated
filer
o
.
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes
o
No
x
.
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing sale price of the Common Stock as reported on
the Nasdaq Capital Market on March 14, 2007) was approximately $135,683,497 as
of March 14, 2007. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares
of the Registrants Common Stock as of the close of business on March 14, 2007
was 53,282,841.
Documents Incorporated by
Reference
The issuer has
incorporated into Part III of Form 10-K, by reference, portions of its Proxy
Statement for its 2007 annual meeting.
AVI BIOPHARMA, INC.
FORM 10-K/A INDEX
EXPLANATORY NOTE
We are filing this Amendment to our Form 10-K
for the fiscal year ended December 31,2006, filed on March 16, 2007 (the
Original Filing), to amend and restate our balance sheets as of December 31,
2006 and 2005, our statements of operations, shareholders equity, and cash
flows for the years ended December 31, 2006, 2005, 2004, and the period from
July 22, 1980 (inception) through December 31, 2006. This will include the
restatement of the financial information by quarter for the periods in 2005 and
2006. This Amendment to the Original Filing amends our classification of
certain warrants that were previously recorded in equity. These warrants were
issued in registered offerings and require settlement in registered shares. As
a result, they cannot be classified within equity according to generally
accepted accounting principles. Instead, the warrants issued by the Company
should be recorded as a liability at fair value at the date of grant, and
marked to market at each reporting period. Changes in fair value are recorded
in earnings.
For the convenience of the reader, this
Amendment sets forth our Original Filing in its entirety, as amended by the
changes related to the restatement. No attempt has been made in this
Amendment to update other disclosures presented in our Original Filing, except
as required to reflect the effects of the restatement. This Amendment does not
reflect events occurring after the filing of our Original Filing, or modify or
update those disclosures, including the exhibits to the Original Filing
effected by subsequent events except as applicable in our financial statement
footnotes subsequent event disclosures. The following sections of our Original Filing
have been amended:
Part I - Item 1 - Description of Business;
Part I - Item 1A Risk Factors;
Part II - Item 6 Selected Financial Data;
Part II - Item 7 - Managements Discussion
and Analysis or Plan of Operation; and
Part II - Item 8 - Financial Statements.
This Amendment has been signed as of a
current date and all certifications of our Chief Executive Officer and Chief
Financial Officer are given as of a current date. Accordingly, this Amendment
should be read in conjunction with our filings made with the Securities and
Exchange Commission subsequent to the filing of the Original Filing, including
any amendments to those filings.
PART I
Item 1. Description of Business
General Overview
We
are a biopharmaceutical company developing therapeutic products principally
based on third-generation NEUGENE
antisense technology. Our principal products in development target
life-threatening diseases, including cardiovascular and infectious diseases.
Currently approved drugs or other therapies for these diseases often prove to
be ineffective or produce undesirable side effects. Our pre-clinical and
clinical studies indicate that our technology may lead to development of drugs
that we believe offer more effective treatment options with fewer side effects
than currently approved products. A patent estate including 202 patents
(foreign and domestic) issued or licensed to us and 198 pending patent
1
applications
(domestic and foreign) protects our technologies. Our lead product candidate,
Resten-NG®, which is targeted at cardiovascular disease, addresses a market we
believe may exceed $3 billion worldwide.
The
net loss in 2006 was $28.7 million, or $0.54 per share. Total expenses were
$33.1 million and revenues were $115,291. See Item 7. Managements Discussion
and Analysis or Plan of Operation and Item 8. Financial Statements.
We
have developed third-generation antisense technology that we believe produces
drugs that may be more stable, specific, efficacious, and cost effective than
other gene-targeting technologies, including second-generation antisense,
ribozyme, and siRNA (short interfering RNA) compounds. In seventeen clinical
trials involving 386 subjects, we have not observed any drug-related serious
adverse events. NEUGENE drugs are
synthetic polymers that block the function of selected genetic sequences
involved in disease processes. Targeting specific genetic sequences provides
for greater selectivity than that available through conventional drugs. We
believe that NEUGENE drugs have
the potential to provide safe and effective treatment for a wide range of human
diseases. NEUGENE drugs are
distinguished by a novel chemistry that replaces the modified backbones of
competing technologies with a synthetic backbone designed to improve
pharmaceutical parameters.
We
have completed pre-clinical and some clinical studies using our NEUGENE drugs in the treatment of
cardiovascular disease, infectious disease, cancer and polycystic kidney
disease (PKD), and in regulating drug metabolism. We filed our first antisense
Investigational New Drug application (IND) with the FDA for Resten-NG for
cardiovascular restenosis in 1999 and have completed a Phase I and a Phase II
clinical trial. We have completed four Phase I trials in our drug metabolism
program and two Phase Ib trials in our cancer and polycystic kidney disease
programs. We filed an IND and conducted a Phase Ib trial in 2003 for our NEUGENE antisense drug for West Nile
virus infection. We filed an IND and conducted an exploratory clinical trial
(Phase I/Ib) for Hepatitis C virus (HCV) infection. We are currently evaluating
clinical sites for a continuation of our HCV studies. We are currently
conducting a Phase Ib/II clinical trial for coronary artery bypass grafting in
Eastern Europe. We also will be conducting a proof of concept study in boys
with Duchenne Muscular Dystrophy in the U.K., in collaboration with the MDEX
consortium. In addition, we are in preclinical development for antivirals for
Dengue virus infection and for influenza A, including avian influenza.
This
annual report includes our trademarks and registered trademarks, including NEUGENE, AVICINE, Resten-NG, Resten-CP, and Oncomyc-NG. Each other
trademark, trade name or service mark appearing in this annual report
belongs to its holder.
2
Clinical Development Program
Our
therapeutic products are based on NEUGENE
antisense technology focused on applications in cardiovascular disease and
infectious disease. We currently have products at various stages of clinical
development as summarized below. We will not have marketable products unless
and until our drug candidates complete all required clinical trials and receive
FDA approval in the United States or approval by regulatory agencies outside of
the United States.
Product Candidate
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Type
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Pre-Clinical
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Phase I/Ib
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Phase II
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Phase III
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Cardiovascular Disease
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Restenosis: Resten-NG
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NEUGENE
Drug
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Completed
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Completed
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Completed
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Planned * (Cook Group)
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Restenosis: Resten-MP microparticles
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NEUGENE
Drug
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Completed
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Completed
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In-progress
(Cook Group)
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CABG: AVI-5126
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NEUGENE
Drug
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Completed
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In-progress
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Planned
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Planned
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Infectious Disease (Viral
targets)
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Hepatitis C: AVI-4065
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NEUGENE
Drug
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Completed
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In-progress
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West Nile: AVI-4020
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NEUGENE
Drug
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Completed
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Completed
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Influenza A/Avian: AVI-6001
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NEUGENE
Drug
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In-progress
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SARS: AVI-4179
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NEUGENE
Drug
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Completed
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Ebola Zaire
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NEUGENE
Drug
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In-progress
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HIV
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NEUGENE
Drug
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Planned
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Cancer
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Cancer: Oncomyc-NG: AVI-4126
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NEUGENE
Drug
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Completed
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Completed
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Drug Metabolism
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Cytochrome P450: AVI-4557
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NEUGENE
Drug
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Completed
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Completed
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Planned
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Genetic Diseases
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PKD: AVI-4126
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NEUGENE
Drug
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Completed
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Completed
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DMD: AVI-4658
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NEUGENE
Drug
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Completed
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In-progress
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*In
this table, Planned refers to trials that are being designed although a
protocol may not yet be complete; In-progress refers to studies or trials
that have actively begun but are not yet complete; and Completed refers to
studies in which the clinical trial or study has ended, the data have
substantially been collected and validated, and a full study report is either
in progress or complete.
Costs
for a clinical trial typically range between $300,000 and $1,500,000 for a
Phase I trial, between $600,000 and $4 million for a Phase II trial and could
range between $5 million and $50 million for a Phase III trial. Because the
scope, timing and issues encountered in each trial vary, we cannot predict the
exact costs associated with a particular trial in advance. For the same
reasons, we cannot predict the nature, timing, costs and quantities of future
studies or trials for a product, how a product will proceed toward and through
Phase III clinical trials and, if Phase III clinical trials are successful,
when and if FDA approval will be sought and received. Moreover, we cannot
predict whether a product will be successfully commercialized, even if
regulatory approval is obtained.
3
Cardiovascular
Disease
Program.
Resten-NG is a NEUGENE antisense drug for treating
cardiovascular restenosis, i.e., the re-narrowing of a coronary artery
following angioplasty. Resten-NG targets a key regulatory gene involved in the
disease process. We believe that by blocking the action of this gene, vessel
wall re-narrowing will be reduced or eliminated. At the October 2006
Transcatheter Cardiovascular Therapeutics conference, our licensee and
development partner, Cook Group, Incorporated (Cook) announced interim Phase
II clinical trial data treating cardiovascular restenosis by delivering
Resten-NG systemically using our proprietary microparticle delivery technology,
possibly lessening the need for, or as an adjunct to, drug eluting stents. We
initiated this Phase II clinical trial at three clinical centers in Germany in
2005, and, as part of our license agreement, Cook took responsibility for
completion of the study and communication of results. Cook has indicated that
it is planning additional clinical studies with products based on our Resten-NG
platform, possibly leading to initiating the product approval process in Europe
prior to initiating clinical trials in the United States.
Resten-CP
is a NEUGENE antisense drug for
treating coronary artery bypass grafting, i.e., the narrowing and failure of
saphenous vein grafts placed around occluded coronary arteries. The molecular
mechanism of vein graft failure is believed to be closely related to the
restenosis process and involves the activation of the same regulatory gene.
Resten-CP targets that gene in the vessel wall in a thirty minute
ex-vivo
treatment before the vein is engrafted. To enhance
delivery of our drug to the target in the vessel wall in the short period of
time available prior to bypass surgery, a delivery peptide, called CytoPorter,
that enhances drug uptake has been attached to the NEUGENE drug.
Resten-CP
has entered a human clinical trial in Eastern Europe with intended expansion
into the European Union. This is a pivotal 600 patient randomized, double
blind, placebo controlled trial incorporating a Phase Ib through Phase III
design. The Phase Ib stage of the trial is underway and a decision on
continuation into the pivotal stages (Phase II/III) of the study will be made
after evaluation of the first 110 enrolled patients. An additional pivotal
study in the United States may also be initiated for market approval.
Infectious Disease Program.
Our infectious disease
program is currently focusing on single-stranded RNA viruses using our
proprietary NEUGENE antisense
compounds targeting West Nile virus, Hepatitis C virus, Influenza A virus,
Dengue virus, the SARS coronavirus, and Ebola virus, as well as many of the
viruses included on the Department of Homeland Security list of bioterrorism
agents, including Marburg, Junin, Anthrax, and Ricin. In June 2003, we
filed an IND with the FDA for our West Nile NEUGENE
drug candidate, AVI-4020. Our NEUGENE
drug candidate AVI-4179, designed to combat the SARS coronavirus, has been
evaluated at an independent laboratory and found to be efficacious in
pre-clinical studies. Due to unpredictable future demand for drugs targeting
West Nile virus and the SARS coronavirus, our future efforts toward
commercialization in viral diseases will focus on Hepatitis C virus and
Influenza A viruses, including avian influenza (H5N1).
We
filed an IND for Hepatitis C virus in September 2005 and have ongoing
exploratory Phase I/Ib clinical studies. Based on encouraging safety and
pharmacokinetic data, we plan to continue HCV clinical studies in 2007. We
anticipate filing an IND for Influenza A virus infection if efficacy trials in
animals now underway by collaborators support the positive data obtained in
2006 from collaborators in cell culture studies.
Drug Metabolism Program.
We have successfully
completed clinical trials demonstrating that our NEUGENE antisense drug improved the pharmacokinetic profile
of two different test drugs by down-regulating the liver enzyme that is
critical to the bodys processing of many drugs. Two clinical studies completed
in late 2002 showed that AVI-4557 down-regulated cytochrome P450 3a4, which
resulted in an improved pharmacokinetic profile of the test
4
drugs.
In 2003, we completed an oral dosing study with this agent to evaluate this
route of administration for our antisense compounds. We are pursuing strategic
relationships with pharmaceutical co-development partners.
Genetic Disease Program.
We completed a Phase Ib
clinical trial in 2002 to evaluate the safety and pharmacokinetics of three
doses of AVI-4126 in adult patients with polycystic kidney disease and with
varying degrees of compromised kidney function. Results of the study showed an
excellent safety profile and no adverse effect on kidney function.
We
are conducting a pilot human clinical trial in boys with Duchenne Muscular
Dystrophy (DMD) in conjunction with the MDEX consortium in the United Kingdom.
Boys with DMD have a mutation in the genetic information that codes for the
production of a critical muscle protein (dystrophin). Our NEUGENE antisense drug, AVI-4658,
targets the most frequent site of this mutation and forces the genetic
machinery to skip over the mutation when processing the genetic instructions.
We believe that this could result in the production of the missing dystrophin
protein, which might restore or prevent deterioration of muscle function. This
is the first clinical application of our Exon Skipping Pre-RNA Interference
Technology (ESPRIT).
Business Strategy
Our strategy is to:
focus on near-term
opportunities in the cardiovascular and viral disease areas;
select gene targets with
broad or multiple disease applications;
manage drug discovery,
pre-clinical and early to mid-stage clinical development in-house; and
initially co-develop or
license products with, or to, strategic partners generally during, or after,
completion of Phase II clinical trials to enhance value and share the costs of
late stage clinical trials and commercialization.
Collaborative Agreements
We believe that our
NEUGENE technology is broadly applicable for
the potential development of pharmaceutical products in many therapeutic areas.
To exploit this core technology as fully as possible, we plan to enter into
collaborative development agreements with pharmaceutical and biotechnology
companies for specific molecular targets for our NEUGENE antisense technology. We will
also pursue opportunities to access intellectual property rights through license
agreements or other arrangements that complement our portfolio of patents and
patent applications.
We anticipate pursuing
NEUGENE antisense collaborative research
agreements to provide us with funding for internal programs aimed at
discovering and developing antisense compounds to inhibit the production of
additional molecular targets. Partners in these agreements and collaborative
efforts may be granted options to obtain licenses to co-develop and to market
drug candidates resulting from their collaborative research programs. We intend
to retain manufacturing rights to our antisense products. There can be no
assurance, however, that we will be able to enter into collaborative research
agreements with pharmaceutical companies on terms and conditions satisfactory
to us. The agreements described in this Collaborative Agreements section are
generally only cancelable for nonperformance, including failure to make any
payments and, in some cases, failure to
5
commercially exploit the technology. There is no assurance the proposed
products will be successfully developed under these collaborative arrangements
or we will receive any of the potential payments noted herein.
We plan to market the initial products for which we obtain regulatory
approval through co-development and marketing arrangements with strategic
partners or other licensing arrangements with larger pharmaceutical companies.
Implementation of this strategy will depend on many factors, including the market
potential of any products we develop and our financial resources. We do not
expect to establish a direct sales capability for therapeutic compounds for at
least the next several years, if at all. The timing of our entry into marketing
arrangements or other licensing arrangements will depend on successful product
development and regulatory approval within the regulatory framework established
by the Federal Food, Drug and Cosmetics Act and/or similar regulatory regimes
outside the United States. Although the implementation of initial aspects of
our marketing strategy may be undertaken before this process is completed, the
development and approval process typically is not completed in less than three
to five years after the filing of an IND application and our marketing
strategy, therefore, may not be implemented for several years.
Chiron Agreement
In January 2006, we
entered into an agreement with Chiron Corporation that
granted us a
nonexclusive license to Chirons patents and patent applications for research,
development, and commercialization of antisense therapeutics against hepatitis
C virus (HCV). Chiron scientists were the first to clone HCV, and Chiron has
been granted more than 100 HCVrelated patents.
The license agreement with Chiron further strengthened our patent position
on our HCV antisense product candidates, which are already covered by issued
U.S. patent claims. AVIs lead
NEUGENE
antisense
compound for HCV, AVI4065, is currently being evaluated in a dose-ranging
study in chronically-infected HCV patients. In conjunction with the license
agreement, AVI issued Chiron shares of AVI common stock as an initial license
fee payment.
Cook Group Agreement
In
March 2006, we
entered into
agreements with Cook Group Incorporated (Cook) for the development and
commercialization of products for vascular diseases. Cook is the worlds
largest privately-held manufacturer of medical devices and is a leading
designer, manufacturer and global distributor of minimally invasive medical
device technology for diagnostic and therapeutic procedures. Pursuant to our
agreements, Cook licensed
NEUGENE
antisense
technology for downregulating cmyc gene expression in the field of
cardiovascular disease. Cook has taken over our clinical development of devicerelated
programs for cardiovascular restenosis, including our RestenNG drugeluting
stent (DES) program, RestenMP microparticle delivery program, and a program
for catheter delivery of RestenNG.
Cook is expected to fully fund the development, clinical and regulatory
costs of licensed programs in the U.S. and Europe leading to commercialization.
This funding is expected to result in expenditures by Cook that could reach
$100 million. The license and development agreement provides for payment to AVI
of a doubledigit royalty on worldwide product sales by Cook and a
commercialization milestone. Cook also purchased 692,003 shares of AVI common
stock for $5 million under a stock purchase agreement. Cook has taken over AVIs
facilities and personnel in Colorado that were dedicated to the programs now
licensed by Cook. Finally, we also entered into a supply agreement to sell Cook
c-myc drugs required to support development, clinical studies, and
commercialization of the licensed products.
6
Ercole Agreement
In
December 2006, we entered into
a crosslicense and collaboration
agreement with Ercole Biotech, Inc. to identify and develop drugs that direct
the splicing of messenger RNA (mRNA) to treat a variety of genetic and acquired
diseases. Under the terms of the agreement, each company granted the other
rights under our respective patents for RNA splicealtering technologies.
AVI and Ercole have each selected a set of specific gene targets and are
taking the lead in investigating the potential therapeutic effects of shifting
splicing of those genes. The license terms also include an exclusive license to
Ercole of AVIs
NEUGENE
antisense
chemistry for the specific targets selected by Ercole.
In connection with the crosslicense
and collaboration agreement, AVI issued Ercole shares of AVI common stock, and
Ercole issued AVI shares of Ercole Series A2 Preferred Stock
.
Manufacturing
We believe we have developed proprietary manufacturing techniques that
will allow large-scale synthesis and purification of NEUGENES. Because our
NEUGENE compounds are based upon a well established backbone chemistry, we
believe that NEUGENE synthesis will be more cost-effective than competing
technologies. We have established a Good Manufacturing Practices, or GMP,
manufacturing facility at our Corvallis, Oregon offices. We believe that our
GMP facility should provide sufficient manufacturing capacity to continue to
meet our early stage clinical trial requirements for the foreseeable future and
allow us to produce products incorporating our technology. Our GMP facility is
subject to FDA inspection and regulation.
We currently intend to retain manufacturing rights for all products
incorporating our patented antisense technology, whether sold directly by us or
through collaborative agreements with industry partners.
In March 1993, we moved to our present laboratory facilities and we
have expanded our facilities several times. This facility and the laboratory
procedures followed by us have not been formally inspected by the FDA and will
have to be approved as products move from the research phase through clinical
testing phases and into commercialization. See Drug Approval Process and Other
Governmental Regulations.
In March 2007, we entered into an agreement to obtain a facility in
Corvallis, Oregon, subject to certain conditions. If the acquisition is closed,
we intend to conduct certain manufacturing of our products and components there
in the future.
Marketing Strategy
We
plan to market initial products, when developed, and for which we obtain
regulatory approval, through marketing arrangements or other licensing
arrangements with pharmaceutical companies. Implementation of this strategy
will depend on many factors, including the market potential of any products we
develop, and our financial resources. We do not expect to establish a direct
sales capability for therapeutic compounds for at least the next several years,
if at all. To market products that will serve a large, geographically diverse
patient population, we expect to enter into licensing, distribution, or
partnering agreements with pharmaceutical companies that have large,
established sales organizations. The timing of our entry into marketing
arrangements or other licensing arrangements with large pharmaceutical
companies will depend on successful product development and regulatory
7
approval
within the regulatory framework established by the Federal Food, Drug and
Cosmetics Act, as amended, and regulations promulgated thereunder and, to the
extent our products are distributed outside of the United States, within the
regulatory framework established in other countries. Although the
implementation of initial aspects of our marketing strategy may be undertaken
before this process is completed, the development and approval process
typically is not completed in less than three to five years after the filing of
an IND application and our marketing strategy therefore may not be implemented for
several years. See Drug Approval Process and Other Governmental Regulation.
Patents and Proprietary Rights
We have developed or acquired a comprehensive body of intellectual
rights. The proprietary nature of, and protection for, our product candidates,
processes and know-how are important to our business. We plan to prosecute and
aggressively defend our patents and proprietary technology. Our policy is to
patent the technology, inventions, and improvements that we believe are
important to the development of our business and are patentable. We also depend
upon trade secrets, know-how, and continuing technological innovation to
develop and maintain our competitive position.
A patent estate including 202 patents (domestic and foreign) issued or
licensed to us, and 198 pending patent applications (domestic and foreign)
protects our technologies. We intend to protect our proprietary technology with
additional filings as appropriate. Some of our patents on core technologies
expire as early as 2008, including for NEUGENES. Based on patented improvements
and additional support to such core patents, however, we believe our patent
protection for those products and other products will extend
beyond 2020.
We have also acquired certain product/technology licenses from The Ohio
State University and Dr. Vernon Stevens. These licenses include exclusive
royalty-bearing licenses covering the composition, manufacturing and use of AVICINE in all fields of use, including
treating and preventing cancer, with the exception of fertility regulation. Our
proprietary rights also include the unrestricted use of vaccine technology for
non-hormonal cancer applications. We enjoy the right to commercialize any new
intellectual property relating to our licensed subject matter, including access
to and use of all new experimental data resulting from Dr. Stevens research.
Our licenses have been granted for a period of 30 years or 10 years from the
expiration of the last issued patent, whichever comes later. Under these
licensing agreements, we have the right to sublicense our products and
technology throughout the world. For such rights, we are obligated to pay the
licensors minimum annual royalties of $55,000. Subject to such minimums, the
royalties are 5% of net sales of products from licensed technology in the
United States and Canada; 2% of net sales in countries of the European
Economic Community; and 25% of any royalties received by us for sublicenses in
the United States, the European Economic Community or in Korea, subject to certain
maximums.
We have licensed certain technology from the Public Health Service (and
others) to supplement and support certain of our core technology. We have
certain obligations and minimum royalties under those agreements, which costs
are not deemed material to our business.
There can be no assurance that any patents we apply for will be granted
or that patents held by us will be valid or sufficiently broad to protect our
technology or provide a significant competitive advantage. Additionally, we cannot
provide assurance that practice of our patents or proprietary technology will
not infringe third-party patents.
8
Drug Approval Process and Other
Government Regulation
The system of reviewing and approving drugs
in the United States is considered the most rigorous in the world. Costs to
bring a single product from research through market approval and
commercialization range from $800 million (Pharmaceutical Research and
Manufacturers Association) to $1.7 billion in 2000 through 2002 (FDA), with the
timing to do so typically ranging between 10 and 15 years. The Pharmaceutical
Research and Manufacturers Association estimates that of every 5,000 medicines
tested, on average, only five are tested in clinical trials, and only 1 of
those is approved for human use.
Drug Discovery
In the initial stages of drug discovery before a compound reaches the
laboratory, tens of thousands of potential compounds are randomly screened for
activity against an assay assumed to be predictive for particular disease
targets. This drug discovery process can take several years. Once a company
locates a screening lead, or starting point for drug development, isolation and
structural determination may begin. The development process results in numerous
chemical modifications to the screening lead in an attempt to improve its drug
properties. After a compound emerges from the above process, the next steps are
to conduct further preliminary studies on the mechanism of action, further in
vitro (test tube) screening against particular disease targets and, finally,
limited in vivo (animal) screening. If the compound passes these barriers, the
toxic effects of the compound are analyzed by performing preliminary
exploratory animal toxicology. If the results are positive, the compound
emerges from the basic research mode and moves into the pre-clinical phase.
Preclinical Testing
During the pre-clinical testing stage, laboratory and animal studies
are conducted to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety. These tests typically take
approximately three and one-half years to complete.
Investigational New Drug
Application
During the pre-clinical testing, an IND is filed with the FDA to begin
human testing of the drug. The IND becomes effective if not rejected by the FDA
within 30 days. The IND must indicate the results of previous experiments, how,
where and by whom the new studies will be conducted, the chemical structure of
the compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured. In addition, an Institutional Review Board, comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted, must review and approve the IND. Progress reports detailing the
results of the clinical trials must be submitted at least annually to the FDA.
Phase I Clinical Trials
After an IND becomes effective, Phase I human clinical trials may
begin. These tests, involving usually between 20 and 80 patients or healthy
volunteers, typically take approximately one year to complete and cost between
$300,000 and $1,500,000 per trial. The Phase I clinical studies also determine
how a drug is absorbed, distributed, metabolized and excreted by the body, and
the duration of its action. Phase I trials are not normally conducted for
anticancer product candidates. A Phase Ib study involves patients with the
targeted disease and is focused on safety.
9
Phase II Clinical Trials
In Phase II clinical trials, controlled studies are generally conducted
on approximately 100 to 300 volunteer patients with the targeted disease. The
preliminary purpose of these tests is to evaluate the effectiveness of the drug
on the volunteer patients as well as to determine if there are any side
effects. These studies generally take approximately two years and cost between
$600,000 and $4 million per trial, and may be conducted concurrently with Phase
I clinical trials. In addition, Phase I/II clinical trials may be conducted to
evaluate not only the efficacy of the drug on the patient population, but also
its safety.
Phase III Clinical Trials
This phase typically lasts about three years, usually involves 1,000 to
3,000 patients and cost between $5 million and $50 million per trial. During
the Phase III clinical trials, physicians
monitor the patients to determine efficacy and to observe and report
any reactions that may result from long-term use of the drug.
New Drug
Application
After the completion of the requisite three
phases of clinical trials, if the data indicate that the drug has an acceptable
benefit to risk assessment and it is found to be safe and effective, a New Drug
Application (NDA) is filed with the FDA. The requirements for submitting an NDA
are defined by and in conjunction with the FDA. These applications are
comprehensive, including all information obtained from each clinical trial as
well as all data pertaining to the manufacturing and testing of the product.
With the implementation of the Prescription Drug Users Fee Act (PDUFA), review
fees are provided at the time of NDA filing. For FY 2006, each NDA with
clinical data must be accompanied by a $767,400 review fee. If the NDA is
assessed as unacceptable in the initial 30 day review, it is returned to the
submitter, with 50% of the fee. The FDA reported the estimated median review
time for a New Molecular Entity (NME) was estimated to be 13.8 months, however,
a priority review of a NME can and has been approved in as little as six
months.
Marketing
Approval
If the FDA approves the NDA, the drug becomes
available for physicians to prescribe. Periodic reports must be submitted to
the FDA, including descriptions of any adverse reactions reported. The FDA may
request additional studies (Phase IV) to evaluate long-term effects.
Phase IV
Clinical Trials and Post Marketing Studies
In addition to studies requested by the FDA
after approval, these trials and studies are conducted to explore new
indications
. The purpose of these trials and studies and related
publications is to broaden the application and use of the drug and its
acceptance in the medical community.
10
Competition
Several companies are pursuing the development of gene silencing
technology, including Eli Lilly, Merck, Genta Incorporated, and ISIS
Pharmaceuticals. All of these companies have products in development stages,
and, in some cases, are in human trials with antisense compounds similar to our
NEUGENE compounds.
While we believe that none of these companies is likely to introduce an
additional antisense compound into the broad commercial market in the immediate
future, many pharmaceutical and biotechnology companies, including most of
those listed above, have financial and technical resources greater than those
currently available to us and have more established collaborative relationships
with industry partners than do we.
In 2006, Genta received significant negative
press when its antisense drugs failed to meet primary endpoints in Phase III
clinical trials in certain cancer applications. Because the underlying
chemistry of our antisense is fundamentally different and distinct from the
antisense chemistries of Genta, we believe that none of the clinical
experiences of Genta are predictive of how an AVI
NEUGENE
antisense compound may fare in similar, or
different, clinical trial settings. We believe that the combination of
pharmaceutical properties of our NEUGENE compounds for restenosis, cancer, and drug metabolism affords us
competitive advantages when compared with the antisense compounds of
competitors.
We can also expect to compete with other
companies exploiting alternative technologies that address the same therapeutic
needs as do our technologies. The biopharmaceutical market is subject to rapid
technological change, and it can be expected that competing technologies will
emerge and will present a competitive challenge to us.
Research and Development
We expensed $25,345,588,
$17,117,750 and $20,738,725 on research and development activities during the
years ended December 31, 2006, 2005 and 2004, respectively. Research and
development (R&D) expenses include related salaries, contractor fees,
materials, utilities and allocations of corporate costs. R&D expenses
consist of independent R&D costs and costs associated with collaborative
development arrangements. In addition, the Company funded R&D at other
companies and research institutions under agreements. Research and development
costs are expensed as incurred.
Employees
As of December 31, 2006, we had 117 employees, 23 of whom hold
advanced degrees. One hundred-three employees are engaged directly in research
and development activities, and fourteen are in administration. None of our
employees are covered by collective bargaining agreements, and we consider
relations with our employees to be good.
11
Where You Can Find
Additional Information
We are a reporting company and file annual, quarterly and current
reports, proxy statements and other information with the SEC. For further
information with respect to us, you may read and copy our reports, proxy
statements and other information, at the SECs public reference rooms at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SECs
regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661 and
at 233 Broadway, New York, NY 10279. You can request copies of these documents
by writing to the SEC and paying a fee for the copying cost. Please call the
SEC at 1-800-SEC-0330 for more information about the operation of the public
reference rooms. Our SEC filings are also available at the SECs web site at http://www.sec.gov.
In addition, you can read and copy our SEC filings at the office of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, our proxy statement and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as well as our corporate governance guideline, outline of
directorship qualifications, code of business conduct and the charter of our
audit committee, compensation committee, and nominations committee are all
available on our website (www.avibio.com) or by sending a request for a paper
copy to: AVI BioPharma, Inc., One S.W. Columbia Ave., Suite 1105, Portland,
Oregon 97258, attn. Investor Relations.
12
Item 1A. Risk Factors
Risks Affecting Future Operating Results
The
following factors should be considered in evaluating our business and prospects
for the future. If risks described below actually occur, our operating results
and financial condition would likely suffer and the trading price of our common
stock may fall, causing a loss of some or all of an investment in our common
stock.
Our products are in an early stage of research and
development and may not be determined to be safe or effective.
We are only in the early stages of research and clinical development
with respect to our NEUGENE antisense pharmaceutical products. We have devoted
almost all of our time to research and development of our technology and
products, protecting our proprietary rights and establishing strategic
alliances. Our potential products are in the pre-clinical or clinical stages of
research and development and will require significant further research,
development, clinical testing and regulatory clearances. We have no products
available for sale and we do not expect to have any products available for sale
for several years. Our proposed products are subject to development risks.
These risks include the possibilities that any of the products could be found
to be ineffective or toxic, or could fail to receive necessary regulatory
clearances. We have not received any significant revenues from the sale of
products and we may not successfully develop marketable products that will
increase sales and, given adequate margins, make us profitable. Third parties
may develop superior or equivalent, but less expensive, products.
We have incurred net losses since our inception and
we may not achieve or sustain profitability.
We incurred a net loss of $18.2 million in 2005 and $28.7 million in
2006. As of December 31, 2006, our accumulated deficit was $199.2 million. Our
losses have resulted principally from expenses incurred in research and
development of our technology and products and from selling, general and
administrative expenses that we have incurred while building our business
infrastructure. We expect to continue to incur significant operating losses in
the future as we continue our research and development efforts and seek to
obtain regulatory approval of our products. Our ability to achieve
profitability depends on our ability to raise additional capital, complete
development of our products, obtain regulatory approvals and market our
products. It is uncertain when, if ever, we will become profitable.
If we fail to attract significant additional
capital, we may be unable to continue to successfully develop our products.
Since we began operations, we have obtained operating funds primarily
by selling shares of our common stock. Based on our current plans, we believe
that current cash balances will be sufficient to meet our operating needs for
the current fiscal year. Furthermore, the actual amount of funds that we will
need will be determined by many factors, some of which are beyond our control.
These factors include the success of our research and development efforts, the
status of our pre-clinical and clinical testing, costs relating to securing
regulatory approvals and the costs and timing of obtaining new patent rights,
regulatory changes, competition and technological developments in the market.
We may need funds sooner than currently anticipated.
If necessary, potential sources of additional funding could include
strategic relationships, public or private sales of shares of our stock or debt
or other arrangements. We may not be
13
able to obtain additional funding when we need it on terms that will be
acceptable to us or at all. If we raise funds by selling additional shares of
our common stock or securities convertible into our common stock, the ownership
interest of our existing shareholders will be diluted. If we are unable to
obtain financing when needed, our business and future prospects would be
materially adversely affected.
If we fail to receive necessary regulatory
approvals, we will be unable to commercialize our products.
All of our products are subject to extensive regulation by the United
States Food and Drug Administration, or FDA, and by comparable agencies in
other countries. The FDA and these agencies require new pharmaceutical products
to undergo lengthy and detailed clinical testing procedures and other costly
and time-consuming compliance procedures. We do not know when or if we will be
able to submit our products for regulatory review. Even if we submit a new drug
application, there may be delays in obtaining regulatory approvals, if we
obtain them at all. Sales of our products outside the United States will also
be subject to regulatory requirements governing clinical trials and product
approval. These requirements vary from country to country and could delay
introduction of our products in those countries. We cannot assure you that any
of our products will receive marketing approval from the FDA or comparable
foreign agencies.
We may fail to compete effectively, particularly
against larger, more established pharmaceutical companies, causing our business
to suffer.
The biotechnology industry is highly competitive. We compete with
companies in the United States and abroad that are engaged in the development
of pharmaceutical technologies and products. They include biotechnology,
pharmaceutical, chemical and other companies; academic and scientific
institutions; governmental agencies; and public and private research
organizations.
The financial and technical resources and production and marketing
capabilities of many of these entities, some of which are our competitors,
exceed our resources and capabilities. Our industry is characterized by
extensive research and development and rapid technological progress.
Competitors may successfully develop and market superior or less expensive
products which render our products less valuable or unmarketable.
We have limited operating experience.
We have engaged solely in
the research and development of pharmaceutical technology. Although some
members of our management team have experience in biotechnology company operations,
we have limited experience in manufacturing or selling pharmaceutical products.
We also have only limited experience in negotiating and maintaining strategic
relationships and in conducting clinical trials and other later-stage phases of
the regulatory approval process. We may not successfully engage in some or all
of these activities.
We have limited manufacturing capability.
While we believe that we
can produce materials for clinical trials and produce products for human use at
our existing and potentially expanded manufacturing facility, we may need to
expand our commercial manufacturing capabilities for products in the future if
we elect not to or cannot contract with others to manufacture our products.
This expansion may occur in stages, each of which would require regulatory
approval, and product demand could at times exceed supply capacity. We have
reviewed sites for expanded facilities and do not know what the construction
cost will be for such facilities and whether we will have the financing
14
needed for such
construction. We do not know if or when the FDA will determine that such
facilities comply with Good Manufacturing Practices. The projected location and
construction of any facilities will depend on regulatory approvals, product
development, pharmaceutical partners and capital resources, among other
factors. We have not obtained regulatory approvals for any productions
facilities for our products, nor can we assure investors that we will be able
to do so.
If we lose key personnel or are unable to attract
and retain additional, highly skilled personnel required for our activities,
our business will suffer.
Our success will depend to a large extent on the abilities and
continued service of several key employees, including Drs. Denis Burger,
Patrick Iversen, and Dwight Weller. We maintain key man life insurance in the
amount of $1,000,000 for Dr. Burger and $500,000 for each of Drs. Iversen and
Weller. The loss of any of these key employees could significantly delay the
achievement of our goals. Competition for qualified personnel in our industry
is intense, and our success will depend on our ability to attract and retain
highly skilled personnel. To date, we have been successful in attracting and
retaining key personnel. We are not aware of any key personnel who plan to
retire or otherwise leave the Company in the near future.
Asserting, defending and maintaining our
intellectual property rights could be difficult and costly, and our failure to
do so will harm our ability to compete and the results of our operations.
Our success will depend on our existing patents and licenses and our
ability to obtain additional patents in the future. A patent estate including
202 patents (domestic and foreign) issued or licensed to us, and 198 pending
patent applications (domestic and foreign) protects our technologies. We
license the composition, manufacturing and use of AVICINE in all fields, except fertility regulation, from The
Ohio State University. We license patents from other parties for certain
complementary technologies.
Some of our patents on core technologies expire as early as 2008,
including for NEUGENES. Based on patented improvements and additions to such
core patents, however, we believe our patent protection for those products and
other products extend beyond 2020.
We cannot assure you that our pending patent applications will result
in patents being issued in the United States or foreign countries. In addition,
the patents that have been or will be issued may not afford meaningful
protection for our technology and products. Competitors may develop products
similar to ours that do not conflict with our patents. Others may challenge our
patents and, as a result, our patents could be narrowed or invalidated. The
patent position of biotechnology firms generally is highly uncertain, involves
complex legal and factual questions, and has recently been the subject of much
litigation. No consistent policy has emerged from the United States Patent and
Trademark Office (USPTO), or the courts regarding the breadth of claims allowed
or the degree of protection afforded under biotechnology patents. In addition,
there is a substantial backlog of biotechnology patent applications at the
USPTO and the approval or rejection of patents may take several years.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action to protect our proprietary rights and, despite our
best efforts, we may be sued for infringing on the patent rights of others. We
have not received any communications or other indications from owners of related
patents or others that such persons believe our products or technology may
infringe their patents. Patent litigation is costly and, even if we prevail,
the cost of such litigation
15
could adversely affect our financial condition. If we do not prevail,
in addition to any damages we might have to pay, we could be required to stop
the infringing activity or obtain a license. Any required license may not be
available to us on acceptable terms, or at all. If we fail to obtain a license,
our business might be materially adversely affected.
To help protect our proprietary rights in unpatented trade secrets, we
require our employees, consultants and advisors to execute confidentiality
agreements. However, such agreements may not provide us with adequate
protection if confidential information is used or disclosed improperly. In
addition, in some situations, these agreements may conflict with, or be subject
to, the rights of third parties with whom our employees, consultants or
advisors have prior employment or consulting relationships. Further, others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets.
If our
strategic relationships are unsuccessful, our business could be harmed.
Our strategic relationships are important to our success. The
development, improvement and marketing of many of our key therapeutic products
are or will be dependent in large part on the efforts of our strategic
partners. The transactions contemplated by our agreements with strategic
partners, including the equity purchases and cash payments, are subject to
numerous risks and conditions. The occurrence of any of these events could
severely harm our business.
Our near-term strategy is to co-develop products with strategic
partners or to license the marketing rights for our products to pharmaceutical
partners after we complete one or more Phase II clinical trials. In this
manner, the extensive costs associated with late-stage clinical development and
marketing will be shared with, or become the responsibility of, our strategic
partners.
To fully realize the potential of our products, including development,
production and marketing, we may need to establish other strategic
relationships.
We may be subject to product liability lawsuits and
our insurance may not be adequate to cover damages.
We believe we carry adequate insurance for our current product
development research. In the future, when we have products available for
commercial sale and use, the use of our products will expose us to the risk of
product liability claims. Although we intend to obtain product liability
insurance coverage, product liability insurance may not continue to be
available to us on acceptable terms and our coverage may not be sufficient to
cover all claims against us. A product liability claim, even one without merit
or for which we have substantial coverage, could result in significant legal
defense costs, thereby increasing our expenses, lowering our earnings and,
depending on revenues, potentially resulting in additional losses.
Continuing efforts of government and third party
payers to contain or reduce the costs of health care may adversely affect our
revenues and future profitability.
In
addition to obtaining regulatory approval, the successful commercialization of
our products will depend on the ability to obtain reimbursement for the cost of
the product and treatment from the consumers of or third-party payors for such
products. Government authorities, private health insurers and other
organizations, such as health maintenance organizations are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care in the United States, the growth of healthcare
16
organizations
such as HMOs, and legislative proposals to reform healthcare and government
insurance programs could significantly influence the purchase of healthcare
services and products, resulting in lower prices and reducing demand for our
products. The cost containment measures that healthcare providers are
instituting and any healthcare reform could affect our or our marketing partners
ability to sell our products and may have a material adverse effect on our
financial results from operations. Reimbursement in the United States or
foreign countries may not be available for any of our products, any
reimbursement granted may be reduced or discontinued, and limits on
reimbursement available from third-party payors may reduce the demand for, or
the price of, our products. The lack or inadequacy of third-party
reimbursements for our products would have a material adverse effect on our
operations. Additional legislation or regulation relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future
that adversely affects our products and our business.
If we fail to establish strategic relationships
with larger pharmaceutical partners, our business may suffer.
We do not intend to conduct late-stage (Phase III) human clinical
trials ourselves. We anticipate entering into relationships with larger
pharmaceutical companies to conduct these and later pharmaceutical trials and
to market our products. We also plan to continue to use contract manufacturing
for late stage clinical and commercial quantities of our products. We may be
unable to enter into partnerships or other relationships, which could impede
our ability to bring our products to market
.
Any such
partnerships, if entered into at all, may be on less than favorable terms and
may not result in the successful development or marketing of our products. If
we are unsuccessful in establishing advantageous clinical testing, manufacturing
and marketing relationships, we are not likely to generate significant revenues
and become profitable.
We use hazardous substances in our research
activities
We use organic and
inorganic solvents and reagents in our clinical development that are customarily
used in pharmaceutical development and synthesis. Some of these chemicals, such
as methylene chloride, isopropyl alcohol, ethyl acetate and acetane, may be
classified as hazardous substances, are flammable and, if exposed to human skin
can cause anything from irritation to severe burns. We receive, store, use and
dispose of such chemicals in compliance with all applicable laws with
containment storage facilities and contained handling and disposal safeguards
and procedures. We are routinely inspected by federal, state and local
governmental and public safety agencies regarding our storage, use and disposal
of such chemicals, including the federal Occupational, Safety and Health Agency
(OSHA), the Oregon Department of Environmental Quality (DEQ) and local fire
departments, without any material noncompliance issues in such inspections to
date. Further, our usage of such chemicals is limited and falls
below the reporting thresholds under federal law. Based on
our limited use of such chemicals, the nature of such chemicals and the
safeguards undertaken by the Company for storage, use and disposal, we believe
we do not have any material exposure for toxic tort liability. Further, the
cost of such compliance is not a material cost in our operating budget. While
we do not have toxic tort liability insurance at this time, we believe our
current insurance coverage is adequate to cover most liabilities that may arise
from our use of such substances. If we are wrong in any of our beliefs, we
could incur a liability in certain circumstances that would be material to our
finances and the value of an investment in our securities.
17
If Our stock price is volatile,
it will have an impact on our warrant liability and the non-cash gain (loss)
recorded to our statement of operations.
We have warrants that are
classified as liabilities and are marked to market based on our common stock
price. While these warrants do not have any cash settlement features, increases
and decreases in our common stock price will continue to have an impact in our
statement of operations. Generally, an increase in our common stock price will
result in an increase in our liability and related expense, while a decrease in
our common stock price will result in a decrease in our liability and related
expense.
Risks Related to Share Ownership
Our right to issue preferred stock, our classified
Board of Directors and Oregon Anti-Takeover laws may delay a takeover attempt
and prevent or frustrate any attempt to replace or remove the then current
management of the Company by shareholders.
Our authorized capital
consists of 200,000,000 shares of common stock and 20,000,000 shares of
preferred stock. Our Board of Directors, without any further vote by the
shareholders, has the authority to issue preferred shares and to determine the
price, preferences, rights and restrictions, including voting and dividend
rights, of these shares. The rights of the holders of shares of common stock
may be affected by the rights of holders of any preferred shares that our board
of directors may issue in the future. For example, our Board of Directors may
allow the issuance of preferred shares with more voting rights, preferential
dividend payments or more favorable rights upon dissolution than the shares of
common stock or special rights to elect directors.
In addition, we have a classified Board of Directors, which means
that only one-half of our directors are eligible for election each year.
Therefore, if shareholders wish to change the composition of our Board of
Directors, it could take at least two years to remove a majority of the
existing directors or to change all directors. Having a classified Board of
Directors may, in some cases, delay mergers, tender offers or other possible
transactions that may be favored by some or a majority of our shareholders and
may delay or frustrate action by shareholders to change the then current Board
of Directors and management.
The Oregon Control Share Act and Business Combination Act may limit
parties that acquire a significant amount of voting shares from exercising
control over us for specific periods of time. These acts may lengthen the
period for a proxy contest or for a person to vote their shares to elect the
majority of our Board and change management.
Our stock
price is volatile and may fluctuate due to factors beyond our control.
Historically, the market price of our stock has been highly volatile.
The following types of announcements could have a significant impact on the
price of our common stock: positive or negative results of testing and clinical
trials by ourselves, strategic partners, or competitors; delays in entering
into corporate partnerships; technological innovations or commercial product
introductions by ourselves or competitors; changes in government regulations;
developments concerning proprietary rights, including patents and litigation
matters; public concern relating to the commercial value or safety of any of
our products; financing or other corporate transactions; or general stock
market conditions.
The significant number of our shares of Common
Stock eligible for future sale may cause the price of our common stock to fall.
We have outstanding
53,182,841 shares of common stock as of December 31, 2006 and all are eligible
for sale under Rule 144 or are otherwise freely tradeable. In addition:
Our
employees and others hold options to buy a total of 5,571,470 shares of common
stock of which 3,660,483 shares were exercisable at December 31, 2006. The options
18
outstanding have exercise
prices between $1.76 and $8.13 per share. The shares of common stock to be
issued upon exercise of these options, have been registered, and, therefore,
may be freely sold when issued;
There are outstanding warrants to buy
8,508,103 shares of common stock at December 31, 2006 with exercise prices
ranging from $.0003 to $35.63 per share. All of these shares of common stock
are registered for resale and may be freely sold when issued;
We
may issue options to purchase up to an additional 1,710,934 shares of common
stock at December 31, 2006 under our stock option plans, which also will be
fully saleable when issued except to the extent limited under Rule 144 for
resales by our officers and directors;
We
are authorized to sell up to 248,144 shares of common stock under our Employee
Stock Purchase Plan to our full-time employees, nearly all of whom are eligible
to participate; and
We
have also granted certain contractual rights to purchase (i) an additional
352,113 shares of our common stock at a price of $7.10 per share and
(ii) the right to purchase up to $7,500,000 of our common stock based on
the average closing sales price for the five days preceding the commitment to
purchase. If we meet certain technological milestones, the holder of these
rights is obligated to purchase shares of common stock from us. The holder of
these rights may require us to register the shares issued upon the exercise of
such purchase rights.
Sales of substantial
amounts of shares into the public market could lower the market price of our
common stock.
We do not expect to pay dividends
in the foreseeable future.
We have never paid
dividends on our shares of common stock and do not intend to pay dividends in
the foreseeable future. Therefore, you should only invest in our common stock
with the expectation of realizing a return through capital appreciation on your
investment. You should not invest in our common stock if you are seeking dividend
income.
Item 1B. Unresolved SEC Comments
None.
Item 2. Description of Property
We occupy 53,000 square feet of leased laboratory and office space at
4575 S.W. Research Way, Suite 200, Corvallis, Oregon 97333. This lease expires
in December 2020. Our executive office is located in 4,400 square feet of
leased space at One S.W. Columbia, Suite 1105, Portland, Oregon 97258. This
lease expires July 2009. In March 2007, we entered into an agreement to obtain
a facility in Corvallis, Oregon, subject to certain conditions. If the
acquisition is closed, we intend to conduct certain manufacturing of our
products and components there in the future. We believe that our facilities are
suitable and adequate for our present operational requirements for the foreseeable
future.
19
Item 3. Legal Proceedings
As
of March 16, 2007, there were no material, pending legal proceedings to which
we are a party. From time to time, we become involved in ordinary, routine or
regulatory legal proceedings incidental to our business.
Item 4. Submission of Matters to
a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the
quarter ended December 31, 2006.
20
PART II
Item 5.
Market for Common Equity and Related Stockholder Matters
Our Common Stock is
quoted on the Nasdaq Capital Market (Nasdaq) under the symbol AVII. The following table sets forth the high and
low closing sales prices as reported by Nasdaq for each quarterly period in the
two most recent fiscal years and quarter-to-date for the next fiscal year:
2005
|
|
High
|
|
Low
|
|
Quarter 1
|
|
$
|
4.14
|
|
$
|
2.00
|
|
Quarter 2
|
|
2.95
|
|
2.22
|
|
Quarter 3
|
|
2.64
|
|
2.11
|
|
Quarter 4
|
|
4.03
|
|
2.59
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
Quarter 1
|
|
$
|
8.65
|
|
$
|
3.39
|
|
Quarter 2
|
|
7.55
|
|
3.71
|
|
Quarter 3
|
|
4.28
|
|
2.58
|
|
Quarter 4
|
|
4.82
|
|
3.18
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
Quarter 1 to
March 9, 2007
|
|
$
|
3.20
|
|
$
|
2.46
|
|
|
|
|
|
|
|
|
|
The number of
shareholders of record and approximate number of beneficial holders on March 9,
2007 was 600 and 15,800 respectively. There were no cash dividends declared or
paid in fiscal years 2006 or 2005. We do not anticipate declaring such
dividends in the foreseeable future.
All securities sold
during 2006 by us were either previously reported on our Form 10-Qs filed with
the Securities and Exchange Commission or sold pursuant to registration
statements filed under the Securities Act of 1933.
During 2006, we issued
41,663 shares of common stock to employees at approximately $2.95 per share for
$123,005, under our Employee Stock Purchase Plan. During 2005, we issued 60,854
shares of common stock to employees at approximately $1.82 per share for
$110,730, under our Employee Stock Purchase Plan.
During 2006, we granted 1,172,700 stock options to purchase shares of
common stock at approximately $7.13 per share, under our 2002 Equity Incentive
Plan. During 2005, we granted 1,245,937 stock options to purchase shares of
common stock at approximately $2.47 per share, under our 2002 Equity Incentive Plan.
21
Equity Compensation Plan Information
|
|
Plan category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
|
|
Number of
securities
remaining
available for future
issuance under
equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
|
|
Equity
compensation plans approved by security holders
|
|
4,167,981
|
|
$
|
5.36
|
|
1,959,078
|
|
Equity
compensation plans not approved by security holders
|
|
-0-
|
|
|
|
-0-
|
|
Total
|
|
4,167,981
|
|
$
|
5.36
|
|
1,959,078
|
|
The number of securities remaining available for future issuance under
equity compensation plans includes shares from the Companys 2002 Equity
Incentive Plan (the 2002 Plan). The number of shares reserved for issuance is
increased by an automatic annual share increase pursuant to which the number of
shares available for issuance under the 2002 Plan automatically increases on
the first trading day of each fiscal year (the First Trading Day), beginning
with the 2003 fiscal year and continuing through the fiscal year 2011, by an
amount equal to two percent (2%) of the total number of shares outstanding on
the last trading day of the immediately preceding fiscal year; such increases
being subject to the limitation in the next sentence. The 2002 Plan provides
that, following any such adjustment, the number of then outstanding options
under the Companys stock option plans and stock purchase plans, together with
options in the reserve then available for future grants under the Companys
stock option plans, will not exceed twenty percent (20%) of the then
outstanding voting shares of capital stock of the Company, and all the actually
outstanding stock options under the Companys stock option plans, together with
all shares in the reserve then available for future grants under the Companys
stock option and stock purchase plans. This automatic share increase feature is
designed to assure that a sufficient reserve of Common Stock remains available
for the duration of the 2002 Plan to attract and retain the services of key
individuals essential to the Companys long-term growth and success. This
feature is also designed to eliminate the uncertainty inherent in seeking an
individual increase to the reserve each year as to what number of shares will
be available in the reserve for option grants. Creating a certain rate of
growth under the 2002 Plan assists the Company as it makes strategic personnel
decisions in an effort to expand its growth, as the Company will know the
approximate number of shares that will become available for issuance under the
2002 Plan. At the same time, the Company has attempted to minimize the dilutive
effect that the issuance of Common Stock upon the exercise of options can have
on stockholders percentage of ownership in the Company by adopting
22
only a 2% growth rate for the 2002 Plan. This rate, while it provides
room for growth in the 2002 Plan, is a rate which the Company believes it can
reasonably sustain, minimizing the risk to stockholders that the option reserve
grows faster than the Company itself. The twenty percent (20%) limitation
discussed above further protects shareholders by capping the size of the 2002
Plan in relation to the Companys other securities.
I
tem 6. Selected Financial
Data
The following selected
financial data should be read in conjunction with Item 7. Managements
Discussion and Analysis or Plan of Operation and Item 8. Financial
Statements.
|
|
YEAR ENDED DECEMBER 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
Operations data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
115,291
|
|
$
|
4,783,760
|
|
$
|
430,461
|
|
$
|
969,866
|
|
$
|
836,784
|
|
Research and development
|
|
25,345,588
|
|
17,117,750
|
|
20,738,725
|
|
15,284,396
|
|
22,413,892
|
|
General and administrative
|
|
7,752,752
|
|
5,182,369
|
|
4,735,731
|
|
4,558,948
|
|
3,763,941
|
|
Interest income,
net
|
|
1,910,037
|
|
840,495
|
|
266,301
|
|
491,098
|
|
460,258
|
|
Gain (loss) on warrant liability
|
|
2,385,502
|
|
(1,530,021
|
)
|
2,840,851
|
|
835,094
|
|
|
|
Realized gain on sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
3,765,752
|
|
|
|
Write-down of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(4,478,260
|
)
|
Net loss
|
|
(28,687,510
|
)
|
(18,205,885
|
)
|
(21,936,843
|
)
|
(13,781,534
|
)
|
(29,359,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
(0.54
|
)
|
(0.41
|
)
|
(0.61
|
)
|
(0.46
|
)
|
(1.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$
|
33,152,132
|
|
$
|
47,051,082
|
|
$
|
19,515,316
|
|
$
|
37,599,136
|
|
$
|
19,293,645
|
|
Working capital
|
|
25,596,492
|
|
38,327,343
|
|
17,948,793
|
|
34,639,526
|
|
15,279,854
|
|
Total assets
|
|
40,862,746
|
|
56,407,982
|
|
28,518,631
|
|
47,145,023
|
|
28,603,757
|
|
Shareholders equity
|
|
32,519,325
|
|
46,081,931
|
|
24,456,708
|
|
39,685,852
|
|
23,481,623
|
|
Item 7.
Managements Discussion and Analysis or Plan of Operations
Forward-Looking
Information
This report contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as believe, anticipate,
expect, intend, plan, will, may, and other similar expressions. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. We have based these forward-looking statements largely on our
expectations. Forward-looking statements in this report include, but are not
necessarily limited to, those relating to:
-
our intention to introduce
new products,
-
receipt of any required FDA
or other regulatory approval for our products,
23
-
our expectations about the
markets for our products,
-
acceptance of our products,
when introduced, in the marketplace,
-
our future capital needs,
-
results of our research and
development efforts, and
-
success of our patent
applications.
Forward-looking statements are subject to risks and uncertainties,
certain of which are beyond our control. Actual results could differ materially
from those anticipated as a result of the factors described in the Risk
Factors and detailed herein and in our other Securities and Exchange
Commission filings, including among others:
-
the effect of regulation by
the FDA and other governmental agencies,
-
delays in obtaining, or our
inability to obtain, approval by the FDA or other regulatory authorities for
our products,
-
research and development
efforts, including delays in developing, or the failure to develop, our
products,
-
the development of
competing or more effective products by other parties,
-
the results of pre-clinical
and clinical testing,
-
uncertainty of market
acceptance of our products,
-
problems that we may face
in manufacturing, marketing, and distributing our products,
-
our inability to raise
additional capital when needed,
-
delays in the issuance of,
or the failure to obtain, patents for certain of our products and technologies,
and
-
problems with important
suppliers and business partners.
Because
of these risks and uncertainties, the forward-looking events and circumstances
discussed in this report or incorporated by reference might not occur. Factors
that cause actual results or conditions to differ from those anticipated by
these and other forward-looking statements include those more fully described
in the Risk Factors section and elsewhere in this report.
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, other than from government grants and
research contracts, 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 additional
collaborative efforts.
As of December 31, 2006, our accumulated
deficit was $199,189,830.
24
Results
of Operations
Year Ended December 31, 2006
Compared with Year Ended December 31, 2005.
Revenues, from
license fees, grants and research contracts, decreased from $4,783,760 in 2005
to $115,291 in 2006, due to decreases in research contract revenues. Revenues
for 2005 were primarily due to the recognition of $4,600,000 in research
contract revenue from
government funding for
work performed on viral disease research projects
. Operating expenses
increased from $22,300,119 in 2005 to $33,098,340 in 2006 due to increases in
research and development, which increased from $17,117,750 in 2005 to
$25,345,588 in 2006, and increases in general and administrative costs, which
increased from $5,182,369 in 2005 to $7,752,752 in 2006. This research and
development increase for 2006 was due primarily to increases in employee costs
of approximately $3,100,000, of which approximately $2,400,000 was recognized
in accordance with SFAS 123R and approximately $430,000 related to the acceleration
of the vesting of certain stock options. See Note 2 to Notes to Financial
Statements. Also, approximately $2,200,000 of this increase in 2006 was due to
increases in clinical expenses from the expansion of clinical programs in
hepatitis C and coronary artery bypass grafting. Additionally, approximately
$1,700,000 of this increase in 2006 was due to contracting costs for the
production of GMP subunits, which are used by the Company to manufacture
compounds for future clinical trials. The increase in 2006 for research and
development included $675,000 i
n AVI common
stock issued to Ercole Biotech, Inc. under the terms of a stock purchase
agreement and
$500,000 in AVI common stock issued to Chiron Corporation
as the first milestone payment due under a license agreement granting AVI a
nonexclusive license to Chirons patents and patent applications for the
research, development, and commercialization of antisense therapeutics against
hepatitis C virus. See Note 5 to Notes to Financial Statements. The general
and administrative increase for 2006 was due primarily to increases in employee
costs of approximately $2,400,000, of which approximately $1,600,000 was
recognized in accordance with SFAS 123R and approximately $400,000 related to
the acceleration of the vesting of certain stock options. Net interest income
increased from $840,495 in 2005 to $1,910,037 in 2006 due to increases in
average cash, cash equivalents and short-term securities balances and increases
in average interest rates of the Companys interest earning investments. Gain
(loss) on warrant liability was a gain of $2,385,502 in 2006 compared to a loss
of $1,530,021 in 2005. 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.
The
Company expects to incur comparable stock-based compensation expense in 2007.
Year Ended December 31, 2005
Compared with Year Ended December 31, 2004.
Revenues, from
license fees, grants and research contracts, increased from $430,461 in 2004 to
$4,783,760 in 2005, primarily due to increases in research contract revenue,
partially offset by decreases in grants revenues. In 2005, the Company
recognized $4,600,000 in research contracts revenue from
government funding for work performed on viral
disease research projects
. Operating expenses decreased from $25,474,456
in 2004 to $22,300,119 in 2005 due to decreases in research and development,
which decreased from $20,738,725 in 2004 to $17,117,750 in 2005, which were
partially offset by increases in general and administrative costs, which
increased from $4,735,731 in 2004 to $5,182,369 in 2005. Approximately $4.8
million of the research and development decrease was due to lower contracting
costs for the production of GMP subunits. These research and development
decreases were partially offset by increases in clinical trial expenses, lab
supplies, employee costs, and clinical trial insurance. Approximately $530,000
of this general and administrative increase was due to additional clinical and
business development staff hired after the first quarter of 2004. These general
and administrative increases were partially offset by decreases in accounting
and legal expenses. Net interest income increased from $266,301
25
in
2004 to $840,495 in 2005 due to increases in average cash, cash equivalents and
short-term securities balances and increases in average interest rates of the
Companys interest earning investments. Gain (loss) on warrant liability
decreased to a loss of $1,530,021 in 2005 from a gain of $2,840,851 in 2004.
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
We
have financed our operations since inception primarily through sales of common
stock and other forms of equity totaling $196,270,726, from grants and contract
research funding of $9,980,819 from various sources, and $1,480,432 from shared
development funding on AVICINE with SuperGen. We expect to continue to incur
losses as we continue and expand our research and development activities and
related regulatory work and increase our collaborative efforts. For 2007, we
expect our expenditures for operations, including our collaborative efforts,
and our GMP facilities to be approximately $25 to $28 million. This cost could
increase if we undertake additional collaborative efforts. However, if need be
in 2007, we believe we can reduce our expenditures because a significant amount
of our costs are variable. Those estimated expenditures include amounts
necessary to fulfill our obligations under our various collaborative, research
and licensing agreements during 2007.
Because
of the cost (up to $1.7 billion) and timeframe (up to 15 years) generally
associated with developing a potential drug or pharmaceutical product to the
point of FDA approval for human use, our business strategy is to develop our
products up to initial Phase III human clinical trials and then look for third
parties to fund further development of the product and to market the product
through strategic partnerships, license agreements or other relationships. We
also look for collaborative and other efforts, such as our relationship with
Cook Group, to utilize other technology to increase the potential variety and
reduce the cost of identifying products. We believe that this strategy will
reduce the potential costs we would otherwise incur in developing a product and
bringing it to market. Our expected costs under our various contracts and for
various drug development products can be estimated for the next year or two,
but not much beyond that due to the uncertainty of clinical trial results,
research results and the timing of securing one or more partners to develop and
market a potential drug.
Because
of the various factors noted above and the expectation that, until we establish
revenue sources, we will license or jointly develop our prospective products to
or with strategic partners, we review, at least annually, each research program
and clinical trial, based on results and progress during the prior year and
estimate our needs for that program or trial for the coming year, making
adjustments based on the progress of the program during the year. We do not set
long-term development budgets or development schedules for bringing our
products to market or track our research costs on a product basis, other than
against the current budgeted amount.
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
million to fund the Companys ongoing defense-related programs. Net of
government administrative costs, it is anticipated that we will receive up to
$9.8 million. Under this allocation, our
NEUGENE
technology will 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 continues to work with the government to define the
scope of the work to be performed on these programs. This additional funding
has not been received and has not been reflected in the financial statements.
26
Our cash, cash equivalents and short-term
securities were $33,152,132 at December 31, 2006, compared with $47,051,082 at
December 31, 2005. The decrease of $13,898,950 was due primarily to $20,613,369
used in operations and $1,453,889 used for purchases of property and equipment
and patent related costs, offset by the receipt of $4,955,623 in net proceeds
from a stock purchase agreement with Cook Group Inc. (Cook) and $3,207,235
from the exercise of warrants and options and sales under the Companys
employee stock purchase plan.
The Company
sold
692,003 shares of common stock at $7.23 per share to Cook, as
described in Note 4
.
We do not expect any material revenues in 2007 from our business
activities. We expect that our cash requirements for the balance of calendar
2007 will be satisfied by existing cash resources.
To fund our operations beyond 2007, we will need to raise additional
capital. We will continue to look for opportunities to finance our ongoing
activities and operations through accessing corporate partners or the public
equity markets, as we currently have no credit facility, nor do we intend to
seek one
.
CONTRACTUAL PAYMENT OBLIGATIONS
The Companys
off-balance sheet arrangements are limited to operating leases and rents on
certain facilities and equipment and license agreements for which it is
obligated to pay the licensors a minimum annual royalty. These off-balance
sheet arrangements are expensed as incurred. In 2006, these expenses totaled
$1,333,000 for operating leases and $125,000 for royalty payments.
A summary of our
contractual commitments and obligations as of December 31, 2006 is as follows:
|
|
Payments Due By Period
|
|
Contractual
Obligation
|
|
Total
|
|
2007
|
|
2008 and
2009
|
|
2010 and
2011
|
|
2012 and
beyond
|
|
Operating leases
|
|
$
|
19,245,000
|
|
$
|
1,170,000
|
|
$
|
2,407,000
|
|
$
|
2,441,000
|
|
$
|
13,227,000
|
|
Royalty payments
|
|
2,005,000
|
|
125,000
|
|
250,000
|
|
250,000
|
|
1,380,000
|
|
|
|
$
|
21,250,000
|
|
$
|
1,295,000
|
|
$
|
2,657,000
|
|
$
|
2,691,000
|
|
$
|
14,607,000
|
|
Our future expenditures
and capital requirements depend on numerous factors, most of which are
difficult to project beyond the short term. These requirements include the
progress of our research and development programs and our 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, our ability to establish collaborative arrangements and the terms
of any such arrangements, and the costs associated with commercialization of
our products. Our cash requirements are expected to continue to increase each
year as we expand our activities and operations. There can be no assurance,
however, that we will ever be able to generate product revenues or achieve or
sustain profitability.
New
Accounting Pronouncements
See
Note 2 of Notes to Financial Statements included under Part III, Item 15.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial
27
statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to stock-based compensation,
valuation of investments, long-lived assets, and revenue recognition. We base
our estimates on historical experience and on various other assumptions. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies and the
related judgments and estimates affect the preparation of our financial statements.
Valuation of Investments
Investments in marketable securities are classified as
available-for-sale under SFAS 115 and recorded at fair value in each period
with changes recorded to other comprehensive income. We periodically evaluate
our investments for other than temporary impairments and record an impairment
unless the evidence indicating that the carrying amount is recoverable
outweighs the negative evidence to the contrary.
Revenue Recognition
Revenue is recorded from research contracts and grants as the services
are performed and payment is reasonably assured.
In 2005, we recognized $4,600,000 in research
contracts revenue from
government funding
for work performed on viral disease research projects
. Upfront,
nonrefundable fees and other fees associated with license and development
arrangements are recognized as revenue ratably over the performance period.
Revenue associated with performance milestones under license and development
arrangements is recognized based upon the achievement of the milestones, as
defined in the respective agreements. Revenue from license and development
arrangements has been insignificant to date.
Long-Lived Asset
Impairment
We regularly evaluate long-lived assets and
certain identified intangible assets for impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which requires us to review
our long-lived assets and certain identifiable intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset might not be recoverable and exceeds its fair value. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet. Based on this analysis, we
did not recognize an impairment on long-lived assets during the year ended
December 31, 2006. If circumstances related to our long-lived assets change, we
may record an impairment charge in the future.
Stock-based Compensation Expense
Effective January 1, 2006, the Company adopted SFAS 123R using the
modified-prospective application. Under the modified prospective application,
stock compensation cost recognized beginning January 1, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted on or subsequent to January 1, 2006, based
on the
28
grant date fair value estimated in accordance with the provisions of
SFAS 123R. Results for prior periods have not been restated.
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 are amortized as compensation expense on a straight-line basis
over the vesting period of the grants. Compensation expense recognized is shown
in the operating activities section of the statements of cash flows. Stock
options
granted to employees are service-based and typically vest over four
years.
The fair market values of stock options granted were measured on the
date of grant using the Black-Scholes option-pricing model, with weighted
average assumptions for the risk-free interest rate, expected dividend yield,
expected lives, and expected 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.
The assumptions used in calculating the fair value
of stock-based compensation expense represent managements best estimates, but
these estimates involve inherent uncertainties and the application of
management judgment. As a result, if factors change and the Company uses
different assumptions, its stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and recognize expense only for those shares expected
to vest. If the Companys actual forfeiture rate is materially different from
its estimates, the stock-based compensation expense could be significantly
different from what it has recorded in the current period.
See Note 2 to Notes to Financial Statements
for a further discussion of stock-based
compensation
.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Due to the short-term
nature of our interest bearing assets we believe that our exposure to interest
rate market risk is not significant.
29
Item 8. Financial Statements
All information required
by this item begins on page F-1 in item 15 of Part III of this Report and is
incorporated into this item by reference.
Item 9.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a)
Disclosure Controls and Procedures
Disclosure controls and
procedures are the controls and other procedures that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures
include, among other processes, controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
The Company carried out
an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures as of December 31, 2006 pursuant to Exchange Act
Rule 13a-15. As a result of the material weakness described below in
Managements Annual Report on Internal Control over Financial Reporting
(Restated), the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures were not
effective as of December 31, 2006.
(b)
Managements
Annual Report on Internal Control over Financial Reporting ( Restated)
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
at the Company. The Companys internal control over financial reporting is a
process designed under the supervision of the Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting principles,
and includes those policies and procedures that:
Pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
With the participation of the Chief Executive Officer
and the Chief Financial Officer, management conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2006, based on
30
the framework and criteria established in
Internal Control Integrated Framework
, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In the Companys Annual Report on Form 10-K for the
year ended December 31, 2006, filed on March 16, 2007, management concluded
that the Companys internal control over financial reporting was effective as
of December 31, 2006. However, management subsequently determined that the
Company needed to restate certain of its previously issued financial
statements. As a result of such financial statement restatement, management
reassessed the Companys internal control over financial reporting using the
COSO criteria and 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.
As a result of this material weakness, management has
revised its earlier assessment and has concluded that the Companys internal
control over financial reporting was not effective as of December 31, 2006.
KPMG LLP, the Companys independent auditor, has
issued an audit report on managements revised assessment of internal control
over financial reporting as of December 31, 2006.
(c) Changes in Internal Control Over Financial
Reporting
There have not been any changes in the Companys
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the Companys fourth
fiscal quarter of 2006 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
(d)
Remediation of Material Weakness
Subsequent to December 31, 2006, 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.
Chief Executive Officer
|
|
|
|
/s/ Mark M. Webber
|
|
Chief Financial Officer
and Chief Information Officer
|
|
|
|
|
Portland, Oregon
November 1, 2007
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
AVI BioPharma, Inc.:
We have audited managements restated
assessment, included in the accompanying Managements
Annual Report on Internal Control over Financial Reporting (Restated)(Item
9A(b))
,
that AVI BioPharma, Inc.
(an Oregon Corporation in the development stage)(the Company) did not maintain
effective internal control over financial reporting as of December 31, 2006,
because of the effect of the material weakness identified in managements
restated assessment, based on criteria established in
Internal ControlIntegrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of the Company is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weakness
has been identified and included in managements restated assessment as of
December 31, 2006:
The Company 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 its stock warrants. As a
result, the Company failed to identify that the warrants required settlement in
registered shares and therefore should be liability classified. This material
weakness resulted in a material 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.
As stated in the fourth and fifth paragraphs
of Managements Annual Report on Internal Control over Financial Reporting
(Restated), managements assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2006 has been
restated to reflect the impact of the aforementioned material weakness in
internal control over financial reporting
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
restated balance sheets of AVI BioPharma, Inc. as of December 31, 2006 and
2005, and the related restated statements of operations, shareholders equity
and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2006, and for the period from July 22,
1980 (inception) through December 31, 2006. The financial statements of AVI
BioPharma, Inc. for the period from July 22, 1980 (inception) through December
31, 2001
32
were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated February 21, 2002. Our opinion on
the statements of operations, shareholders equity and comprehensive income
(loss), and cash flows, insofar as it relates to the amounts included for the
period from July 22, 1980 (inception) through December 31, 2001, is based
solely on the report of the other auditors.
The aforementioned material weakness was considered in determining the
nature, timing and extent of audit tests applied in the audit of the 2006
financial statements (restated), and this report does not affect our report
dated March 16, 2007, except as to the restatement discussed in Note 3, which
is as of November 1, 2007, which expressed an unqualified opinion on those
financial statements.
In our opinion, managements restated
assessment that the Company did not maintain effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in
Internal ControlIntegrated Framework
issued by COSO
.
Also,
in our opinion, because of the effect of the material weakness described above
on the achievement of the objectives of the control criteria, the Company did
not maintain effective internal control over financial reporting as of December
31, 2006, based on
criteria established in
Internal ControlIntegrated Framework
issued by
COSO
.
Portland, Oregon
March 16, 2007, except as to the fourth
and fifth paragraphs of Managements
Annual Report on the Internal Control
over Financial Reporting (Restated),
which are as of November 1, 2007
33
PART III
Item 10.
Directors and Executive Officers of the Registrant
Information regarding our
directors and executive officers required by this item is included in our
definitive proxy statement for our 2007 annual meeting of shareholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report and is incorporated herein by reference.
Item 11.
Compensation Discussion and Analysis
The information required
by this item is included in our definitive proxy statement for our 2007 annual
meeting of shareholders to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Annual Report and is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required
by this item is included in our definitive proxy statement for our 2007 annual
meeting of shareholders to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Annual Report and is incorporated
herein by reference.
Item 13.
Certain Relationships and Related Transactions
The information required
by this item is included in our definitive proxy statement for our 2007 annual
meeting of shareholders to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Annual Report and is
incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required
by this item is included in our definitive proxy statement for our 2007 annual
meeting of shareholders to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Annual Report and is
incorporated herein by reference.
34
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
The following documents are filed as part of this Report:
Financial Statements
The following financial statements of the Company and the Report of
KPMG LLP, Independent Auditors, are included in Part IV of this Report on the
pages indicated:
Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
35
(b) Exhibits
The following exhibits
are filed herewith and this list is intended to constitute the exhibit index:
Exhibit No.
|
|
Description
|
1.1
|
|
Underwriting Agreement dated November 14, 2005 (15)
|
3.1
|
|
Third Restated Articles of Incorporation of AntiVirals Inc. (1)
|
3.2
|
|
Bylaws of AntiVirals Inc. (1)
|
3.3
|
|
First Amendment to Third Restated Articles of Incorporation (4)
|
3.4
|
|
Amendment to Article 2 of the Companys Third Restated Articles of
Incorporation (11)
|
4.1
|
|
Form of Specimen Certificate for Common Stock. (1)
|
4.2
|
|
Form of Warrant for Purchase of Common Stock. (1)
|
4.3
|
|
Form of Warrant Agreement. (1)
|
4.4
|
|
Form of Representatives Warrant. (1)
|
4.5
|
|
Form of Warrant
Agreement between AntiVirals Inc. and ImmunoTherapy Shareholders (3)
|
4.6
|
|
Form of Common Stock Purchase Warrant. (5)
|
4.7
|
|
Warrant to purchase 485,290 shares of the Companys common stock
dated November 14, 2005 (16)
|
10.1
|
|
1992 Stock Incentive Plan (as amended through May 11, 2000). (1)
|
10.2
|
|
Employment Agreement with Denis R. Burger, Ph.D. dated
November 4, 1996. (1)
|
10.3
|
|
Employment Agreement with Alan P. Timmins dated November 4, 1996.
(1)
|
10.4
|
|
Employment Agreement with Dwight Weller, Ph.D. dated November 4,
1996. (1)
|
10.5
|
|
Technology Transfer Agreement between Anti-Gene Development
Group and AntiVirals Inc., dated February 9, 1992. (1)
|
10.6
|
|
Amendment to Technology Transfer Agreement between Anti-Gene
Development Group and AntiVirals Inc. dated January 20, 1996. (1)
|
10.7
|
|
License and Option Agreement between Anti-Gene Development Group
and AntiVirals Inc., dated February 9, 1993. (1)
|
10.8
|
|
Commercial Lease between Research Way Investments, Landlord, and
AntiVirals Inc., Tenant, dated June 15, 1992. (1)
|
10.9
|
|
Lease between Benjamin Franklin Plaza, Inc., Landlord, and
AntiVirals Inc., Tenant, dated June 17, 1992.(1)
|
10.10
|
|
First Amendment to Lease between Benjamin Franklin Plaza, Inc.,
Landlord, and AntiVirals Inc., Tenant, dated July 24, 1995. (1)
|
10.11
|
|
Employment Agreement with Patrick L. Iversen, Ph.D. dated
July 14, 1997. (2)
|
10.12
|
|
ImmunoTherapy
Corporation 1997 Stock Option Plan (3)
|
10.13
|
|
License
Agreement between ImmunoTherapy Corporation and Ohio State University, dated
March 12, 1996 (3)
|
10.14
|
|
License
Agreement between ImmunoTherapy Corporation and Ohio State University, dated
December 26, 1996 (3)
|
10.15
|
|
Amendment to
License Agreement between ImmunoTherapy Corporation and Ohio State
University, dated September 23, 1997 (3)
|
10.16
|
|
Agreement and
Plan of Reorganization and Merger dated as of February 2, 1998, among
AntiVirals Inc., AntiVirals Acquisition Corporation and ImmunoTherapy
Corporation (3)
|
10.17
|
|
First Amendment
to Plan of Reorganization and Merger dated as of May 27, 1998, among
AntiVirals Inc., AntiVirals Acquisition Corporation and ImmunoTherapy
Corporation (3)
|
10.18
|
|
Second Amendment
to Plan of Reorganization and Merger dated as of August 4, 1998, among
AntiVirals Inc., AntiVirals Acquisition Corporation and ImmunoTherapy
Corporation (3)
|
36
10.19
|
|
Form of Escrow
Agreement among AntiVirals Inc., the Escrow Indemnitors and Jeffrey Lillard
(3)
|
10.20
|
|
Purchase
Agreement, dated December 15, 1999, by and between AVI BioPharma, Inc. and
certain Investors (5)
|
10.21
|
|
Registration
Rights Agreement, dated December 15, 1999, by and between AVI BioPharma, Inc.
and certain Investors (5)
|
10.22
|
|
Purchase
Agreement, dated December 16, 1999, by and between AVI BioPharma, Inc. and
certain Investors (5)
|
10.23
|
|
Registration
Rights Agreement, dated December 16, 1999, by and between AVI BioPharma, Inc.
and certain Investors (5)
|
10.24
|
|
Subscription
Agreement, dated December 1, 1999, by and between SuperGen, Inc. and AVI
BioPharma, Inc. (5)
|
10.25
|
|
2000 Amendment
to Technology Transfer Agreement between Anti-Gene Development Group and AVI
BioPharma, Inc. (6)
|
10.26
|
|
United States of
America Sales, Distribution, and Development Agreement, dated April 4, 2000,
between SuperGen, Inc. and AVI BioPharma, Inc. (7)
|
10.27
|
|
Common Stock and
Warrant Purchase Agreement, dated April 4, 2000, between SuperGen, Inc. and
AVI BioPharma, Inc. (7)
|
10.28
|
|
Registration
Rights Agreement, dated April 14, 2000, between SuperGen, Inc. and AVI
BioPharma, Inc. (7)
|
10.29
|
|
2000 Employee
Share Purchase Plan (8)
|
10.30
|
|
Employment Agreement with Mark M. Webber dated May
11, 2000. (9)
|
10.31
|
|
Lease Agreement with Spieker Partners, LP dated May
8, 2001. (9)
|
10.32*
|
|
Investment Agreement dated May 22, 2001 between the
Company and Medtronic Asset Management, Inc. (9)
|
10.33
|
|
Warrant dated June 20, 2001 issued to Medtronic
Asset Management, Inc. (9)
|
10.34
|
|
Registration Rights Agreement dated June 20, 2001
between the Company and Medtronic Asset Management, Inc. (9)
|
10.35*
|
|
License and Development Agreement dated June 20,
2001 between the Company and Medtronic, Inc. (9)
|
10.36*
|
|
Supply Agreement dated June 20, 2001 between the
Company and Medtronic, Inc. (9)
|
10.37
|
|
Securities Purchase Agreement dated March 25, 2002
between the Company and certain purchasers (SPA) (10)
|
10.38
|
|
Form of Warrant issued by the Company to certain purchasers under the
SPA (10)
|
10.39
|
|
Registration Rights Agreement dated March 25, 2002 between the Company
and certain purchasers (10)
|
10.40
|
|
2002 Equity Incentive Plan (11)
|
10.41
|
|
Securities Purchase Agreement dated January 19, 2005 between the
Company and certain purchasers (SPA). (12)
|
10.42
|
|
Form of Purchase Warrant issued by the Company to certain purchasers
under the SPA. (12)
|
10.43
|
|
Amendment to employment agreement of Denis R. Burger, Ph.D (14)
|
10.44
|
|
Amendment to employment agreement of Alan P. Timmins (14)
|
10.45
|
|
Amendment to employment agreement of Patrick L. Iversen, Ph.D (14)
|
10.46
|
|
Amendment to employment agreement of Dwight D. Weller, Ph.D (14)
|
10.47
|
|
Amendment to employment agreement of Peter D. OHanley, M.D., Ph.D
(14)
|
10.48
|
|
Amendment to employment agreement of Mark M. Webber (14)
|
10.49
|
|
Securities Purchase Agreement dated November 14, 2005 between the
Company and certain purchasers (16)
|
10.50*
|
|
Supply Agreement, dated March 10, 2006, by and between Cook Group
Incorporated and AVI BioPharma, Inc. (17)
|
10.51*
|
|
License and Development Agreement, dated March 10, 2006, by and
between Cook Group Incorporated and AVI BioPharma, Inc. (17)
|
37
10.52*
|
|
Investment Agreement, dated March 10, 2006, by and between Cook Group
Incorporated and AVI BioPharma, Inc. (17)
|
10.53*
|
|
License Agreement dated January 26, 2006 by and between with Chiron
Corporation and AVI BioPharma, Inc. (18)
|
10.54
|
|
Stock Purchase Agreement dated January 26, 2006 by and between with
Chiron Corporation and AVI BioPharma, Inc. (18)
|
10.55
|
|
Second Lease Extension and Modification Agreement dated January 24,
2006 by and between Research Way Investments and AVI BioPharma, Inc. (19)
|
10.56*
|
|
Collaboration and License Agreement, dated December 19, 2006, by and between
Ercole Biotech, Inc. and AVI BioPharma, Inc. (filed herewith)
|
10.57
|
|
Series A-2 Preferred Stock and Common Stock Purchase Agreement, dated
December 19, 2006, by and between Ercole Biotech, Inc. and AVI BioPharma,
Inc. (filed herewith)
|
14.0
|
|
Code of Business Conduct and Ethics (13)
|
23.0
|
|
Consent of Independent Registered Public
Accounting Firm.
|
31.1
|
|
Certification of
the Companys Chief Executive Officer, Denis R. Burger, Ph.D., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification of
the Companys Chief Financial Officer, Mark M. Webber, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
32.0
|
|
Certification of CEO and CFO Pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
.
|
(1)
Incorporated
by reference to Exhibits to Registrants Registration Statement on Form SB-2,
as amended and filed with the Securities and Exchange Commission on May 29,
1997 (Commission Registration No. 333-20513).
(2)
Incorporated
by reference to Exhibits to Registrants Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997, and filed with the Securities and Exchange
Commission on March 30, 1998.
(3)
Incorporated
by reference to Exhibits to Registrants Registration Statement on Form S-4, as
amended, and filed with the Securities and Exchange Commission on August 7,
1998 (Commission Registration No. 333-60849).
(4)
Incorporated
by reference to Exhibits to Registrants current report on Form 8-K, as filed
with the Securities and Exchange Commission on September 30, 1998 (Commission
Registration No. 000-22613).
(5)
Incorporated
by reference to Exhibits to Registrants Registration Statement on Form S-3, as
amended, and filed with the Securities and Exchange Commission on December 21,
1999 (Commission Registration No. 333-93135).
(6)
Incorporated
by reference to Exhibits to Registrants Registration Statement on Form S-1 and
filed with the Securities and Exchange Commission on June 16, 2000 (Commission
Registration No. 333-39542).
(7)
Incorporated
by reference to Exhibits to Registrants Registrations Statement on Form S-3,
and filed with the Securities and Exchange Commission on September 15, 2000
(Commission Registration No. 333-45888).
(8)
Incorporated
by reference to Appendix A to Registrants Definitive Proxy Statement on Form
14-A, as amended, filed with the Securities and Exchange Commission on April
12, 2000.
38
(9)
Incorporated
by reference to Exhibits to Registrants Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001, and filed with the Securities and
Exchange Commission on August 14, 2001, as amended on April 23, 2002.
(10)
Incorporated
by reference to Exhibits to Registrants current report on Form 8-K, as filed
with the Securities and Exchange Commission on April 2, 2002.
(11)
Incorporated
by reference to appendixes to Registrants Definitive Proxy Statement on
Schedule 14-A, as filed with the Securities and Exchange Commission on April
11, 2002.
(12)
Incorporated
by reference to registrants current report on Form 8-K, as filed with the
Securities and Exchange Commission on January 20, 2005.
(13)
Incorporated
by reference to Exhibits to Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, and filed with the Securities and Exchange
Commission on March 15, 2004.
(14)
Incorporated
by reference to Registrants current report on Form 8-K, as filed with the
Securities and Exchange Commission on February 28, 2005.
(15)
Incorporated
by reference to Registrants current report on Form 8-K, as filed with the
Securities and Exchange Commission on November 21, 2005.
(16)
Incorporated
by reference to Exhibits to Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 2005, and filed with the Securities and Exchange
Commission on March 16, 2006.
(17)
Incorporated
by reference to Exhibits to Registrants Registrations Statement on Form S-3,
and filed with the Securities and Exchange Commission on April 11, 2006
(Commission Registration No. 333-133211).
(18)
Incorporated
by reference to Exhibits to Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2006, and filed with the Securities and
Exchange Commission on May 10, 2006.
(19)
Incorporated
by reference to Exhibits to Registrants Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006, and filed with the Securities and
Exchange Commission on August 9, 2006.
(c)
Exhibits. See Item 15 (a) above.
(d)
Financial Statement
Schedules. See Item 15 (a) above.
* A Confidential Treatment Request for certain information in this
document has been filed with the Securities and Exchange Commission. The
information for which treatment has been sought has been deleted from such
exhibit and the deleted text replaced by an asterisk (*).
Materials in the exhibit marked with a "" were filed in the originally
filed 10-k.
39
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November
2, 2007
|
AVI BIOPHARMA,
INC.
|
|
|
|
|
|
|
By:
|
/s/ K. Michael
Forrest
|
|
|
K. Michael Forrest
|
|
Interim Chief
Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in their
capacities indicated on March 16, 2007:
Signature
|
|
Title
|
|
|
|
|
|
|
/s/ K.
Michael Forrest
|
|
Interim Chief
Executive Officer
|
K. Michael
Forrest
|
|
(Principal
Executive Officer)
|
|
|
|
/s/ ALAN P.
TIMMINS
|
|
President, Chief
Operating Officer
|
Alan P. Timmins
|
|
|
|
|
|
/s/ MARK M.
WEBBER
|
|
Chief Financial
Officer and Chief Information Officer
|
Mark M. Webber
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
/s/ JACK L.
BOWMAN
|
|
Director
|
Jack L. Bowman
|
|
|
|
|
|
/s/ MICHAEL D.
CASEY
|
|
Director
|
Michael D. Casey
|
|
|
|
|
|
/s/ JOHN W.
FARA, Ph.D.
|
|
Director
|
John W. Fara,
Ph.D.
|
|
|
|
|
|
/s/ K. MICHAEL
FORREST
|
|
Director
|
K. Michael
Forrest
|
|
|
|
|
|
/s/ GIL PRICE,
M.D.
|
|
Director
|
Gil Price, M.D.
|
|
|
|
|
|
/s/ JOHN C.
HODGMAN
|
|
Director
|
John C. Hodgman
|
|
|
|
|
|
/s/ WILLIAM
GOOLSBEE
|
|
Director
|
William Goolsbee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
AVI
BioPharma, Inc.:
We
have audited the accompanying balance sheets of AVI BioPharma, Inc. (an Oregon
corporation in the development stage) as of December 31, 2006 and 2005, and the
related statements of operations, shareholders equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended
December 31, 2006 and for the period from July 22, 1980 (inception) through
December 31, 2006. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of AVI
BioPharma, Inc. for the period from July 22, 1980 (inception) through December
31, 2001 were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in
their report dated February 21, 2002. Our opinion on the statements of
operations, shareholders equity and comprehensive income (loss), and cash
flows, insofar as it relates to the amounts included for the period from July
22, 1980 (inception) through December 31, 2001, is based solely on the report
of the other auditors.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of AVI BioPharma, Inc. as of December 31,
2006 and 2005, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2006 and for the period
from July 22, 1980 (inception) through December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As
discussed in Note 2 to the financial statements, effective January 1, 2006, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payment.
As
discussed in Note 3 to the financial statements, the Company has restated its
balance sheets as of December 31, 2006 and December 31, 2005 and the related
statements of operations, shareholders equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December
31, 2006.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of AVI
BioPharmas internal control over financial reporting as of December 31, 2006,
based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16,
2007, except as to the fourth and fifth paragraphs of Managements Annual
Report on Internal Control Over Financial Reporting (Restated), which are as of
November 1, 2007, expressed an unqualified opinion on managements restated
assessment of, and an adverse opinion on the effective operation of, internal
control over financial reporting as of December 31, 2006.
Portland, Oregon
March 16, 2007, except for Note 3,
which is as of November 1, 2007
F-1
THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.
Report of Independent Public
Accountants
To
the Board of Directors and Shareholders of
AVI BIOPHARMA, INC.
We
have audited the accompanying balance sheet of AVI
BIOPHARMA, INC. (an Oregon corporation in the development stage) as of
December 31, 2001, and the related statements of operations, shareholders
equity and cash flows for each of the two years in the period ended December
31, 2001 and for the period from inception (July 22, 1980) to
December 31, 2001. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of AVI
BIOPHARMA, INC. as of December 31, 2001, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2001 and for the period from inception (July 22, 1980) to
December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/
Arthur Andersen LLP
|
|
Portland,
Oregon
|
February
21, 2002
|
F-2
AVI BIOPHARMA, INC.
(A Development Stage Company)
BALANCE
SHEETS
|
|
December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,159,201
|
|
$
|
34,597,734
|
|
Short-term securitiesavailable-for-sale
|
|
12,992,931
|
|
12,453,348
|
|
Accounts receivable
|
|
51,498
|
|
1,236,446
|
|
Other current assets
|
|
736,283
|
|
365,866
|
|
Total Current Assets
|
|
33,939,913
|
|
48,653,394
|
|
|
|
|
|
|
|
Property and Equipment, net of accumulated depreciation and
amortization of $10,174,712 and $8,396,923
|
|
4,329,583
|
|
5,599,269
|
|
Patent Costs, net of accumulated amortization of $1,496,699 and
$1,270,881
|
|
2,558,541
|
|
2,117,710
|
|
Other Assets
|
|
34,709
|
|
37,609
|
|
Total Assets
|
|
$
|
40,862,746
|
|
$
|
56,407,982
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,401,584
|
|
$
|
1,861,604
|
|
Accrued employee compensation
|
|
1,371,353
|
|
886,369
|
|
Warrant liability
|
|
5,192,576
|
|
7,578,078
|
|
Other liabilities
|
|
377,908
|
|
|
|
Total Current Liabilities
|
|
8,343,421
|
|
10,326,051
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
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;
53,182,841 and 51,182,751 issued and outstanding
|
|
5,318
|
|
5,118
|
|
Additional paid-in capital
|
|
231,685,419
|
|
216,566,165
|
|
Accumulated other comprehensive income
|
|
18,418
|
|
12,968
|
|
Deficit accumulated during the development stage
|
|
(199,189,830
|
)
|
(170,502,320
|
)
|
Total Shareholders Equity
|
|
32,519,325
|
|
46,081,931
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
40,862,746
|
|
$
|
56,407,982
|
|
See
accompanying notes to financial statements.
F-3
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Year ended December 31,
|
|
(Inception) through
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
December 31, 2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from license fees, grants and research contracts
|
|
$
|
115,291
|
|
$
|
4,783,760
|
|
$
|
430,461
|
|
$
|
9,980,819
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
25,345,588
|
|
17,117,750
|
|
20,738,725
|
|
147,647,215
|
|
General and administrative
|
|
7,752,752
|
|
5,182,369
|
|
4,735,731
|
|
40,820,528
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
19,545,028
|
|
|
|
33,098,340
|
|
22,300,119
|
|
25,474,456
|
|
208,012,771
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
1,910,037
|
|
840,495
|
|
266,301
|
|
7,449,542
|
|
Gain (loss) on warrant liability
|
|
2,385,502
|
|
(1,530,021
|
)
|
2,840,851
|
|
4,531,426
|
|
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
|
)
|
|
|
4,295,539
|
|
(689,526
|
)
|
3,107,152
|
|
(1,157,878
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
$
|
(21,936,843
|
)
|
$
|
(199,189,830
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.54
|
)
|
$
|
(0.41
|
)
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for computing
basic and diluted loss per share
|
|
52,660,711
|
|
44,655,008
|
|
35,994,976
|
|
|
|
See
accompanying notes to financial statements.
F-4
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
INCOME (LOSS)
|
|
Partnership
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Deficit Accumulated
During the
Development
Stage
|
|
Total
Shareholders Equity
|
|
|
|
Units
|
|
Shares
|
|
Amount
|
|
(Restated)
|
|
(Loss
|
|
(Restated)
|
|
(Restated)
|
|
BALANCE AT JULY 22, 1980 (Inception)
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Issuance of partnership units, warrants and common stock
|
|
3,615
|
|
8,272,916
|
|
828
|
|
33,732,654
|
|
|
|
|
|
33,733,482
|
|
Compensation expense related to issuance of warrants for common stock
and partnership units
|
|
|
|
|
|
|
|
537,353
|
|
|
|
|
|
537,353
|
|
Exercise of warrants for partnership units and common stock
|
|
42
|
|
1,530,858
|
|
152
|
|
1,809,165
|
|
|
|
|
|
1,809,317
|
|
Exercise of options for common stock
|
|
|
|
730,547
|
|
73
|
|
3,153,387
|
|
|
|
|
|
3,153,460
|
|
Issuance of common stock for ESPP
|
|
|
|
99,421
|
|
10
|
|
481,484
|
|
|
|
|
|
481,494
|
|
Issuance of common stock and warrants for cash and securities, net of
offering costs
|
|
|
|
19,928,020
|
|
1,993
|
|
112,289,336
|
|
|
|
|
|
112,291,329
|
|
Issuance of common stock and warrants for the acquisition of
ImmunoTherapy Corporation
|
|
|
|
2,132,592
|
|
213
|
|
17,167,199
|
|
|
|
|
|
17,167,412
|
|
Issuance of common stock and warrants for services
|
|
|
|
192,848
|
|
20
|
|
919,243
|
|
|
|
|
|
919,263
|
|
Compensation expense related to issuance of options for common stock
|
|
|
|
|
|
|
|
619,714
|
|
|
|
|
|
619,714
|
|
Conversion of debt into common stock and partnership units
|
|
9
|
|
9,634
|
|
1
|
|
87,859
|
|
|
|
|
|
87,860
|
|
Issuance of common stock in exchange for partnership units
|
|
(1,810
|
)
|
1,632,950
|
|
163
|
|
(163
|
)
|
|
|
|
|
|
|
Withdrawal of partnership net assets upon conveyance of technology
|
|
(1,856
|
)
|
|
|
|
|
(176,642
|
)
|
|
|
|
|
(176,642
|
)
|
Common stock subject to rescission, net
|
|
|
|
(64,049
|
)
|
(6
|
)
|
(288,789
|
)
|
|
|
|
|
(288,795
|
)
|
Comprehensive income (loss): Write-down of short-term securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
17,001,348
|
|
|
|
17,001,348
|
|
Realized gain on sale of short-term securities available-for-sale
|
|
|
|
|
|
|
|
|
|
(3,765,752
|
)
|
|
|
(3,765,752
|
)
|
Unrealized loss on short-term securities available-for-sale
|
|
|
|
|
|
|
|
|
|
(13,525,399
|
)
|
|
|
(13,525,399
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(130,359,592
|
)
|
(130,359,592
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,649,395
|
)
|
BALANCE AT DECEMBER 31, 2003
|
|
|
|
34,465,737
|
|
3,447
|
|
170,331,800
|
|
(289,803
|
)
|
(130,359,592
|
)
|
39,685,852
|
|
Exercise of options for common stock
|
|
|
|
4,121
|
|
|
|
14,986
|
|
|
|
|
|
14,986
|
|
Issuance of common stock for ESPP
|
|
|
|
49,918
|
|
5
|
|
94,553
|
|
|
|
|
|
94,558
|
|
Compensation expense related to issuance of options for common stock
|
|
|
|
|
|
|
|
421,635
|
|
|
|
|
|
421,635
|
|
Issuance of common stock for cash, net of offering costs
|
|
|
|
1,623,377
|
|
162
|
|
6,019,196
|
|
|
|
|
|
6,019,358
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term securities available-for-sale, net
|
|
|
|
|
|
|
|
|
|
157,162
|
|
|
|
157,162
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(21,936,843
|
)
|
(21,936,843
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,779,681
|
)
|
BALANCE AT DECEMBER 31, 2004
|
|
|
|
36,143,153
|
|
3,614
|
|
176,882,170
|
|
(132,641
|
)
|
(152,296,435
|
)
|
24,456,708
|
|
Exercise of options for common stock
|
|
|
|
37,029
|
|
4
|
|
94,950
|
|
|
|
|
|
94,954
|
|
Issuance of common stock for ESPP
|
|
|
|
60,854
|
|
6
|
|
110,724
|
|
|
|
|
|
110,730
|
|
Compensation expense related to issuance of options for common stock
|
|
|
|
|
|
|
|
394,225
|
|
|
|
|
|
394,225
|
|
Issuance of common stock for cash, net of offering costs
|
|
|
|
14,941,715
|
|
1,494
|
|
39,084,096
|
|
|
|
|
|
39,085,590
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term securities available-for-sale, net
|
|
|
|
|
|
|
|
|
|
145,609
|
|
|
|
145,609
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(18,205,885
|
)
|
(18,205,885
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,060,276
|
)
|
BALANCE AT DECEMBER 31, 2005
|
|
|
|
51,182,751
|
|
$
|
5,118
|
|
$
|
216,566,165
|
|
$
|
12,968
|
|
$
|
(170,502,320
|
)
|
$
|
46,081,931
|
|
Exercise of warrants for common stock
|
|
|
|
705,048
|
|
71
|
|
2,342,346
|
|
|
|
|
|
2,342,417
|
|
Exercise of options for common stock
|
|
|
|
218,353
|
|
22
|
|
741,791
|
|
|
|
|
|
741,813
|
|
Issuance of common stock for ESPP
|
|
|
|
41,663
|
|
4
|
|
123,001
|
|
|
|
|
|
123,005
|
|
Issuance of common stock to vendors
|
|
|
|
343,023
|
|
34
|
|
1,549,966
|
|
|
|
|
|
1,550,000
|
|
Compensation expense related to issuance of options for common stock
|
|
|
|
|
|
|
|
525,126
|
|
|
|
|
|
525,126
|
|
Issuance of common stock for cash and securities, net of offering
costs
|
|
|
|
692,003
|
|
69
|
|
4,955,554
|
|
|
|
|
|
4,955,623
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
4,881,470
|
|
|
|
|
|
4,881,470
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term securities available-for-sale, net
|
|
|
|
|
|
|
|
|
|
5,450
|
|
|
|
5,450
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(28,687,510
|
)
|
(28,687,510
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,682,060
|
)
|
BALANCE AT DECEMBER 31, 2006
|
|
|
|
53,182,841
|
|
$
|
5,318
|
|
$
|
231,685,419
|
|
$
|
18,418
|
|
$
|
(199,189,830
|
)
|
$
|
32,519,325
|
|
See
accompanying notes to financial statements.
F-5
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Year ended December 31,
|
|
(Inception) through
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
December 31, 2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
$
|
(21,936,843
|
)
|
$
|
(199,189,830
|
)
|
Adjustments to reconcile net loss to net cash flows used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
2,090,375
|
|
1,997,672
|
|
1,888,008
|
|
12,820,239
|
|
Loss on disposal of assets
|
|
192,369
|
|
35,862
|
|
86,947
|
|
315,178
|
|
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
|
|
1,375,000
|
|
|
|
|
|
1,375,000
|
|
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
|
|
525,126
|
|
394,225
|
|
421,635
|
|
2,643,053
|
|
Stock-based compensation
|
|
4,881,470
|
|
|
|
|
|
4,881,470
|
|
Conversion of interest accrued to common stock
|
|
|
|
|
|
|
|
7,860
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
19,545,028
|
|
(Gain) loss on warrant liability
|
|
(2,385,502
|
)
|
1,530,021
|
|
(2,840,851
|
)
|
(4,531,426
|
)
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets
|
|
814,531
|
|
(919,237
|
)
|
108,308
|
|
(787,781
|
)
|
Other assets
|
|
2,900
|
|
|
|
(7,762
|
)
|
(34,709
|
)
|
Net increase (decrease) in accounts payable, accrued employee
compensation, and other liabilities
|
|
577,872
|
|
498,375
|
|
(1,501,395
|
)
|
3,445,845
|
|
Net cash used in operating activities
|
|
(20,613,369
|
)
|
(14,668,967
|
)
|
(23,781,953
|
)
|
(145,509,572
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(767,282
|
)
|
(1,070,801
|
)
|
(1,070,338
|
)
|
(15,298,511
|
)
|
Patent costs
|
|
(686,607
|
)
|
(397,081
|
)
|
(462,591
|
)
|
(4,475,030
|
)
|
Purchase of marketable securities
|
|
(14,969,926
|
)
|
(13,140,581
|
)
|
(13,123,205
|
)
|
(112,865,796
|
)
|
Sale of marketable securities
|
|
14,435,793
|
|
3,693,329
|
|
35,494,101
|
|
104,800,437
|
|
Acquisition costs
|
|
|
|
|
|
|
|
(2,377,616
|
)
|
Net cash provided by (used in) investing activities
|
|
(1,988,022
|
)
|
(10,915,134
|
)
|
20,837,967
|
|
(30,216,516
|
)
|
|
|
|
|
|
|
|
|
|
|
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
|
|
8,162,858
|
|
43,527,006
|
|
7,073,900
|
|
196,270,726
|
|
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
|
|
8,162,858
|
|
43,527,006
|
|
7,073,900
|
|
195,885,289
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
(14,438,533
|
)
|
17,942,905
|
|
4,129,914
|
|
20,159,201
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
34,597,734
|
|
16,654,829
|
|
12,524,915
|
|
|
|
End of period
|
|
$
|
20,159,201
|
|
$
|
34,597,734
|
|
$
|
16,654,829
|
|
$
|
20,159,201
|
|
|
|
|
|
|
|
|
|
|
|
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 on short-term securitiesavailable-for-sale
|
|
$
|
5,450
|
|
$
|
145,609
|
|
$
|
157,162
|
|
$
|
18,418
|
|
Issuance of common stock and warrants in satisfaction of liabilities
|
|
$
|
175,000
|
|
$
|
|
|
$
|
|
|
$
|
545,000
|
|
See
accompanying notes to financial statements.
F-6
AVI BIOPHARMA, INC.
(A Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
1. ORGANIZATION
AND NATURE OF BUSINESS:
AVI
BioPharma, Inc. (the Company or AVI) was incorporated in the State of
Oregon on July 22, 1980. The mission of the Company is to develop and
commercialize improved therapeutic products based upon antisense and cancer
immunotherapy technology.
Through
May 1993, the financial statements included the combined accounts of the
Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or the
Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit sales
through that date have been paid to the Company under the terms of research and
development contracts entered into by the Partnership and the Company.
Significant transactions between the Company and the Partnership through that
date have been eliminated.
In
March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1,
1993, each partner could elect to exchange each unit held or unit warrant held
for 1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. Total shares and warrants to purchase
shares issued in the exchange offer were 1,632,950 and 381,700, respectively.
Effective
May 19, 1993, the Company and the Partnership entered into a Technology
Transfer Agreement wherein the Partnership conveyed all intellectual property
then in its control to the Company. As part of the conveyance, the Company
tendered to the Partnership for liquidation all partnership units received
pursuant to the exchange offer and received a 49.37 percent undivided interest
in the intellectual property. The Company then purchased the remaining
undivided interest in the intellectual property for rights to payments of
4.05 percent of gross revenues in excess of $200 million, from sales of
products, which would, in the absence of the Technology Transfer Agreement,
infringe a valid claim under any patent transferred to the Company. The Company
also granted to the Partnership a royalty-bearing license to make, use and sell
small quantities of product derived from the intellectual property for research
purposes only.
In March 2000, the Company
and AGDG amended the Technology Transfer Agreement to give to AGDG and Gene
Tools LLC, related organizations, exclusive, non royalty-bearing rights to in
vitro diagnostic applications of the intellectual property. In consideration
for this amendment, Gene Tools paid the Company $1 million and reduced the
royalty that the Company would pay to AGDG under the Technology Transfer
Agreement on future sales of therapeutic products from 4.05% to 3.00%.
The
remaining net assets of the Partnership, $176,642 of cash, were no longer
combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter
into research and development contracts with the Company. The Partnership currently
exists primarily for the purpose of collecting potential future payments from
the Company as called for in the Technology Transfer Agreement.
F-7
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include the valuation of
investments, long-lived asset impairment, and revenue recognition.
Cash and
Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less from the date of purchase to be cash equivalents. The
Company held cash and cash equivalents of $20,159,201 and $34,597,734 as of December 31,
2006 and 2005, respectively which consist primarily of money market funds.
Short-Term
SecuritiesAvailable-For-Sale
The
Company accounts for its short-term securities in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115). 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
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
investments in marketable securities had gross unrealized gains of $18,418 and
$12,968 as of December 31, 2006 and 2005, respectively.
Accounts
Receivable
Accounts
receivable is stated at invoiced amount and do not bear interest. An allowance
for doubtful accounts receivable is not necessary since the collect ability of
individual accounts receivable is known by the company. Amounts included in
accounts receivable are as follows:
As of December 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Research contract
|
|
$
|
45,846
|
|
$
|
1,200,000
|
|
Grant
|
|
5,652
|
|
36,446
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
51,498
|
|
$
|
1,236,446
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property
and equipment is stated at cost and depreciated over the estimated useful lives
of the assets, generally five years, using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset, generally five years, using the straight-line method.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures
that increase the useful life or value are capitalized.
F-8
Amounts
included in property and equipment are as follows:
As of December 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Lab equipment
|
|
$
|
4,770,021
|
|
$
|
4,634,255
|
|
Office equipment
|
|
676,323
|
|
700,578
|
|
Leasehold improvements
|
|
8,804,831
|
|
8,661,359
|
|
Construction in process
|
|
253,120
|
|
|
|
|
|
14,504,295
|
|
13,996,192
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
(10,174,712
|
)
|
(8,396,923
|
)
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,329,583
|
|
$
|
5,599,269
|
|
Depreciation
expense was $1,844,599, $1,749,314 and $1,678,173 for the years ended December 31,
2006, 2005 and 2004, respectively.
Patent
Costs
Patent
costs consist primarily of legal and filing fees incurred to file patents on
proprietary technology developed by the Company. Patent costs are amortized on
a straight-line basis over the shorter of the estimated economic lives or the
legal lives of the patents, generally 17 years. Patent amortization was
$245,776, $248,385 and $209,835 for the years ended December 31, 2006,
2005 and 2004, respectively. Estimated aggregate amortization expense over the
five succeeding fiscal years is expected to be $1,300,000.
Revenue Recognition
The
Company records revenue from research contracts and grants as the services are
performed and payment is reasonably assured.
In 2005, the Company
recognized $4,600,000 in research contracts revenue from government funding for
work performed on viral disease research projects. Upfront, nonrefundable fees and other fees associated
with license and development arrangements are recognized as revenue ratably
over the performance period. Revenue associated with performance milestones
under license and development arrangements is recognized based upon the
achievement of the milestones, as defined in the respective agreements. To date
revenue from license and development arrangements has not been significant.
Research and Development
Research
and development (R&D) expenses include related salaries, contractor fees,
materials, utilities and allocations of corporate costs. R&D expenses also
consist of independent R&D costs and costs associated with collaborative
development arrangements. In addition, the Company funds R&D at other
companies and research institutions under agreements. Research and development
costs are expensed as incurred.
F-9
Other
Current Assets
Amounts
included in other current assets are as follows:
As of December 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
480,003
|
|
$
|
272,165
|
|
Prepaid rents
|
|
100,838
|
|
93,701
|
|
Restricted cash
|
|
155,442
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
736,283
|
|
$
|
365,866
|
|
Starting
in April 2006, the Company was required to pledge $150,000 as collateral
for company credit cards issued to certain employees. The Company classifies
this amount as restricted cash. As of December 31, 2006, restricted cash
including accrued interest was $155,442. The remaining components of other
current assets include normally occurring prepaid expenses and rents.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered and
settled. A valuation allowance is recorded to reduce the net deferred tax asset
to zero because it is more likely than not the deferred tax asset will not be
realized.
F-10
Net Loss
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, there is no
difference between basic EPS and diluted EPS since the common stock equivalents
would be antidilutive.
Year Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net loss (Restated)
|
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
$
|
(21,936,843
|
)
|
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
|
|
52,660,711
|
|
44,655,008
|
|
35,994,976
|
|
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
|
|
52,660,711
|
|
44,655,008
|
|
35,994,976
|
|
Net loss per share - basic and diluted (Restated)
|
|
$
|
(0.54
|
)
|
$
|
(0.41
|
)
|
$
|
(0.61
|
)
|
*
Warrants and stock
options to purchase 14,079,573, 17,025,547 and 13,817,608 shares of common
stock as of December 31, 2006, 2005 and 2004, respectively, were excluded
from earnings per share calculation as their effect would have been
antidilutive.
Stock-based
Compensation
The
Company has two stock-based compensation plans, the 2002 Equity Incentive Plan
and the 2000 Employee Stock Purchase Plan, which are described below. Prior to
fiscal year 2006, the Company accounted for those plans under the recognition
and measurement provisions of Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees, and related Interpretations, as permitted by
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, (SFAS
123). Compensation costs related to stock options granted at fair value under
those plans were not recognized in the statements of operations.
In
December of 2004, FASB issued SFAS 123 (revised 2004), Share-Based
Payment, (SFAS 123R). Under the new standard, companies are no longer to
account for share-based compensation transactions using the intrinsic value
method in accordance with APB Opinion No. 25. Instead, companies are
required to account for such transactions using a fair-value method and
recognize the expense in the statements of operations.
Effective
January 1, 2006, the Company adopted SFAS 123R using the
modified-prospective application. Under the modified prospective application,
stock compensation cost recognized beginning January 1, 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all
share-based payments granted on or subsequent to January 1, 2006, based on
the grant date fair value estimated in accordance with the provisions of SFAS
123R. Results for prior periods have not been restated.
F-11
The
Companys net loss for the year ended December 31, 2006 was increased by approximately
$4.0 million as a result of the application of SFAS 123R.
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 are
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 2006, 2005 and 2004 were
measured on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions:
Year Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
Risk-free interest rate
|
|
4.14
|
%
|
3.38
|
%
|
3.00
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected lives
|
|
9.3
Years
|
|
9.1
Years
|
|
9.2
Years
|
|
Expected volatility
|
|
91
|
%
|
93
|
%
|
93
|
%
|
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.
A
summary of the Companys stock option compensation activity with respect to the
year ended December 31, 2006 follows:
Stock Options
|
|
Shares
|
|
Weighted
Average
Exercisable
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2006
|
|
4,812,396
|
|
$
|
4.55
|
|
|
|
|
|
Granted
|
|
1,172,700
|
|
$
|
7.13
|
|
|
|
|
|
Exercised
|
|
(218,353
|
)
|
$
|
3.40
|
|
|
|
|
|
Canceled or expired
|
|
(195,273
|
)
|
$
|
5.03
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
5,571,470
|
|
$
|
5.12
|
|
5.63
|
|
$
|
(1,810,109
|
)
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2006 and expected to vest
|
|
5,533,250
|
|
$
|
5.12
|
|
5.61
|
|
$
|
(1,796,164
|
)
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
3,660,483
|
|
$
|
5.10
|
|
4.19
|
|
$
|
(1,112,864
|
)
|
F-12
The
weighted average fair value per share of stock-based payments granted to
employees during 2006, 2005 and 2004 was $6.09, $2.12 and $2.70, respectively.
During 2006, 2005 and 2004, the total intrinsic value of stock options
exercised were $779,563, $36,344 and $3,643, and the total fair value of stock
options that vested were $4,047,970, $2,219,446 and $2,011,753, respectively.
As
of December 31, 2006, there was $5,237,126 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 2.4 years.
During
the year ended December 31, 2006, $741,813 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:
|
|
Year Ended
December 31, 2006
|
|
Research and development
|
|
$
|
2,408,132
|
|
General and administrative
|
|
1,639,838
|
|
Total
|
|
$
|
4,047,970
|
|
Prior to January 1, 2006, the Company accounted
for stock options using the intrinsic value method as prescribed by APB 25. The
Company provided disclosures of net loss and net loss per share as if the
method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, had been applied in measuring compensation expense as follows:
For the Year Ended December 31,
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net loss, as reported (Restated)
|
|
$
|
(18,205,885
|
)
|
$
|
(21,936,843
|
)
|
Deduct: Total stock-based employee compensation expense determined
under fair value based method, for all awards not previously included in net
loss
|
|
(2,219,446
|
)
|
(2,011,753
|
)
|
Net loss, as adjusted (Restated)
|
|
$
|
(20,425,331
|
)
|
$
|
(23,948,596
|
)
|
Basic and diluted net loss per share:
|
|
|
|
|
|
As reported (Restated)
|
|
$
|
(0.41
|
)
|
$
|
(0.61
|
)
|
As adjusted (Restated)
|
|
$
|
(0.46
|
)
|
$
|
(0.67
|
)
|
The
following table presents the impact of the Companys adoption of SFAS 123R on
net loss and loss per share for the year ended December 31, 2006
:
|
|
As reported
following
SFAS No.
123R
|
|
If reported
following
APB 25
|
|
|
|
|
|
|
|
Net loss (Restated)
|
|
$
|
(28,687,510
|
)
|
$
|
(24,639,540
|
)
|
Basic and diluted net loss per share (Restated)
|
|
$
|
(0.54
|
)
|
$
|
(0.47
|
)
|
F-13
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 year ended December 31,
2006 the total compensation expense for participants in the ESPP was $56,475
using the Black-Scholes option-pricing model with a weighted average estimated
fair value per share of $1.40, expected life of six months, risk free interest
rate of 4.51%, volatility of 84.33%, and no dividend yield. At December 31,
2006, 248,144 shares remain available for purchase through the plan and there
were 87 employees eligible to participate in the plan, of which 32 were
participants.
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.
See Note 4. The acceleration of these stock options in the first quarter of
2006 increased compensation costs by $833,500.
During
the year ended December 31, 2006, the total compensation expense for
stock-based compensation recognized in accordance with SFAS 123R and for
acceleration of the vesting of certain stock options was $4,881,470,
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 are 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 in 2006, 2005 and 2004 was $525,126, $394,225 and $421,635,
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.
The
fair market values of these warrants is recorded on the balance sheet at
issuance and marked to market at each 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 at December 31:
Year Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
Risk-free interest rate
|
|
4.6%-4.7
|
%
|
4.3
|
%
|
3.20
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected lives
|
|
1.9-3.4
Years
|
|
2.9-4.4
Years
|
|
3.9
Years
|
|
Expected volatility
|
|
76.1%-87.2
|
%
|
83.2%-86.1
|
%
|
85.2
|
%
|
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 warrants is recorded in shareholders equity and no further adjustments
are made.
Comprehensive
Income (Loss)
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 short-term securitiesavailable-for-sale. Accordingly, such investment
securities are stated on the balance sheet at their fair market value
.
Recent
Accounting Pronouncements
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. FIN 48 is effective for fiscal years beginning after December 15,
2006 and is required to be adopted by the Company in the first quarter of
fiscal 2007. The cumulative effects, if any, of applying FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the
period of adoption. The Company is currently evaluating the effect that the
adoption of FIN 48 will have on its results of operations and financial
condition and does not believe that it will have a material impact on the
consolidated financial statements.
F-14
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108
provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 establishes an approach that requires
quantification of financial statement errors based on the effects of each of
the companys balance sheet and statement of operations and the related
financial statement disclosures. SAB 108 is effective for fiscal years
beginning after November 15, 2006 and is required to be adopted by the
Company in the first quarter of fiscal 2007. The Company does not expect the
adoption of SAB 108 to have a material impact on its consolidated results of
operations and financial condition.
3. 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
years ended December 31, 2006 will be adjusted to reduce equity and
increase liabilities for the issued warrants, and changes in fair value will be
recorded on their own line item.
The effect of the correction of this error on the
balance sheet as of December 31, 2006 and the statement of operations for
the twelve month period ended 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
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
2,385,502
|
|
2,385,502
|
|
Net loss
|
|
(31,073,012
|
)
|
2,385,502
|
|
(28,687,510
|
)
|
Net loss per share (basic and
diluted)
|
|
(0.59
|
)
|
0.05
|
|
(0.54
|
)
|
The effect of the correction of this error on the
balance sheet as of December 31, 2005 and the statement of operations for
the twelve month period ended December 31, 2005 is summarized as follows:
|
|
December 31, 2005
As Previously
Reported
|
|
Adjustments
|
|
December 31, 2005
As Restated
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
|
7,578,078
|
|
7,578,078
|
|
Total Current Liabilities
|
|
2,747,973
|
|
7,578,078
|
|
10,326,051
|
|
Additional paid-in capital
|
|
226,290,167
|
|
(9,724,002
|
)
|
216,566,165
|
|
Deficit accumulated during the development stage
|
|
(172,648,244
|
)
|
2,145,924
|
|
(170,502,320
|
)
|
Total Shareholders Equity
|
|
53,660,009
|
|
(7,578,078
|
)
|
46,081,931
|
|
|
|
|
|
|
|
|
|
Loss on warrant liability
|
|
|
|
(1,530,021
|
)
|
(1,530,021
|
)
|
Net loss
|
|
(16,675,864
|
)
|
(1,530,021
|
)
|
(18,205,885
|
)
|
Net loss per share (basic and
diluted)
|
|
(0.37
|
)
|
(0.04
|
)
|
(0.41
|
)
|
The effect of the correction of this error on the
statement of shareholders equity and the statement of operations for the
twelve month period ended December 31, 2004 is summarized as follows:
|
|
December 31, 2004
As Previously
Reported
|
|
Adjustments
|
|
December 31, 2004
As Restated
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
182,370,440
|
|
(5,488,270
|
)
|
176,882,170
|
|
Deficit accumulated during the
development stage
|
|
(155,972,380
|
)
|
3,675,945
|
|
(152,296,435
|
)
|
Total Shareholders Equity
|
|
26,269,033
|
|
(1,812,325
|
)
|
24,456,708
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
2,840,851
|
|
2,840,851
|
|
Net loss
|
|
(24,777,694
|
)
|
2,840,851
|
|
(21,936,843
|
)
|
Net loss per share (basic and
diluted)
|
|
(0.69
|
)
|
0.08
|
|
(0.61
|
)
|
The effect of the correction of this error on the
statement of shareholders equity for the period ended December 31, 2003
is summarized as follows:
|
|
December 31, 2003
As Previously
Reported
|
|
Adjustments
|
|
December 31, 2003
As Restated
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
174,875,072
|
|
(4,543,272
|
)
|
170,331,800
|
|
Deficit accumulated during the
development stage
|
|
(131,194,686
|
)
|
835,094
|
|
(130,359,592
|
)
|
Total Shareholders Equity
|
|
43,394,030
|
|
(3,708,178
|
)
|
39,685,852
|
|
The effect of the correction of this error on the
statement of operations from July 22, 1980 (Inception) through December 31,
2006 is summarized as follows:
|
|
July 22, 1980
(Inception) through
December 31, 2006
As Previously
Reported
|
|
Adjustments
|
|
July 22, 1980
(Inception) through
December 31, 2006
As Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
4,531,426
|
|
4,531,426
|
|
Net loss
|
|
(203,721,256)
|
|
4,531,426
|
|
(199,189,830
|
)
|
F-15
The Company has also restated the quarterly information
for the periods 2006 and 2005 (see note 10). 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.
4. LIQUIDITY:
The
Company is in the development stage. Since its inception in 1980 through December 31,
2006, the Company has incurred losses of approximately $199 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.
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.
On March 13,
2006, the Company announced that it had entered into agreements with Cook Group
Inc. (Cook) for Cooks development and commercialization of products for
vascular and cardiovascular diseases. Under a stock purchase agreement with
Cook, the Company received net proceeds of $4,955,623. The Company sold 692,003
shares of common stock at $7.23 per share to Cook, as described in Note 4. The
Company believes it has sufficient cash to fund operations through 2007. For
2007, the Company expects expenditures for operations, including collaborative
efforts and GMP facilities to be approximately $25 to $28 million. Expenditures
for 2007 could increase if the Company undertakes additional collaborative
efforts. If
necessary, however, the Companys management has the ability to
significantly curtail certain expenditures because a significant amount of the
Companys costs are variable.
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 million to fund the Companys ongoing defense-related programs. Net of
government administrative costs, it is anticipated that we will receive up to
$9.8 million. Under this allocation, our
NEUGENE technology will 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
continues to work with the government to define the scope of the work to be
performed on these programs. This additional funding has not been received and
has not been reflected in the financial statements.
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.
F-16
5. SHAREHOLDERS EQUITY AND WARRANT LIABILITY:
In December 2003, the Company closed a private equity financing for net
proceeds of $13,899,007 with several institutional investors. The Company sold
3,246,753 shares of common stock at $4.62 per share. These investors received a
warrant for the purchase of 1,623,377 common shares for $4.62 per share. These
warrants were immediately exercisable and were exercised on January 22, 2004.
These investors also received a warrant for
the purchase of 974,026 common shares for
$5.50 per share. These warrants are immediately exercisable and expire in
December 2008. In connection with the equity financing, the placement agent
received a warrant for the purchase of 340,909 common shares for $5.50 per
share. These warrants are immediately exercisable and expire in December 2008.
The fair value of these warrants has been recorded as a liability and is marked
to market each period, with the resulting gain (loss) recorded in the Statement
of Operations.
In January
2004, the institutional investors above exercised warrants for the
purchase of 1,623,377 shares of the Companys common stock at $4.62 per share,
for net proceeds of $6,964,356. Investors also received new five-year warrants
to purchase 389,611 common shares for $5.50 per share. These warrants are
exercisable starting July 28, 2004 and expire on December 8, 2008. The fair
value of these warrants has been recorded as a liability and is marked to
market each period, with the resulting gain (loss) recorded in the Statement of
Operations.
In January 2005, the Company closed a private
equity financing for net proceeds of $22,300,338 with several institutional
investors. The Company sold 8,000,000 shares of common stock at $3.00 per
share. These investors also received warrants for the purchase of 1,600,001
common shares at $5.00 per share. These warrants are exercisable starting July
19, 2005 and expire on July 19, 2009. In connection with the equity financing,
the placement agent received a warrant for the purchase of an additional
560,000 common shares at $5.00 per share. These warrants also are exercisable
starting July 19, 2005 and expire on July 19, 2009. The fair value of these
warrants has been recorded as a liability and is marked to market each period,
with the resulting gain (loss) recorded in the Statement of Operations.
In November 2005, the Company closed a
private equity financing for net proceeds of $21,020,984 with several
institutional investors. The Company sold 6,941,715 shares of common stock at
$3.26 per share. In connection with the equity financing, the placement agent
received a warrant for the purchase of 485,920 common shares at $5.00 per
share. These warrants are exercisable commencing on May 14, 2006 and expire on May
14, 2010. The fair value of these warrants has been recorded as a liability and
is marked to market each period, with the resulting gain (loss) recorded in the
Statement of Operations.
In
March 2006, the Company announced that it had entered into agreements with Cook
Group Inc. (Cook) for Cooks development and commercialization of products
for vascular and cardiovascular diseases. There may be future royalty and
milestone payments from Cook based on the License and Development Agreement.
Under a stock purchase agreement with Cook, the Company received net proceeds
of $4,955,623. The Company sold 692,003 shares of common stock at $7.23 per
share to Cook.
In
2000, the Board of Directors and the Companys shareholders approved the
Employee Stock Purchase Plan under which the Company is authorized to sell up
to 250,000 shares of common stock to its full-time employees, nearly all of
whom are eligible to participate. Under the terms of the Plan, employees may
elect every six months to have up to 10% of their compensation withheld to purchase
the Companys common stock. The purchase
price of the stock is 85% of
the lower of the beginning-of-plan period or end-of-plan period market price of
the Companys common stock. During 2006, employees elected to purchase a total
of 41,663 shares of the Companys common stock at $2.95 per share. During 2005,
employees elected to purchase a total of 60,854 shares of the Companys common
stock at $1.82 per share. During 2004, employees elected to purchase a total of
49,918 shares of the Companys common stock at $1.89 per share. At December 31,
2006, 248,144 shares remained available to purchase.
F-17
The Company has two stock option plans, the 2002 Equity Incentive Plan
and the 1997 Stock Option Plan (the Plans). The 2002 Plan provides for the
issuance of incentive stock options to employees and nonqualified stock
options, stock appreciation rights and bonus rights to employees, directors of
the Company and consultants. The 1997 Plan provides for the assumption of the
ImmunoTherapy Options under the Merger Agreement. The Company has reserved 7,282,404 shares
of common stock for issuance under the Plans. Options issued under the Plans
generally vest ratably over four years and expire five to ten years from the
date of grant. At December 31, 2006, 4,167,981 options are outstanding at a
weighted-average exercise price of $5.36 under equity compensations plans
approved by security holders. At December 31, 2006, 1,959,078 shares were
available to issue under equity compensation plans approved by security
holders.
A summary of the status
of the Companys stock option plans and changes are presented in the following
table:
|
|
2006
|
|
2005
|
|
2004
|
|
For the Year Ended
December 31,
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at beginning of year
|
|
4,812,396
|
|
$
|
4.55
|
|
3,803,278
|
|
$
|
5.22
|
|
3,333,861
|
|
$
|
5.60
|
|
Granted
|
|
1,172,700
|
|
7.13
|
|
1,245,937
|
|
2.47
|
|
631,041
|
|
3.10
|
|
Exercised
|
|
(218,353
|
)
|
3.40
|
|
(37,029
|
)
|
2.56
|
|
(4,121
|
)
|
3.64
|
|
Canceled
|
|
(195,273
|
)
|
5.03
|
|
(199,790
|
)
|
4.73
|
|
(157,503
|
)
|
4.75
|
|
Options
outstanding at end of year
|
|
5,571,470
|
|
5.12
|
|
4,812,396
|
|
4.55
|
|
3,803,278
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of year
|
|
3,660,483
|
|
$
|
5.10
|
|
3,308,714
|
|
$
|
5.40
|
|
2,912,510
|
|
$
|
5.63
|
|
F-18
At December 31, 2006, 1,710,934 shares were available for future grant.
The following table summarizes information about stock options
outstanding at December 31, 2006:
Exercise
Price
|
|
Outstanding
Shares at
December 31,
2006
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Exercisable
Options
|
|
$
|
1.76
|
|
20,000
|
|
2.62
|
|
20,000
|
|
2.00
|
|
100,000
|
|
8.03
|
|
100,000
|
|
2.06
|
|
20,000
|
|
7.75
|
|
20,000
|
|
2.20
|
|
60,000
|
|
6.78
|
|
40,001
|
|
2.24
|
|
50,000
|
|
8.38
|
|
50,000
|
|
2.26
|
|
2,500
|
|
8.72
|
|
2,500
|
|
2.29
|
|
26,666
|
|
8.36
|
|
6,667
|
|
2.43
|
|
7,333
|
|
3.36
|
|
2,001
|
|
2.53
|
|
844,824
|
|
7.61
|
|
311,833
|
|
2.55
|
|
63,000
|
|
7.48
|
|
46,500
|
|
2.60
|
|
5,000
|
|
8.21
|
|
1,250
|
|
2.64
|
|
33,000
|
|
8.17
|
|
8,250
|
|
2.89
|
|
100,000
|
|
7.24
|
|
50,000
|
|
2.92
|
|
183,334
|
|
7.22
|
|
91,668
|
|
3.02
|
|
33,334
|
|
7.23
|
|
16,668
|
|
3.25
|
|
20,000
|
|
8.88
|
|
6,667
|
|
3.29
|
|
10,000
|
|
2.28
|
|
10,000
|
|
3.31
|
|
25,000
|
|
2.76
|
|
25,000
|
|
3.45
|
|
100,000
|
|
7.25
|
|
50,000
|
|
3.50
|
|
53,159
|
|
0.61
|
|
53,159
|
|
3.69
|
|
28,000
|
|
2.05
|
|
28,000
|
|
3.81
|
|
15,000
|
|
1.64
|
|
15,000
|
|
3.97
|
|
21,360
|
|
1.00
|
|
21,360
|
|
4.16
|
|
20,000
|
|
6.28
|
|
20,000
|
|
4.25
|
|
20,000
|
|
1.98
|
|
20,000
|
|
4.34
|
|
51,596
|
|
4.00
|
|
44,930
|
|
4.55
|
|
30,000
|
|
1.62
|
|
30,000
|
|
4.64
|
|
83,000
|
|
9.39
|
|
29,165
|
|
4.87
|
|
20,000
|
|
6.01
|
|
15,000
|
|
4.89
|
|
10,000
|
|
6.01
|
|
7,500
|
|
5.35
|
|
745,800
|
|
5.93
|
|
745,800
|
|
5.53
|
|
40,000
|
|
3.92
|
|
40,000
|
|
5.75
|
|
503,000
|
|
3.00
|
|
503,000
|
|
5.88
|
|
45,000
|
|
6.38
|
|
45,000
|
|
6.00
|
|
33,334
|
|
0.16
|
|
33,334
|
|
6.38
|
|
235,000
|
|
0.44
|
|
235,000
|
|
6.63
|
|
510,000
|
|
1.11
|
|
510,000
|
|
6.65
|
|
40,000
|
|
5.37
|
|
40,000
|
|
6.69
|
|
100,000
|
|
0.69
|
|
100,000
|
|
6.88
|
|
132,000
|
|
3.62
|
|
132,000
|
|
6.98
|
|
100,000
|
|
9.22
|
|
|
|
7.19
|
|
33,334
|
|
3.58
|
|
33,334
|
|
7.35
|
|
972,896
|
|
8.48
|
|
74,896
|
|
8.13
|
|
25,000
|
|
0.84
|
|
25,000
|
|
|
|
5,571,470
|
|
|
|
3,660,483
|
|
|
|
|
|
|
|
|
|
|
F-19
The Company has also
issued warrants for the purchase of common stock in conjunction with financing
and compensation arrangements. The 2,645,921, and 389,611 warrants granted in 2005
and 2004, respectively, have not been considered in the fair value based method
of accounting defined in SFAS 123 as such warrant grants related to the raising
of additional equity. A summary of the status of the Companys warrants and
changes are presented in the following table:
|
|
2006
|
|
2005
|
|
2004
|
|
For the Year Ended
December 31,
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Warrants
outstanding at beginning of year
|
|
12,213,151
|
|
$
|
10.79
|
|
10,014,330
|
|
$
|
12.34
|
|
11,662,382
|
|
$
|
11.20
|
|
Granted
|
|
|
|
|
|
2,645,921
|
|
5.00
|
|
389,611
|
|
5.50
|
|
Exercised
|
|
(705,048
|
)
|
3.32
|
|
|
|
|
|
(1,623,377
|
)
|
4.62
|
|
Expired
|
|
(3,000,000
|
)
|
10.00
|
|
(447,100
|
)
|
9.14
|
|
(414,286
|
)
|
4.03
|
|
Warrants
outstanding at end of year
|
|
8,508,103
|
|
11.68
|
|
12,213,151
|
|
10.79
|
|
10,014,330
|
|
12.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of year
|
|
6,842,225
|
|
$
|
5.85
|
|
10,061,353
|
|
$
|
6.95
|
|
8,348,452
|
|
$
|
7.70
|
|
The following table summarizes information about warrants outstanding
at December 31, 2006:
Exercise
Price
|
|
Outstanding
Warrants at
December 31,
2006
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Exercisable
Warrants
|
|
$
|
0.0003
|
|
16,667
|
|
No expiration date
|
|
16,667
|
|
1.14
|
|
1,000
|
|
No expiration date
|
|
1,000
|
|
5.00
|
|
2,645,921
|
|
2.70
|
|
2,645,921
|
|
5.50
|
|
1,613,637
|
|
1.94
|
|
1,613,637
|
|
7.00
|
|
2,565,000
|
|
1.34
|
|
2,565,000
|
|
35.63
|
|
1,665,878
|
|
3.25
|
|
|
|
|
|
8,508,103
|
|
|
|
6,842,225
|
|
|
|
|
|
|
|
|
|
|
The
warrants issued in 2004 and 2005 do not require net cash settlement, however,
as the warrants require settlement in registered shares, the Company has
recorded the warrants as liabilities on the accompanying balance sheet. There
is no effect on cash flows from these warrants as the mark to market adjustment
is reflected as a non-cash charge within the Companys Statements of
Operations. There were 4,350,467 liability classified warrants outstanding at
December 31, 2006 and 2005, and 1,704,546 liability classified warrants
outstanding at December 31, 2004.
F-20
6. SIGNIFICANT AGREEMENTS:
On January 27, 2006, the Company announced
that it had entered into a definitive License Agreement with Chiron Corporation
(Chiron) granting the Company a nonexclusive license to Chirons patents and
patent applications for the research, development, and commercialization of
antisense therapeutics against hepatitis C virus, in exchange for the payment
of certain milestone and royalty payments to Chiron. In lieu of the first
milestone payment due under the License Agreement, the Company and Chiron also
entered into a separate agreement under which the Company issued to Chiron
89,012 shares of the Companys common stock with a market value of $500,000 and
which was expensed to research and development. There may be future payments
made to Chiron by the Company based on milestones in the License Agreement.
On March 13, 2006, the Company announced that
it had entered into agreements with Cook Group Inc. (Cook) for Cooks
development and commercialization of products for vascular and cardiovascular
diseases. See Note 4.
Effective January 1, 2006, the Company
extended the lease on its facility located at 4575 SW Research Way, Suite 200,
Corvallis, OR 97333. This lease now expires on December 31, 2020. As of
December 31, 2005, the Company had an accrued rent payable of $615,163 related
to back rent payments. During the first half of 2006 the Company issued 31,154
shares of the Companys common stock with a market value of $175,000, and paid
cash to Research Way Investments to pay off the accrued rent payable related to
back rent payments.
In January 2006, the Company issued 30,000
shares of the Companys common stock with a market value of $200,000 to the
Oregon State University Foundation to secure access to certain university
research facilities, which was expensed to research and development.
In
December 2006, the Company entered into a cross-license and collaboration
agreement with Ercole Biotech, Inc. (Ercole) to identify and develop drugs
that direct the splicing of messenger RNA (mRNA) to treat a variety of genetic
and acquired diseases 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 192,857 shares of the Companys common stock with
a market value of $675,000 and which was expensed to research and development.
F-21
7. INCOME TAXES:
As of December 31, 2006
the Company has net operating loss carryforwards of approximately $150,482,000,
available to reduce future taxable income, which expire 2007 through 2026. Of this
$150,482,000, approximately $2,600,000 relates to net operating losses assumed
as part of the ImmunoTherapy Corporation acquisition. Utilization of these
ImmunoTherapy Corporation net operating losses is limited to approximately
$1,200,000 per year. In addition, the Internal Revenue Code rules under Section
382 could limit the future use of the remaining $147,882,000 in losses based on
ownership changes and the value of the Companys stock. Approximately
$3,923,000 of the Companys carryforwards were generated as a result of
deductions related to exercises of stock options. When utilized, this portion
of the Companys carryforwards, as tax effected, will be accounted for as a
direct increase to contributed capital rather than as a reduction of that years
provision for income taxes. The principal differences between net operating
loss carryforwards for tax purposes and the accumulated deficit result from
depreciation, amortization, investment write-downs, treatment of research and
development costs, limitations on the length of time that net operating losses
may be carried forward, and differences in the recognition of stock-based
compensation.
The Company had net
deferred tax assets of $79,398,000 and $67,629,000 at December 31, 2006
and 2005, primarily from net operating loss carryforwards. A valuation
allowance was recorded to reduce the net deferred tax asset to zero because it
is more likely than not the deferred tax asset will not be realized. The net
change in the valuation allowance for deferred tax assets was an increase of
approximately $11,769,000, $9,056,000 and $12,093,000 for the years ended
December 31, 2006, 2005 and 2004, respectively, mainly due to the increase
in the net operating loss carryforwards, research and development tax credits and
write-down of short-term securities.
An analysis of the
deferred tax assets (liabilities) are as follows:
December 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net operating
loss carryforwards
|
|
$
|
58,688,000
|
|
$
|
50,079,000
|
|
Difference in
depreciation and amortization
|
|
1,413,000
|
|
1,031,000
|
|
Capital loss
carryforward
|
|
5,007,000
|
|
5,007,000
|
|
Research and
development tax credits
|
|
12,575,000
|
|
10,935,000
|
|
FAS 123R stock
compensation
|
|
946,000
|
|
0
|
|
Stock options
for consulting services
|
|
765,000
|
|
560,000
|
|
Other
|
|
4,000
|
|
17,000
|
|
|
|
79,398,000
|
|
67,629,000
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
(79,398,000
|
)
|
(67,629,000
|
)
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
8. RELATED PARTY TRANSACTIONS:
During the year ended
December 31, 2004, the Company paid Boston Healthcare Associates, Inc., of
which former director Andrew J. Ferrara is President, $986 for business
development consulting services.
F-22
9. COMMITMENTS:
Lease
Obligations
The Company leases office
and laboratory facilities under various noncancelable operating leases through
December 2020. Rent expense under these leases was $1,333,000, $1,160,000
and $1,485,000 for the years ended December 31, 2006, 2005 and 2004,
respectively, and $8,543,000 for the period from July 22, 1980 through
December 31, 2006.
At December 31, 2006,
the aggregate noncancelable future minimum payments under these leases are as
follows:
Year ending December 31,
|
|
|
|
2007
|
|
$
|
1,170,000
|
|
2008
|
|
1,206,000
|
|
2009
|
|
1,201,000
|
|
2010
|
|
1,177,000
|
|
2011
|
|
1,264,000
|
|
Thereafter
|
|
13,227,000
|
|
Total minimum
lease payments
|
|
$
|
19,245,000
|
|
Royalty
Obligations
The Company has license
agreements for which it is obligated to pay the licensors a minimum annual
royalty. Royalty payments under these agreements were $125,000, $125,000 and $125,000
for the years ended December 31, 2006, 2005 and 2004, respectively, and $983,750
for the period from July 22, 1980 through December 31, 2006.
At December 31, 2006,
the aggregate future minimum royalty payments under these agreements are as
follows:
Year ending December 31,
|
|
|
|
2007
|
|
$
|
125,000
|
|
2008
|
|
125,000
|
|
2009
|
|
125,000
|
|
2010
|
|
125,000
|
|
2011
|
|
125,000
|
|
Thereafter
|
|
1,380,000
|
|
Total minimum
royalty payments
|
|
$
|
2,005,000
|
|
F-23
10. FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(SEE FOOTNOTE 3):
2006 for quarter ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
license fees, grants and research contracts
|
|
$
|
17,519
|
|
$
|
13,252
|
|
$
|
18,558
|
|
$
|
65,962
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
6,721,547
|
|
5,938,867
|
|
5,921,929
|
|
6,763,245
|
|
General and
administrative
|
|
2,068,201
|
|
1,347,114
|
|
1,515,711
|
|
2,821,726
|
|
|
|
8,789,748
|
|
7,285,981
|
|
7,437,640
|
|
9,584,971
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(loss):
|
|
|
|
|
|
|
|
|
|
Interest income,
net
|
|
443,042
|
|
492,083
|
|
517,053
|
|
457,859
|
|
Gain (loss) on
warrant liability
|
|
2,250,049
|
|
529,136
|
|
13,801,693
|
|
(14,195,376
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(6,079,138
|
)
|
$
|
(6,251,510
|
)
|
$
|
6,899,664
|
|
$
|
(23,256,526
|
)
|
Net income
(loss) per share - basic
|
|
$
|
(0.11
|
)
|
$
|
(0.12
|
)
|
$
|
0.13
|
|
$
|
(0.45
|
)
|
Net income
(loss) per share - diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.12
|
)
|
$
|
0.13
|
|
$
|
(0.45
|
)
|
Shares used in per
share calculations - basic
|
|
53,000,236
|
|
52,964,049
|
|
52,946,054
|
|
51,715,050
|
|
Shares used in
per share calculations - diluted
|
|
53,000,236
|
|
52,964,049
|
|
54,060,830
|
|
51,715,050
|
|
2005 for quarter ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
license fees, grants and research contracts
|
|
$
|
1,417,446
|
|
$
|
3,281,805
|
|
$
|
39,317
|
|
$
|
45,192
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
4,913,490
|
|
4,147,201
|
|
3,915,155
|
|
4,141,904
|
|
General and
administrative
|
|
1,409,066
|
|
1,052,244
|
|
1,272,529
|
|
1,448,530
|
|
|
|
6,322,556
|
|
5,199,445
|
|
5,187,684
|
|
5,590,434
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(loss):
|
|
|
|
|
|
|
|
|
|
Interest income,
net
|
|
353,538
|
|
225,169
|
|
215,725
|
|
46,063
|
|
Gain (loss) on
warrant liability
|
|
(1,990,461
|
)
|
(533,842
|
)
|
833,797
|
|
160,485
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,542,033
|
)
|
$
|
(2,226,313
|
)
|
$
|
(4,098,845
|
)
|
$
|
(5,338,694
|
)
|
Net loss per
share, basic and diluted
|
|
$
|
(0.14
|
)
|
$
|
(0.05
|
)
|
$
|
(0.09
|
)
|
$
|
(0.13
|
)
|
Shares used in
per share calculations
|
|
47,838,357
|
|
44,184,293
|
|
44,167,565
|
|
42,455,512
|
|
11.
SUBSEQUENT EVENTS:
On January 9, 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 is granting Eleos Inc. an exclusive license to the Companys
NeuGene
®
third-generation
antisense chemistry to treat cancer with p53-related drugs. In return, Eleos Inc.
is granting the Company an exclusive license to its patents 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. is making an upfront payment of
$500,000 to the Company.
F-24
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