AVI BIOPHARMA, INC.
(A Development Stage
Company)
BALANCE
SHEETS
(unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
3,861,272
|
|
$
|
20,159,201
|
|
Short-term
securitiesavailable-for-sale
|
|
10,188,487
|
|
12,992,931
|
|
Accounts
receivable
|
|
1,751,367
|
|
51,498
|
|
Other current
assets
|
|
952,987
|
|
736,283
|
|
Total Current
Assets
|
|
16,754,113
|
|
33,939,913
|
|
|
|
|
|
|
|
Property and
Equipment, net of accumulated depreciation and amortization of $11,472,216 and
$10,174,712
|
|
7,099,321
|
|
4,329,583
|
|
Patent Costs,
net of accumulated amortization of $1,674,130 and $1,496,699
|
|
2,976,692
|
|
2,558,541
|
|
Other Assets
|
|
34,709
|
|
34,709
|
|
Total Assets
|
|
$
|
26,864,835
|
|
$
|
40,862,746
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,274,320
|
|
$
|
1,401,584
|
|
Accrued employee
compensation
|
|
1,325,351
|
|
1,371,353
|
|
Long-term debt,
current portion
|
|
70,261
|
|
|
|
Warrant
liability
|
|
1,642,246
|
|
5,192,576
|
|
Other
liabilities
|
|
1,238,152
|
|
377,908
|
|
Total Current
Liabilities
|
|
9,550,330
|
|
8,343,421
|
|
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt,
non-current portion
|
|
2,088,797
|
|
|
|
|
|
|
|
|
|
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; 53,730,376 and 53,182,841 issued
and outstanding
|
|
5,373
|
|
5,318
|
|
Additional
paid-in capital
|
|
237,450,696
|
|
231,685,419
|
|
Accumulated
other comprehensive income
|
|
|
|
18,418
|
|
Deficit
accumulated during the development stage
|
|
(222,230,361
|
)
|
(199,189,830
|
)
|
Total
Shareholders Equity
|
|
15,225,708
|
|
32,519,325
|
|
Total
Liabilities and Shareholders Equity
|
|
$
|
26,864,835
|
|
$
|
40,862,746
|
|
See accompanying notes to
financial statements.
2
AVI BIOPHARMA, INC.
(A Development Stage
Company)
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(inception) through
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
September 30, 2007
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
Revenues from
license fees, grants and research contracts
|
|
$
|
2,911,406
|
|
$
|
13,252
|
|
$
|
5,798,872
|
|
$
|
97,772
|
|
$
|
15,779,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
9,880,480
|
|
5,938,867
|
|
25,358,937
|
|
18,624,041
|
|
173,006,152
|
|
General and
administrative
|
|
1,544,512
|
|
1,347,114
|
|
7,879,193
|
|
5,684,551
|
|
48,699,721
|
|
Acquired
in-process research and development
|
|
|
|
|
|
|
|
|
|
19,545,028
|
|
|
|
11,424,992
|
|
7,285,981
|
|
33,238,130
|
|
24,308,592
|
|
241,250,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income,
net
|
|
182,320
|
|
492,083
|
|
848,397
|
|
1,466,995
|
|
8,297,939
|
|
Gain on warrant
liability
|
|
1,296,322
|
|
529,136
|
|
3,550,330
|
|
135,453
|
|
8,081,756
|
|
Realized gain on
sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
3,862,502
|
|
Write-down of
short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(17,001,348
|
)
|
|
|
1,478,642
|
|
1,021,219
|
|
4,398,727
|
|
1,602,448
|
|
3,240,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,034,944
|
)
|
$
|
(6,251,510
|
)
|
$
|
(23,040,531
|
)
|
$
|
(22,608,372
|
)
|
$
|
(222,230,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.12
|
)
|
$
|
(0.43
|
)
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common shares outstanding for computing basic and diluted loss per
share
|
|
53,693,693
|
|
52,964,049
|
|
53,500,250
|
|
52,546,293
|
|
|
|
See accompanying notes to
financial statements.
3
AVI BIOPHARMA, INC.
(A Development Stage
Company)
STATEMENTS
OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Nine months ended September 30,
|
|
(Inception) to
|
|
|
|
2007
|
|
2006
|
|
September 30, 2007
|
|
|
|
|
|
(Restated)
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,040,531
|
)
|
$
|
(22,608,372
|
)
|
$
|
(222,230,361
|
)
|
Adjustments to
reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
1,506,768
|
|
1,560,636
|
|
14,327,007
|
|
Loss on disposal
of assets
|
|
58,584
|
|
192,369
|
|
373,762
|
|
Realized gain on
sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
(3,862,502
|
)
|
Write-down of
short-term securitiesavailable-for-sale
|
|
|
|
|
|
17,001,348
|
|
Issuance of
common stock to vendors
|
|
700,000
|
|
700,000
|
|
2,075,000
|
|
Compensation
expense on issuance of common stock and partnership units
|
|
|
|
|
|
861,655
|
|
Compensation
expense to non-employees on issuance of options and warrants to purchase
common stock or partnership units
|
|
312,637
|
|
525,126
|
|
2,955,690
|
|
Stock-based
compensation
|
|
3,933,926
|
|
3,946,821
|
|
8,815,396
|
|
Conversion of interest
accrued to common stock
|
|
|
|
|
|
7,860
|
|
Acquired
in-process research and development
|
|
|
|
|
|
19,545,028
|
|
Gain on warrant
liability
|
|
(3,550,330
|
)
|
(135,453
|
)
|
(8,081,756
|
)
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
(1,916,573
|
)
|
737,997
|
|
(2,704,354
|
)
|
Other assets
|
|
|
|
2,900
|
|
(34,709
|
)
|
Net increase
(decrease) in accounts payable, accrued employee compensation, and other
liabilities
|
|
4,646,244
|
|
(390,094
|
)
|
8,092,089
|
|
Net cash used in
operating activities
|
|
(17,349,275
|
)
|
(15,468,070
|
)
|
(162,858,847
|
)
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(1,151,800
|
)
|
(734,894
|
)
|
(16,450,311
|
)
|
Patent costs
|
|
(651,649
|
)
|
(519,179
|
)
|
(5,126,679
|
)
|
Purchase of
marketable securities
|
|
(110,417
|
)
|
(4,400,635
|
)
|
(112,976,213
|
)
|
Sale of
marketable securities
|
|
2,896,443
|
|
4,013,570
|
|
107,696,880
|
|
Acquisition
costs
|
|
|
|
|
|
(2,377,616
|
)
|
Net cash
provided by (used in) investing activities
|
|
982,577
|
|
(1,641,138
|
)
|
(29,233,939
|
)
|
|
|
|
|
|
|
|
|
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
|
|
68,769
|
|
8,089,722
|
|
196,339,495
|
|
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
|
|
68,769
|
|
8,089,722
|
|
195,954,058
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
in cash and cash equivalents
|
|
(16,297,929
|
)
|
(9,019,486
|
)
|
3,861,272
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Beginning of
period
|
|
20,159,201
|
|
34,597,734
|
|
|
|
End of period
|
|
$
|
3,861,272
|
|
$
|
25,578,248
|
|
$
|
3,861,272
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Short-term
securitiesavailable-for-sale received in connection with the private
offering
|
|
$
|
|
|
$
|
|
|
$
|
17,897,000
|
|
Change in
unrealized gain (loss) on short-term securitiesavailable-for-sale
|
|
$
|
(18,418
|
)
|
$
|
6,359
|
|
$
|
|
|
Issuance of
common stock and warrants in satisfaction of liabilities
|
|
$
|
|
|
$
|
175,000
|
|
$
|
545,000
|
|
Issuance of
common stock for building purchase
|
|
$
|
750,000
|
|
$
|
|
|
$
|
750,000
|
|
Assumption of
long-term debt for building purchase
|
|
$
|
2,199,792
|
|
$
|
|
|
$
|
2,199,792
|
|
Issuance of
warrants in connection with financing arrangements
|
|
$
|
|
|
$
|
|
|
$
|
9,724,002
|
|
See accompanying notes to
financial statements.
4
AVI BIOPHARMA, INC.
NOTES TO
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The
financial information included herein for the three and nine-month periods
ended September 30, 2007 and 2006 and the financial information as of September
30, 2007 is unaudited; however, such information reflects all adjustments
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods. The financial
information as of December 31, 2006 is derived from AVI BioPharma, Inc.s (the Companys)
Form 10-K/A. The interim financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Companys
Form 10-K/A. The results of operations for the interim periods presented are
not necessarily indicative of the results to be expected for the full year.
Stock-based compensation costs are generally based on the fair value calculated
from the Black-Scholes option-pricing model on the date of grant for stock
options and on the date of enrollment for the Plan. The fair value of stock
grants is amortized as compensation expense on a straight-line basis over the
vesting period of the grants. Stock options granted to employees are
service-based and typically vest over four years
.
The fair market values of stock options granted during the periods
presented were measured on the date of grant using the Black-Scholes
option-pricing model, with the following weighted average assumptions:
Three and Nine Months Ended September 30,
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
4.83
|
%
|
4.14
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
8.0 years
|
|
9.3 years
|
|
Expected
volatility
|
|
89
|
%
|
91
|
%
|
The risk-free interest
rate is estimated using an average of treasury bill interest rates. The
expected dividend yield is zero as the Company has not paid any dividends to
date and does not expect to pay dividends in the future. The expected lives are
estimated using expected and historical exercise behavior. The expected
volatility is estimated using historical calculated volatility and considers
factors such as future events or circumstances that could impact volatility.
As part of the requirements of FSAS 123R, the Company is required to
estimate potential forfeiture of stock grants and adjust compensation cost
recorded accordingly. The estimate of forfeitures will be adjusted over the
requisite service period to the extent that actual forfeitures differ, or are
expected to differ, from such estimates. Changes in estimated forfeitures will
be recognized through a cumulative catch-up in the period of change and will
also impact the amount of stock compensation expense to be recognized in future
periods
.
5
A summary of the Companys
stock option compensation activity with respect
to the nine months ended September 30,
2007 follows:
Stock Options
|
|
Shares
|
|
Weighted
Average
Exercisable
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2007
|
|
5,571,470
|
|
$
|
5.12
|
|
|
|
|
|
Granted
|
|
1,197,548
|
|
$
|
2.79
|
|
|
|
|
|
Exercised
|
|
(11,639
|
)
|
$
|
2.49
|
|
|
|
|
|
Canceled or
expired
|
|
(457,853
|
)
|
$
|
5.91
|
|
|
|
|
|
Outstanding at
September 30, 2007
|
|
6,299,526
|
|
$
|
4.62
|
|
5.54
|
|
$
|
(11,531,643
|
)
|
|
|
|
|
|
|
|
|
|
|
Vested at
September 30, 2007 and expected to vest
|
|
6,262,580
|
|
$
|
4.63
|
|
5.52
|
|
$
|
(11,481,940
|
)
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2007
|
|
4,452,205
|
|
$
|
4.83
|
|
4.32
|
|
$
|
(9,046,519
|
)
|
The weighted average fair value per share of
stock-based payments granted to employees during the nine months ended
September 30, 2007 and September 30, 2006 was $2.26 and $6.09, respectively.
During the same periods, the total intrinsic value of stock options exercised
were $4,937 and $773,798, and the total fair value of stock options that vested
were $2,876,554 and $3,113,321, respectively.
As of September 30, 2007, there was
$3,520,157 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 1.9 years.
During the nine
months ended September
30, 2007
, $29,002 was received
for the exercise of stock options. The Company is obligated to issue shares
from the 2002 Equity Incentive Plan upon the exercise of stock options. The
Company does not currently expect to repurchase shares from any source to
satisfy its obligations under the Plan.
The following are the stock-based
compensation costs recognized in the Companys statements of operations:
|
|
Three Months Ended
September 30, 2007
|
|
Nine Months Ended
September 30, 2007
|
|
Research and
development
|
|
$
|
497,002
|
|
$
|
1,381,687
|
|
General and
administrative
|
|
282,088
|
|
1,494,867
|
|
Total
|
|
$
|
779,090
|
|
$
|
2,876,554
|
|
|
|
Three Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2006
|
|
Research and
development
|
|
$
|
644,304
|
|
$
|
1,822,385
|
|
General and
administrative
|
|
359,246
|
|
1,290,936
|
|
Total
|
|
$
|
1,003,550
|
|
$
|
3,113,321
|
|
6
The
2000 Employee Stock Purchase Plan
(ESPP) provides that eligible employees may contribute, through payroll,
deductions, up to 10% of their earnings toward the purchase of the Companys
Common Stock at 85% of the fair market value at specific dates. On January 1,
2006, the Company adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share based payment awards made to
the Companys employees and directors related to the Employee Stock Purchase
Plan, based on estimated fair values.
During the three and nine-month periods ended September 30, 2007 the total compensation expense for
participants in the ESPP was $10,751 and $29,465, respectively, using
the Black-Scholes option-pricing model
with a weighted average estimated fair value per share of $1.09, expected life
of six months, risk free interest rate of 4.93%, volatility of 56.92%, and no
dividend yield. During the three and nine-month periods ended September
30, 2006 the total compensation expense
for participants in the ESPP was $12,531 and $45,250, respectively, using
the Black-Scholes option-pricing model
with a weighted average estimated fair value per share of $1.44, expected life
of six months, risk free interest rate of 4.32%, volatility of 88.15%, and no
dividend yield. At September 30, 2007, 230,687 shares remain available
for purchase through the plan and there were 95 employees eligible to
participate in the plan, of which 31 were participants.
On March 27, 2007, in connection with
his resignation, the Company entered into a Separation and Release Agreement
with AVIs former Chairman and Chief Executive Officer. Pursuant to this
agreement, he may exercise his previously granted options until the
earlier of the termination date specified in the respective stock option grant
agreements or March 28, 2010. This modification of these stock options in the
first quarter of 2007 increased compensation costs by $1,057,372.
On March 15, 2006 unvested stock options for
nine employees in the Companys Colorado facility were accelerated. These
employees joined Cook Group Inc. in April 2006. The acceleration of these stock
options in the first quarter of 2006 increased compensation costs by $833,500.
During the
three and nine-month
periods ended September 30, 2007
the total compensation expense for stock-based compensation was $779,090 and
$3,933,926, respectively. During the three and nine-month periods ended
September 30, 2006 the total compensation
expense for stock-based compensation was $1,003,550 and $3,946,821,
respectively.
The Company records the fair value of stock options granted to
non-employees in exchange for services in accordance with EITF 96-18
Accounting for Equity Instruments That are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services
. The fair value of the options granted is expensed when
the measurement date is known. The performance for services was satisfied on
the grant date for stock options granted to non-employees. The total fair value
of the options granted to non-employees during the nine months ended September
30, 2007 and September 30, 2006 was $312,637 and $525,126, respectively,
which was expensed to research and development.
Warrants. Certain of the Companys warrants issued in connection with
financing arrangements are classified as liabilities in accordance with EITF 00-19,
Accounting for derivative financial instruments
indexed to, and potentially settled in, a Companys own stock
.
7
The fair market value of these warrants is recorded on the balance
sheet at issuance and marked to market at each financial reporting period. The
change in the fair value of the warrants is recorded in the Statement of
Operations as a non-cash gain (loss) and is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Three and Nine Months Ended September 30,
|
|
2007
|
|
2006
|
|
Risk-free interest
rate
|
|
3.9%-4.0
|
%
|
4.5%-4.6
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
1.2-2.6 years
|
|
2.2-3.6 years
|
|
Expected
volatility
|
|
57.6%-71.2
|
%
|
86.8%-91.3
|
%
|
The risk-free interest
rate is estimated using an average of treasury bill interest rates. The
expected
dividend yield
is zero as the Company has not paid any dividends to date and does not expect
to pay dividends in the future. The expected lives are based on the remaining
contractual lives of the related warrants. The expected volatility is estimated
using historical calculated volatility and considers factors such as future
events or circumstances that could impact volatility.
For warrants classified as permanent equity
in accordance with EITF 00-19, the fair value of the warrants is recorded in
shareholders equity and no further adjustments are made.
Commitments
and Contingencies
.
In the normal course of business, the
Company may be named as a party to various legal claims, actions and
complaints, including matters involving employment, intellectual property,
effects from the use of drugs utilizing our technology, or others. It
is impossible to predict with certainty whether any resulting
liability would have a material adverse effect on the Companys financial
position, results of operations or cash flows.
Financial Instruments
.
The carrying
amounts reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable, and other current monetary assets and liabilities
approximate fair value because of the immediate or short-term maturity of these financial instruments.
License
Arrangements.
License
arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive licensed rights to patented or
patent pending compounds, technology access fees, various performance or sales
milestones and future product royalty payments. Some of these arrangements are
multiple element arrangements.
The Company defers recognition of
non-refundable upfront fees if it has continuing performance obligations
without which the technology, right, product or service conveyed in conjunction
with the non-refundable fee has no utility to the licensee that is separate and
independent of Company performance under the other elements of the arrangement.
In addition, if the Company has continuing involvement through research and
development services that are required because its know-how and expertise
related to the technology is proprietary to the Company, or can only be
performed by the Company, then such up-front fees are deferred and recognized
over the period of continuing involvement.
8
Payments related to substantive,
performance-based milestones in a research and development arrangement are
recognized as revenue upon the achievement of the milestones as specified in
the underlying agreements when they represent the culmination of the earnings
process.
Government
Research Contract Revenue.
The Company recognizes revenues from federal research
contracts during the period in which the related expenditures are incurred. The
Company presents these revenues and related expenses at gross in the
consolidated financial statements in accordance with EITF 99-19
Reporting Revenue Gross as a Principal versus Net as an Agent
.
Income
Taxes.
In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The provisions of FIN 48 are effective for the
Company as of January 1, 2007, with cumulative effect, if any, of applying FIN
48 recorded as an adjustment to opening retained earnings in the year of
adoption. The Company adopted FIN 48 on January 1, 2007, which did not have a
material impact on the consolidated financial statements. See Note 8.
Note 2. Restatement of Prior Financial
Information:
In
December 2003, January 2004, January 2005 and November 2005, the Company issued
warrants in connection with various financing transactions in registered
offerings. Previously, the Company had classified these warrants in the
shareholders equity section of the Companys balance sheet. In accordance with
EITF 00-19, if a financial instrument requires settlement in registered shares,
the financial instrument cannot be classified within equity, as the companys
ability to maintain an effective registration statement is outside that companys
control. The warrants issued by the Company require settlement in registered
shares and accordingly, should be recorded as a liability at fair value at the
date of grant, and marked to market at each reporting period.
The Company has evaluated the financial
statement impact in each of the previously filed reporting periods effected,
and concluded that the changes are quantitatively material to its previously
filed financial statements. The amounts previously recorded in each of the
three and nine month periods ended September 30, 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.
9
The
effect of the correction of this error on the statement of operations for the
three month period ended September 30, 2006 is summarized as follows:
|
|
September 30,
2006 As
Previously
Reported
|
|
Adjustments
|
|
September 30,
2006 As Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
529,136
|
|
529,136
|
|
Net loss
|
|
(6,780,646
|
)
|
529,136
|
|
(6,251,510
|
)
|
Net loss per share (basic and diluted)
|
|
(0.13
|
)
|
0.01
|
|
(0.12
|
)
|
The
effect of the correction of this error on the statement of operations for the
nine month period ended September 30, 2006 is summarized as follows:
|
|
September 30,
2006 As
Previously
Reported
|
|
Adjustments
|
|
September 30,
2006 As Restated
|
|
|
|
|
|
|
|
|
|
Gain on warrant liability
|
|
|
|
135,453
|
|
135,453
|
|
Net loss
|
|
(22,743,825
|
)
|
135,453
|
|
(22,608,372
|
)
|
Net loss per share (basic and diluted)
|
|
(0.43
|
)
|
|
|
(0.43
|
)
|
Note 3. Liquidity
The Company is in the development stage. Since its inception in 1980
through September 30, 2007, the Company has incurred losses of
approximately $222 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.
The Company believes it has sufficient cash to fund operations at least through
the first quarter of 2008, exclusive of future receipts from billings on
existing government contracts. For 2007, the Company expects
10
expenditures for operations, net of
government funding, including collaborative efforts and GMP facilities to be
approximately $24 to $26 million. Expenditures for 2007 could exceed this level
if the Company undertakes additional collaborative efforts. If necessary,
however, the Companys management has the ability to curtail certain
expenditures because a significant amount of the Companys costs are variable.
In December 2006, the Company announced the
execution of a two-year $28 million research contract with the Defense Threat
Reduction Agency (DTRA), an agency of the United States Department of Defense
(DoD). The contract is directed toward funding the Companys development of
antisense therapeutics to treat the effects of Ebola, Marburg and Junin
hemorrhagic viruses, which are seen by DoD as potential biological warfare and
bioterrorism agents. Funding under this contract is expected over two years,
with up to $18.0 million committed in the first year, and the remainder
anticipated in the second year. During the nine months ended September 30,
2007, the Company recognized $3,567,455 in research contract revenue from this
contract.
In January 2006, the Company announced that the final version of the
2006 defense appropriations act had been approved, which included an allocation
of $11.0 million to fund the Companys ongoing defense-related programs. Net of
government administrative costs, it is anticipated that the Company will
receive up to $9.8 million under this allocation. The Companys NEUGENE
®
technology is expected to be used to continue developing therapeutic agents
against Ebola, Marburg and dengue viruses, as well as to continue developing
countermeasures for anthrax exposure and antidotes for ricin toxin. The Company
has received signed contracts for all four of these projects. The Company
expects that funding under these signed contracts will be completed over the
next 12 months
. During
the nine months ended September 30, 2007, the Company recognized $2,096,190 in
research contract revenue from these contracts.
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.
11
Note 4. Earnings Per Share
Basic EPS is calculated using the weighted average number of common
shares outstanding for the period and diluted EPS is computed using the
weighted average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position, there is no
difference between basic EPS and diluted EPS since the common stock equivalents
would be antidilutive.
Three Months Ended September 30,
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
Net loss
|
|
$
|
(7,034,944
|
)
|
$
|
(6,251,510
|
)
|
Weighted average
number of shares of common stock and common stock equivalents outstanding:
|
|
|
|
|
|
Weighted average
number of common shares Outstanding for computing basic earnings per share
|
|
53,693,693
|
|
52,964,049
|
|
Dilutive effect
of warrants and stock options after application of the treasury stock method
|
|
|
*
|
|
*
|
Weighted average
number of common shares outstanding for computing diluted earnings per share
|
|
53,693,693
|
|
52,964,049
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.12
|
)
|
Nine Months Ended September 30,
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
Net loss
|
|
$
|
(23,040,531
|
)
|
$
|
(22,608,372
|
)
|
Weighted average
number of shares of common stock and common stock equivalents outstanding:
|
|
|
|
|
|
Weighted average
number of common shares outstanding for computing basic earnings per share
|
|
53,500,250
|
|
52,546,293
|
|
Dilutive effect
of warrants and stock options after application of the treasury stock method
|
|
|
*
|
|
*
|
Weighted average
number of common shares outstanding for computing diluted earnings per share
|
|
53,500,250
|
|
52,546,293
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.43
|
)
|
$
|
(0.43
|
)
|
* Warrants and stock options to purchase 14,807,629 and
14,220,937 shares of common stock as of September 30, 2007 and 2006,
respectively, were excluded from the earnings per share calculation as their
effect would have been antidilutive.
12
Note 5. Comprehensive Income and securities
available for sale
Comprehensive income (loss) includes charges
or credits to equity that did not result from transactions with shareholders.
The Companys only component of other comprehensive income (loss) is
unrealized gain (loss) on cash equivalents and short-term
securitiesavailable-for-sale. Accordingly, such investment securities are
stated on the balance sheet at their fair market value. The Company classifies
its investment securities with an original maturity of three months or less
from the date of purchase as cash equivalents. The Company classifies its
investment securities with an original maturity of more than three months from
the date of purchase as short-term securitiesavailable-for-sale
. At
September 30, 2007 and December 31, 2006, the Companys investments in
marketable securities had gross unrealized gains of $0 and $
18,418, respectively. The unrealized
difference between the adjusted cost and the fair market value of these
securities has been reflected as a separate component of shareholders equity.
The following table sets forth the calculation of comprehensive income for the
periods indicated:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,034,944
|
)
|
$
|
(6,251,510
|
)
|
$
|
(23,040,531
|
)
|
$
|
(22,608,372
|
)
|
Unrealized gain
(loss) on marketable securities
|
|
|
|
2,127
|
|
(18,418
|
)
|
6,359
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$
|
(7,034,944
|
)
|
$
|
(6,249,383
|
)
|
$
|
(23,058,949
|
)
|
$
|
(22,602,013
|
)
|
Note 6. Significant Agreements
On January 8, 2007, the Company announced
that it had entered into a cross-license agreement with Eleos Inc. for the
development of antisense drugs targeting p53, a well-studied human protein that
controls cellular response to genetic damage. Under the terms of the agreement,
the Company granted Eleos Inc. an exclusive license to the Companys NEUGENE
®
third-generation antisense chemistry to treat cancer with p53-related drugs. In
return, Eleos Inc. granted an exclusive license to its patents to the Company
for treatment of most viral diseases with drugs that target p53. The companies
are sharing rights in other medical fields where targeting p53 may be
therapeutically useful. Each company will make milestone payments and royalty
payments to the other on development and sales of products that utilize
technology licensed under the agreement. In addition, Eleos Inc. made an
upfront payment of $500,000 to the Company. The Company recognized $93,750 in
license fees in the nine months ended September 30, 2007; the remaining
$406,250
has been classified as deferred revenue
.
In February 2007, the Company issued 100,000
shares of the Companys common stock with a market value of $300,000 for
consulting services, which was expensed as a component of research and
development.
On March 27, 2007, the Board of Directors appointed K.Michael Forrest
as interim Chief Executive Officer and set his compensation as follows: (a)
annual salary - $385,000 and (b) options to acquire 300,000 shares of the
Companys common stock. The stock options granted to Mr. Forrest become
exercisable starting one month after the grant date, with one-twelfth of the
options becoming exercisable at that time and
an additional one-twelfth of the
13
options becoming exercisable each month
thereafter. The exercise price is $2.45 per share.
On March 27, 2007, in connection with
the resignation of AVIs Chairman and Chief Executive Officer, the Company
entered into a Separation and Release Agreement, pursuant to which the former
Chairman and CEO is entitled to receive his base compensation for 18
months ($562,500 in the aggregate) and medical insurance for the same
18 month period and may exercise his previously granted options until the
earlier of the termination date of the respective stock option grant agreements
or March 28, 2010. The Company recognized $1,619,872 in total compensation
expense to general and administrative in the first quarter of 2007, including
$562,500 in cash compensation and $1,057,372 in SFAS 123R expenses.
On April 19, 2007, the Company entered into a real property purchase
agreement with WKL Investments Airport, LLC (WKL) to purchase a parcel of
real property, including improvements situated on the land and intangibles
related to the land, for $3,300,000. The Company paid the purchase price as
follows: $350,208 in cash, assumption of two loans secured by the property in
the amount of $2,199,792, and issuance of 270,758 shares of AVI common stock
(at $2.77 per share or $750,000 in the aggregate).
On May 2, 2007, the Company entered into a
cross-license and collaboration agreement with Ercole Biotech, Inc. (Ercole)
to develop drugs that may prove effective in treating the genetic diseases
Duchenne muscular dystrophy and beta thalassemia and a stock purchase agreement
in connection therewith. Under the terms of the stock purchase
agreement, Ercole issued AVI shares of
Ercole Series A2 Preferred Stock, and the Company issued to Ercole 73,607 shares of the Companys common
stock with a market value of $200,000 and which was expensed to research and
development.
In August 2007, the Company issued 74,074
shares of the Companys common stock with a market value of $200,000 for
consulting services, which was expensed as a component of research and
development.
Note 7. Other current assets
Amounts included in other
current assets are as follows:
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
569,484
|
|
$
|
480,003
|
|
Prepaid rents
|
|
103,504
|
|
100,838
|
|
Restricted cash
|
|
279,999
|
|
155,442
|
|
|
|
|
|
|
|
Other current
assets
|
|
$
|
952,987
|
|
$
|
736,283
|
|
Starting in April 2006, the Company was required to pledge $150,000 as
collateral for company credit cards issued to certain employees. Starting in
April 2007, the Company was required to pledge $125,000 as collateral for
payments on long-term debt. The Company classifies these amounts as restricted
cash. As of September 30, 2007, restricted cash including accrued interest was
$279,999. The remaining components of other current assets include normally
occurring prepaid expenses and rents.
14
Note 8. Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007, which
did not materially impact its consolidated financial statements. No
unrecognized tax benefits were recorded as of the date of adoption. As a result
of the implementation of FIN 48, the Company did not recognize any liability
for unrecognized tax benefits. There are no unrecognized tax benefits included
in the balance sheet that would, if recognized, affect the effective tax rate.
The Companys policy is to recognize interest and/or penalties related
to income tax matters in income tax expense. The Company had no accrual for
interest or penalties on its balance sheet at September 30, 2007 and at
December 31, 2006, and has not recognized interest and/or penalties in the
statement of operations for the nine months ended September 30, 2007.
At January 1, 2007, the Company had net deferred tax assets of
$79,398,000. The deferred tax assets are primarily composed of federal and
state tax net operating loss carryforwards, federal and state R&D credit
carryforwards, share-based compensation expense and intangibles. Due to
uncertainties surrounding its ability to generate future taxable income to
realize these assets, a full valuation allowance has been established to offset
its net deferred tax asset. Additionally, the Internal Revenue Code rules under
Section 382 could limit the future use of its net operating loss and R&D
credit carryforwards to offset future taxable income based on ownership changes
and the value of the Companys stock.
Note 9. Subsequent Events
On October 15, 2007, the Company
and
Charleys Fund, Inc. announced that the Company has been awarded a $2.45
million research grant from Charleys Fund, a nonprofit organization that funds
drug development and discovery initiatives specific to Duchenne muscular
dystrophy (DMD). This award will support a new product development program
using proprietary exon skipping technologies developed by the Company and its
partner, Ercole Biotech, Inc., to overcome the effects of certain genetic
errors in the dystrophin gene. The award will allow AVI to accelerate its
development of new therapeutics for DMD.
On October 30, 2007, the Company obtained a
loan for $4,500,000 from a lending institution with a $7,500 loan fee at a
fixed interest rate of 7.2%. This loan is due on December 7, 2007 and is
secured by Certificates of Deposit with this same institution.
Item 2.
Managements
Discussion and Analysis or Plan of Operations
This section should be read in conjunction with the same titled section
contained in our Annual Report on Form 10-K/A as filed with the SEC for the
year ended December 31, 2006 and the Risk Factors contained in such report.
Forward-Looking Information
The
discussion in this Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act. Forward looking statements are identified by such words as believe,
expect, anticipate and words and phrases of similar import. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Such forward-looking
15
statements
involve risks and uncertainties, including, but not limited to, the results of
research and development efforts, the success of raising funds in the current
offering or future offerings under our current shelf registration, the results
of pre-clinical and clinical testing, the effect of regulation by FDA and other
agencies, the impact of competitive products, product development,
commercialization and technological difficulties, and other risks detailed in
the Companys Securities and Exchange Commission filings, that could cause
actual results to differ materially from the expected results reflected in such
forward looking statements.
Restatement
On October 22, 2007, the Audit Committee and
Board of Directors of AVI BioPharma, Inc. concluded that the Companys
previously issued financial statements for the fiscal years 2004 through 2006
contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2006 and the financial statements for the periods ended March 31,
2007 and June 30, 2007 contained in its Quarterly Reports on Form 10-Q should
be restated. The Company has restated such financial statements and certain
financial information as contained in the Companys Form 10-K/A and Form 10-Q/A
filed on November 5, 2007. The Company has also concluded that the financial
statements for the three and nine month periods ended September 30, 2006 as
contained in this Form 10-Q, should be restated. Accordingly, such prior
financial statements as contained in the Form 10-Q for the period ended
September 30, 2006 should no longer be relied upon.
This restatement is a result of the Companys
treatment of warrants issued by the Company in December 2003, January 2004 and
January and November, 2005. Previously, the Company had classified these
warrants in the shareholders equity section of the Companys balance sheet.
Under 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.
See Note 2 Restatement of Prior Financial
Information of the Notes to the Financial Statements included in this Form
10-Q for a detailed discussion of the effect of this restatement.
Overview
From our inception in 1980, we have devoted
our resources primarily to fund our research
and development efforts. We have been unprofitable since inception and, other
than limited interest, license fees, grants and research contracts, we have had
no material revenues from the sale of products or other sources and we do not
expect material revenues for the foreseeable future. We expect to continue to
incur losses for the foreseeable future as we continue to expand our research
and development efforts and enter into additional collaborative efforts.
As of September 30, 2007, the Companys accumulated deficit was $222,230,361.
16
Results of Operations
Revenues, from license fees, grants and research contracts, increased
to $2,911,406 in the third quarter of 2007 from $13,252 in the third quarter of
2006, primarily due to increases in research contract revenues of $2,869,335
and license fees of $31,250, partially offset by decreases in grant revenues of
$2,431. Revenues, from license fees, grants and research contracts, increased
to $5,798,872 for the nine months ended September 30, 2007 from $97,772 for the
comparable period in 2006, due to increases in research contracts revenues of
$5,664,640 and license fees of $93,750, partially offset by decreases in grants
revenues of $57,290.
Operating expenses increased to $11,424,992 in the third quarter of
2007 from $7,285,981 in the third quarter of 2006 and to $33,238,130 for the
nine months ended September 30, 2007 from $24,308,592 for the comparable period
of 2006 primarily due to increases in research and development, which increased
to $9,880,480 in the third quarter of 2007 from $5,938,867 in the third quarter
of 2006 and to $25,358,937 for the nine months ended September 30, 2007 from
$18,624,041 in the comparable period in 2006. This research and development
increase in the third quarter of 2007 was due primarily to approximately
$2,130,000 expensed for government research contracts and approximately
$1,870,000 for contracting costs for the production of GMP subunits, which are
used by the Company to manufacture compounds for future clinical trials. In
addition, professional consultant costs increased approximately $470,000. These
research and development increases were partially offset by decreases in net
clinical expenses of approximately $510,000. The research and development
increase for the nine months ended September 30, 2007 was due primarily to
approximately $4,230,000 expensed for government research contracts and
approximately $2,040,000 for contracting costs for the production of GMP
subunits, which are used by the Company to manufacture compounds for future
clinical trials. In addition, professional consultant costs increased approximately
$710,000, chemical and lab supply costs increased approximately $350,000, net
clinical expenses increased approximately $190,000, and leasehold and patent
amortization expenses increased approximately $90,000. These research and
development increases were partially offset by decreases in employee costs of
approximately $1,070,000, of which approximately $430,000 was related to the
acceleration of the vesting of certain stock options in the first quarter of
2006 and decreases in SFAS 123R expenses of approximately $440,000 and salaries
and bonuses of approximately $200,000.
The remaining increase in operating expenses was due to general and
administrative costs increasing to $1,544,512 in the third quarter of 2007 from
$1,347,114 in the third quarter of 2006 and to $7,879,193 for the nine months
ended September 30, 2007 from $5,684,551 for the comparable period of 2006.
This general and administrative increase in the third quarter of 2007 was due
primarily to increases in salaries, bonuses, and other compensation costs of
approximately $165,000, legal expenses of approximately $55,000 and accounting
costs of approximately $20,000, partially offset by decreases in SFAS 123R
expenses of approximately $65,000. This general and administrative increase for
the nine months ended September 30, 2007 was due primarily to increases in
salaries, bonuses, and other compensation costs of approximately $1,775,000, of
which approximately $1,620,000 (including $562,500 in cash compensation and
$1,057,372 in SFAS 123R expenses) was related to the Separation and Release
Agreement with the Companys former Chief Executive Officer, partially offset
by decreases in SFAS 123R expenses of approximately $265,000.
17
General and administrative also includes increases in legal expenses of
approximately $600,000 and accounting expenses of approximately $80,000.
Net interest income decreased to $182,320 in the third quarter of 2007
from $492,083 in the third quarter of 2006 and to $848,397 for the nine months
ended September 30, 2007 from $1,466,995 for the comparable period in 2006 due
to decreases in average cash, cash equivalents and short-term securities,
partially offset by increases in average interest rates of the Companys
interest earning investments. Gain on warrant liability increased to $1,296,322
in the third quarter of 2007 from $529,136 in the third quarter of 2006 and to
$3,550,330 for the nine months ended September 30, 2007 from $135,453 for the
comparable period in 2006.
The
gain on warrant liability is a function of the Companys stock price and
fluctuates as the market price of the Companys stock fluctuates.
Liquidity and Capital Resources
The Company does not expect any material revenues
in 2007 or 2008 from its business activities other than from potential
government grants and research contracts. The Company
expects that its
cash requirements through 2007 will be satisfied by existing cash resources. To
fund its operations beyond 2007, the Company will need to secure additional
funds. Such funds could come from technology license fees, government grants
and research contracts, and the capital markets.
In December 2006, the Company announced the
execution of a two-year $28 million research contract with the Defense Threat
Reduction Agency (DTRA), an agency of the United States Department of Defense
(DoD). The contract is directed toward funding the Companys development of
antisense therapeutics to treat the effects of Ebola, Marburg and Junin
hemorrhagic viruses, which are seen by DoD as potential biological warfare and
bioterrorism agents. Funding under this contract is expected over two years,
with approximately $18.0 million committed in the first year, and the remainder
anticipated in the second year. During the nine months ended September 30,
2007, the Company recognized $3,567,455 in research contract revenue from this
contract.
In January 2006, the Company announced that
the final version of the 2006 defense appropriations act had been approved,
which included an allocation of $11.0 million to fund the Companys ongoing
defense-related programs. Net of government administrative costs, it is
anticipated that the Company will receive up to $9.8 million under this
allocation. The Companys NEUGENE
®
technology is expected
to be used to continue developing therapeutic agents against Ebola, Marburg and
dengue viruses, as well as to continue developing countermeasures for anthrax
exposure and antidotes for ricin toxin. The Company has received signed
contracts for all four of these projects. The Company expects that funding
under these signed contracts will be received over the next 12 months. During
the nine months ended September 30, 2007, the Company recognized $2,096,190 in
research contract revenue from these contracts
.
The Companys cash, cash equivalents and short-term securities were
$14,049,759 at September 30, 2007, compared with $33,152,132 at December 31,
2006. The decrease of $19,102,373 was due primarily to $17,349,275 used in
operations and $1,803,449 used for purchases of property and equipment and
patent related costs
,
partially offset by the receipt
18
of
$68,769 from the exercise of
options and sales under the Companys employee stock purchase plan during the
nine months ended September 30, 2007.
The Companys short-term securities include certificates of deposit,
commercial paper and other highly liquid investments with original maturities
in excess of 90 days at the time of purchase and less than one year from the
balance sheet date. The Company classifies its investment securities as
available-for-sale and, accordingly, such investment securities are stated on
the balance sheet at their fair market value with unrealized gains (losses)
recorded as a separate component of shareholders equity and comprehensive
income (loss).
The Companys future expenditures and capital requirements depend on
numerous factors, most of which are difficult to project beyond the short term,
including without limitation, the progress of its research and development
programs, the progress of its pre-clinical and clinical trials, the time and
costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, its ability
to establish collaborative arrangements and the terms of any such arrangements,
and the costs associated with commercialization of its products. The Companys
cash requirements are expected to continue to increase each year as the Company
expands its activities and operations. There can be no assurance, however, that
the Company will ever be able to generate product revenues or achieve or
sustain profitability.
In addition, the Companys Chief Executive Officer recently resigned.
There can be no assurance that the Company will be able to find and employ a
permanent CEO that will be able to lead the Company successfully in the near
term. The failure to secure a permanent replacement may adversely affect the
Companys research and development efforts.
The Company expects to continue to incur losses as it
expands its research and development activities and related regulatory work and
increases its collaborative efforts.
For 2007, the Company expects expenditures for operations,
net of government funding, including collaborative efforts and GMP facilities
to be approximately $24 to $26 million. Expenditures for 2007 could exceed this
level if the Company undertakes additional collaborative efforts. The Company
believes it has sufficient cash to fund operations through the first quarter of
2008, exclusive of future receipts from billings on existing government
contracts. The Company will need to secure additional funding to maintain
operations beyond that point. If necessary, however, the Companys management
has the ability to curtail certain expenditures because a significant amount of
the Companys costs are variable
.
Critical Accounting Policies and Estimates
The discussion and analysis of the Companys financial condition and
results of operations are based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. The Companys critical accounting policies and
estimates are consistent with the disclosure in the Companys Form 10-K/A, with
the exception of FIN 48, see Note 7.
19
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
There has been no material change in the Companys market risk exposure
since the filing of our 2006 Annual Report on Form 10-K/A.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures (as such terms are defined in Rules 13a-15(c) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)). Based upon that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were not effective as of September 30, 2007.
Changes in Internal Control Over Financial
Reporting
As described in Item 9A of our Amended Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2006, management conducted an assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2006, based upon the Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management concluded that, as of December 31, 2006,
the Company did not maintain effective internal control over financial
reporting. The Company identified the following material weakness in internal
control over financial reporting as of December 31, 2006:
Management lacked adequate technical expertise
to ensure the proper application, at inception, of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and EITF 00-19 Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock related to certain stock warrants. As a result, the
Company failed to identify that certain warrants should be liability
classified. This material weakness resulted in a misstatement requiring the
restatement of the Companys financial statements for the years ended December
31, 2006, 2005 and 2004 and for each of the interim periods in 2006 and 2005.
During the fiscal year ending December 31, 2007,
we developed a remediation plan that would result in the implementation of
significant changes in our internal control over financial reporting, including
the following:
The Company has adopted additional controls wherein if the issuance of
warrants or other
derivative financial instruments is contemplated,
legal counsel and an independent accountant will be consulted as to the
financial statement impact that the issuance of such warrants or other
derivative financial instruments may have, prior to issuance.
The Company began to execute these remediative measures pertaining to the
third quarter of 2007 financial statements. Additional measures may be
forthcoming as the Company evaluates the effectiveness of these efforts. We
cannot assure you that these remediation efforts will be successful or that
20
our internal control over financial reporting will be effective in
accomplishing all control objectives all of the time.
PART II -
OTHER INFORMATION
Item 1. Legal Proceedings
.
None
Item 1A. Risk Factors.
The resignation and replacement of the Companys Chief Executive
Officer could have adverse impacts on the Company.
In March 2007, the Companys Chief Executive officer resigned and an
interim CEO was appointed. The Company has commenced a search for a permanent
replacement. There can be no assurance that the Company will be able to find
and employ a new permanent CEO that will be able to lead the Company
successfully in the near term. The failure to secure a permanent replacement
may adversely affect the Companys research and development efforts.
The Company will need additional funds to continue operations at
current levels.
The Companys net cash use through the end of 2007 is expected to be
approximately $5 to $6 million assuming no material change in the Companys operations,
including clinical trials and research and development activities. As of
September 30, 2007, the Company has cash, cash equivalents and short-term
securities of $14 million. Unless the Company is able to secure additional
capital, it will need to curtail expenditures on its clinical programs, its
research and development efforts and/or its plans to expand its manufacturing
capacity. While such curtailments may extend the Companys cash resources, such
efforts may adversely affect the Companys prospects to commercialize its
existing products and develop its next-generation products, which could
adversely affect shareholder value.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
None
Item 3 Defaults Upon Senior
Securities.
None
Item 4. Submission of Matters to
a Vote of Security Holders.
None
Item 5. Other Information.
None
21
Item 6
.
Exhibits
|
|
|
|
Incorporated by Reference to Filings Indicated
|
Exhibit No
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
4.1
|
|
Third Restated Articles of
Incorporation of AntiVirals Inc.
|
|
SB-2
|
|
333-20513
|
|
3.1
|
|
5/29/97
|
|
|
4.2
|
|
First Amendment to Third
Restated Articles of Incorporation of AntiVirals Inc.
|
|
8-K
|
|
0-22613
|
|
3.3
|
|
9/30/98
|
|
|
4.3
|
|
Amendment to Article 2 of
the Companys Third Restated Articles of Incorporation
|
|
DEF 14A
|
|
1-14895
|
|
N/A
|
|
4/11/02
|
|
|
4.4
|
|
Bylaws of AntiVirals Inc.
|
|
SB-2
|
|
333-20513
|
|
3.2
|
|
5/29/97
|
|
|
10.58+
|
|
Cross License Agreement
dated January 8, 2007 by and between Eleos, Inc. and AVI BioPharma, Inc.
|
|
10-Q
|
|
0-22613
|
|
10.58
|
|
05/10/07
|
|
|
10.59
|
|
Separation and Release
Agreement dated March 27, 2007 by and between Denis R. Burger, Ph.D. and AVI
BioPharma, Inc.
|
|
10-Q
|
|
0-22613
|
|
10.59
|
|
05/10/07
|
|
|
10.60+
|
|
Cross License and
Collaboration Agreement by and between Ercole Biotech, Inc. and AVI BioPharma,
Inc.
|
|
10-Q
|
|
0-22613
|
|
10.60
|
|
08/09/07
|
|
|
10.61
|
|
Real estate purchase
agreement by and between WKL Investments Airport and AVI BioPharma, Inc.
|
|
10-Q
|
|
0-22613
|
|
10.61
|
|
08/09/07
|
|
|
31.1
|
|
Certification of the
Companys Chief Executive Officer, K. Michael Forrest, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification of Chief
Financial Officer, Mark M. Webber pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
X
|
32
|
|
Certification of the
Companys Chief Executive Officer, K. Michael Forrest, and Chief Financial
Officer, Mark M. Webber, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
Materials in the exhibit marked with a +
have been omitted pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Securities and Exchange Commission.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
|
November 9, 2007
|
|
AVI BIOPHARMA, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ K. MICHAEL FORREST
|
|
|
|
K. Michael Forrest
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ MARK M. WEBBER
|
|
|
|
Mark M. Webber
|
|
|
Chief Financial Officer and Chief Information
Officer
|
|
|
(Principal Financial and Accounting Officer)
|
23
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