PART I
Item 1.
Description of Business
General Overview
AVI
BioPharma, Inc. is a biopharmaceutical company developing therapeutic
products principally based on third-generation NeuGene antisense technology (in
this report, we, our, us, AVI, and Company refers to AVI BioPharma, Inc.).
Our principal products in development target life-threatening diseases,
including cardiovascular, infectious, and genetic 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 186 patents (foreign and domestic)
issued or licensed to us and 192 pending patent 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.
Our
net loss in 2007 was $27.2 million, or $0.50 per share. Total expenses were
$44.1 million and revenues were $11.0 million. 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 as well as biologics such
as monoclonal antibodies. NeuGene drugs are synthetic polymers that
block the function of selected genetic sequences involved in disease processes.
Targeting specific genetic sequences could provide for greater selectivity than
that available through conventional drugs for the range of disease we are
researching. 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. Four NeuGenes have been the
subject of nineteen clinical trials; 405 subjects received a NeuGene
drug. In each study, the drug was well-tolerated, and no definite drug
related serious adverse events were reported.
We
believe that our NeuGene chemistry can also be used in a way that is novel from
conventional antisense approaches to target splice-joining sites in the
pre-RNA. This forces the cellular machinery to skip over targeted exons and
creates an altered mRNA template. The process, which we call ESPRIT, for Exon
Skipping Pre-RNA Interference Technology, allows the production of altered
proteins. We believe that when the skipped exon contains a disease-causing
mutation, for example, the resulting altered protein may have its function
restored, or partially restored. This approach may be used to overcome the
devastating consequences of certain disease-causing mutations.
We
have completed pre-clinical and some clinical studies using our NeuGene drugs
in the treatment of cardiovascular disease, infectious disease, cancer,
polycystic kidney disease (PKD), in regulating drug metabolism via the P450
cytochrome system. 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 with this
product. 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
1
virus
infection. We filed an IND and conducted an exploratory clinical trial (Phase
I/Ib) for Hepatitis C virus (HCV) infection. We are currently conducting a
Phase Ib/II clinical trial for coronary artery bypass grafting in eastern
Europe. We are also conducting a proof
of concept study in boys with Duchenne Muscular Dystrophy (DMD) in the U.K., in
collaboration with the MDEX consortium.
In addition, we are in preclinical development for antivirals for Ebola
Zaire, Marburg Musoke, Dengue virus, and for influenza A, including H5N1 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 primarily based on NeuGene antisense technology
focused on applications in cardiovascular disease, infectious diseases, and
genetic diseases. 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
|
|
Type
|
|
Pre-Clinical
|
|
Phase I/Ib
|
|
Phase II
|
|
Phase III
|
Cardiovascular Disease
|
|
|
|
|
|
|
|
|
|
|
Restenosis: Resten-NG
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
Completed
|
|
|
Restenosis: Resten-MP
microparticles
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
Completed (Cook Group)
|
|
|
CABG: AVI-5126
|
|
NeuGene Drug
|
|
Completed
|
|
In-progress
|
|
|
|
|
Infectious Disease (Viral targets)
|
|
|
|
|
|
|
|
|
|
|
Hepatitis C: AVI-4065
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
|
|
|
West Nile: AVI-4020
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
|
|
|
Influenza A/Avian: AVI-6001
|
|
NeuGene Drug
|
|
In-progress
|
|
|
|
|
|
|
SARS: AVI-4179
|
|
NeuGene Drug
|
|
Completed
|
|
|
|
|
|
|
Ebola Zaire
|
|
NeuGene Drug
|
|
In-progress
|
|
|
|
|
|
|
Marburg Musoke
|
|
NeuGene Drug
|
|
In-progress
|
|
|
|
|
|
|
Junin Virus
|
|
NeuGene Drug
|
|
In-progress
|
|
|
|
|
|
|
Cancer
|
|
|
|
|
|
|
|
|
|
|
Cancer: Oncomyc-NG:
AVI-4126
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
|
|
|
Drug Metabolism
|
|
|
|
|
|
|
|
|
|
|
Cytochrome P450: AVI-4557
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
|
|
|
Genetic Diseases
|
|
|
|
|
|
|
|
|
|
|
PKD: AVI-4126
|
|
NeuGene Drug
|
|
Completed
|
|
Completed
|
|
|
|
|
DMD: (Intramuscular-local)
AVI-4658
|
|
NeuGene Drug
|
|
Completed
|
|
In-progress
|
|
|
|
|
DMD: (Intravenous-systemic)
AVI-4658
|
|
NeuGene Drug
|
|
Completed
|
|
|
|
|
|
|
*In
this table, In-progress refers to studies or trials that have actively begun
recruitment after receipt of all regulatory approvals but are not yet complete
in terms of recruitment or analyses; and Completed refers to studies in which
all clinical trial or study activities have 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 numbers of subsequent
clinical studies or trials for a product, or how a product will proceed toward
and through Phase III or pivotal clinical trials prior to regulatory license
approval. 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, which
occurred in July, 2007. Cook has indicated to us that it is planning additional
clinical studies with products based on our Resten-NG platform.
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. We believe that 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, which 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. If this clinical study goes to completion, we believe
that it will be considered a pivotal study that would enroll 600 patients who
undergo Coronary Artery Bypass Graft (CABG) surgery. The study design is a
randomized, double blind, placebo controlled trial incorporating Phase Ib
through Phase III components. The Phase Ib stage of the trial is underway and we
believe a decision on continuation into the pivotal stages (Phase II/III) of
the study will probably be made after evaluation of the first 77 enrolled
patients. An additional pivotal study in the United States would need to be
initiated for market approval of Resten-CP in this country.
Infectious Disease Program.
Our infectious disease
program is currently focusing on single-stranded RNA viruses using our
proprietary NeuGene antisense compounds to target West Nile virus, hepatitis C
virus, influenza A virus, dengue virus, the SARS coronavirus, and Ebola Zaire
virus, Marburg Musoke virus, and Junin virus, as well as many of the items
included on the Department of Homeland Securitys list of bioterrorism agents,
including 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 development and commercialization in
viral diseases will focus on government programs in bioterrorism, like Ebola
Zaire and Marburg Musoke, as well as avian influenza, H5N1.
Genetic Disease Program.
We are conducting an
exploratory 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 that is localized to the cell membrane (dystrophin).
The absence of dystrophin in muscle cells leads to an abnormally permeable cell
ultimately causing its death and replacement by scar tissue. Our NeuGene antisense drug, AVI-4658,
4
targets
the most frequent site of this mutation and forces the genetic machinery to
skip over the mutation when processing the genetic instructions, thereby,
allowing for production of a new, albeit truncated, dystrophin protein. 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) and entails administration of the drug directly into an
affected muscle in DMD boys. We are
currently pursuing opportunities to conduct a systemic clinical study with this
product with a number of regulatory agencies.
Business Strategy
Our
strategy is to:
·
focus on near-term opportunities in the
cardiovascular disease, infectious diseases and genetic 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 also plan to 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 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
5
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. 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 the 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.
We expect Cook 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 percentage 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.
Ercole Agreement
In December 2006, we entered into
a crosslicense 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. Under the terms of the agreement, each company granted the other
rights under our respective patents for RNA splicealtering technologies.
6
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 December 2006 cross - license and
collaboration agreement, AVI issued Ercole shares of AVI common stock, and
Ercole issued AVI shares of Ercole Series A - 2 Preferred Stock
.
In May 2007, we entered into a cross-license and
collaboration agreement with 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 A - 2 Preferred Stock, and
AVI issued to Ercole
shares of AVIs common stock.
On
March 13, 2008
AVI
announced the
execution of a definitive Agreement and Plan of Merger (the Merger Agreement)
pursuant to which Ercole Biotech, Inc. (Ercole) will become a
wholly-owned subsidiary of AVI. Under the terms of the Merger Agreement,
subject to adjustment as provided in the Merger Agreement and described below,
AVI will issue up to $7.5 million of AVI common stock, valued at $1.3161 per
share, in exchange for all outstanding shares of Ercole stock not already owned
by AVI. In addition, AVI will assume up
to $1.5 million in liabilities of Ercole, to be paid by AVI through a
combination of cash and AVI common stock.
Liabilities in excess of $1.5 million will be deducted from the $7.5
million in common stock. Certain
warrants to purchase shares of Ercoles common stock will be exchanged for warrants
exercisable for shares of AVIs common stock.
Subject to the satisfaction of customary closing conditions, including
approval of Ercoles stockholders, the transaction is expected to close by March 21,
2008.
In
addition, in anticipation of the closing of the merger, on March 12, 2008,
the Company loaned Ercole approximately $900,000 to be used by Ercole to repay
its debt obligation to Isis Pharmaceuticals, Inc. In exchange, Ercole issued a convertible
promissory note to the Company. In the
event the merger closes, this debt will be forgiven. If the merger does not close, Ercole will
either repay the amounts owing or the Company may convert such amounts into
shares of Ercole Class A Voting Common Stock.
Eleos
Agreement
In
January 2007, we announced that we had entered into a cross-license
agreement with Eleos Inc. (Eleos) 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, AVI granted Eleos an
exclusive license to AVIs NeuGene
®
third-generation antisense
chemistry to treat cancer with p53-related drugs. In return, Eleos granted an
exclusive license to its patents to AVI 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 AVI.
Charleys
Fund Agreement
In
October 2007, AVI
and Charleys
Fund, Inc., a nonprofit organization that funds drug development and
discovery initiatives specific to Duchenne muscular dystrophy (DMD), announced
that AVI had been awarded a $2.45 million research grant from Charleys Fund.
This award will support a new product development program using proprietary
exon skipping technologies developed by AVI 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
7
development
of new therapeutics for DMD.
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 site. 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
purchased an additional facility in Corvallis, Oregon. This could provide the
Company with future expansion space for the manufacture of potential products
and components.
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 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 property 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
8
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
186 patents (domestic and foreign) issued or licensed to us, and 192 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 that 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 licensed
certain technology from the United States 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 our patents will be valid
or sufficiently broad to protect our technology or provide a significant
competitive advantage. Additionally, we cannot provide assurance that our
patents or proprietary technology will not infringe third-party patents.
Drug Approval Process and Other
Government Regulation
The
system of reviewing and approving drugs in the United States is considered to
be among 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.
9
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.
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.
10
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.
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
$34,760,402, $25,345,588 and $17,117,750 on research and development activities
during the years ended December 31, 2007, 2006 and 2005, 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.
11
Employees
As of December 31,
2007, we had 125 employees, 20 of whom hold advanced degrees. One hundred-eight
employees are engaged directly in research and development activities, and
seventeen are in administration. None of our employees are covered by
collective bargaining agreements and we consider relations with our employees
to be good.
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.
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.
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 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
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 resources
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 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
$28.7 million in 2006 and $27.2 million in 2007. As of December 31, 2007,
our accumulated deficit was $226.4 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
13
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 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 needed
for such construction. We do not know if or when the FDA will determine that
such
14
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. Patrick Iversen and Dwight Weller. We maintain
key man life insurance in the amount of $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 186 patents (domestic and
foreign) issued or licensed to us, and 192 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 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.
15
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.
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,
16
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.
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.
17
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
64,449,094 shares of common stock as of December 31, 2007 and all are
eligible for sale under Rule 144 or are otherwise freely tradeable. In
addition:
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Our employees and
others hold options to buy a total of 6,304,453 shares of common stock of
which 4,497,526 shares were exercisable at December 31, 2007. The
options outstanding have exercise prices between $1.76 and $7.35 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;
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There are outstanding warrants to buy 13,856,411 shares of common
stock at December 31, 2007 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;
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We may issue options to
purchase up to an additional 1,834,535 shares of common stock at
December 31, 2007 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;
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We are authorized to
sell up to 208,585 shares of common stock under our Employee Stock Purchase
Plan to our full-time employees, nearly all of whom are eligible to
participate; and
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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.
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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.
18
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 purchased an additional facility, totaling 34,000 square
feet, in Corvallis, Oregon which could provide the Company with future
expansion space for the manufacture of potential products and components. We
believe that our facilities are suitable and adequate for our present
operational requirements for the foreseeable future.
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,
2007.
19
Report of Independent Registered Public
Accounting Firm
The
Board of Directors and Shareholders
AVI BioPharma, Inc.:
W
e
have audited the accompanying balance sheets of AVI BioPharma, Inc. (an
Oregon corporation in the development stage) as of December 31, 2007 and
2006, and the related statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2007 and for the period from July 22,
1980 (inception) through December 31, 2007. 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, shareholder 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,
2007 and 2006, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2007 and for the
period from July 22, 1980 (inception) through December 31, 2007, 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.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), AVI BioPharmas internal control
over financial reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 17, 2008 expressed an unqualified
opinion on the effectiveness of the Companys
internal control over financial reporting.
Portland,
OR
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(signed)
KPMG LLP
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March
17, 2008
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
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December 31,
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2007
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2006
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Assets
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|
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Current Assets:
|
|
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Cash and cash equivalents
|
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$
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24,802,562
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|
$
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20,159,201
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Short-term securitiesavailable-for-sale
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271,851
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12,992,931
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Accounts receivable
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2,869,760
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51,498
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|
Other current assets
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|
767,278
|
|
736,283
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|
Total Current Assets
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28,711,451
|
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33,939,913
|
|
|
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|
Property and Equipment, net of accumulated depreciation and
amortization of $11,816,549 and $10,174,712
|
|
6,825,145
|
|
4,329,583
|
|
Patent Costs, net of accumulated amortization of $1,725,074 and
$1,496,699
|
|
3,066,625
|
|
2,558,541
|
|
Other Assets
|
|
34,709
|
|
34,709
|
|
Total Assets
|
|
$
|
38,637,930
|
|
$
|
40,862,746
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,026,072
|
|
$
|
1,401,584
|
|
Accrued employee compensation
|
|
1,171,666
|
|
1,371,353
|
|
Long-term debt, current portion
|
|
71,099
|
|
|
|
Warrant liability
|
|
4,414,657
|
|
5,192,576
|
|
Deferred revenue
|
|
737,500
|
|
|
|
Other liabilities
|
|
331,335
|
|
377,908
|
|
Total Current Liabilities
|
|
9,752,329
|
|
8,343,421
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, non-current portion
|
|
2,070,704
|
|
|
|
Other long-term liabilities
|
|
433,149
|
|
|
|
|
|
|
|
|
|
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;
64,449,094 and 53,182,841 issued and outstanding
|
|
6,445
|
|
5,318
|
|
Additional paid-in capital
|
|
252,732,858
|
|
231,685,419
|
|
Accumulated other comprehensive income
|
|
|
|
18,418
|
|
Deficit accumulated during the development stage
|
|
(226,357,555
|
)
|
(199,189,830
|
)
|
Total Shareholders Equity
|
|
26,381,748
|
|
32,519,325
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
38,637,930
|
|
$
|
40,862,746
|
|
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
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
December 31, 2007
|
|
Revenues from license fees, grants and research contracts
|
|
$
|
10,985,191
|
|
$
|
115,291
|
|
$
|
4,783,760
|
|
$
|
20,966,010
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
34,760,402
|
|
25,345,588
|
|
17,117,750
|
|
182,407,617
|
|
General and administrative
|
|
9,332,365
|
|
7,752,752
|
|
5,182,369
|
|
50,152,893
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
19,545,028
|
|
|
|
44,092,767
|
|
33,098,340
|
|
22,300,119
|
|
252,105,538
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
983,976
|
|
1,910,037
|
|
840,495
|
|
8,433,518
|
|
Gain (loss) on warrant liability
|
|
4,955,875
|
|
2,385,502
|
|
(1,530,021
|
)
|
9,487,301
|
|
Realized gain on sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
3,862,502
|
|
Write-down of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
(17,001,348
|
)
|
|
|
5,939,851
|
|
4,295,539
|
|
(689,526
|
)
|
4,781,973
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,167,725
|
)
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
$
|
(226,357,555
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.50
|
)
|
$
|
(0.54
|
)
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for computing
basic and diluted loss per share
|
|
53,942,015
|
|
52,660,711
|
|
44,655,008
|
|
|
|
See accompanying notes to financial statements.
F-4
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
Accumulated
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Comprehensive
|
|
During
the
|
|
Total
|
|
|
|
Partnership
|
|
Common
Stock
|
|
Paid-In
|
|
Income
|
|
Development
|
|
Shareholders
|
|
|
|
Units
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Loss)
|
|
Stage
|
|
Equity
|
|
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
|
|
|
|
734,668
|
|
73
|
|
3,168,373
|
|
|
|
|
|
3,168,446
|
|
Issuance of
common stock for ESPP
|
|
|
|
149,339
|
|
15
|
|
576,037
|
|
|
|
|
|
576,052
|
|
Issuance of
common stock and warrants for cash and securities, net of offering costs
|
|
|
|
21,551,397
|
|
2,155
|
|
118,308,532
|
|
|
|
|
|
118,310,687
|
|
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
|
|
|
|
|
|
|
|
1,041,349
|
|
|
|
|
|
1,041,349
|
|
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 securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
17,001,348
|
|
|
|
17,001,348
|
|
Realized gain on
sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(3,765,752
|
)
|
|
|
(3,765,752
|
)
|
Unrealized loss
on short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(13,368,237
|
)
|
|
|
(13,368,237
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(152,296,435
|
)
|
(152,296,435
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152,429,076
|
)
|
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 and warrants 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 securitiesavailable-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 securitiesavailable-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
|
|
Exercise of
options for common stock
|
|
|
|
11,639
|
|
1
|
|
29,001
|
|
|
|
|
|
29,002
|
|
Issuance of
common stock for ESPP
|
|
|
|
39,559
|
|
4
|
|
89,736
|
|
|
|
|
|
89,740
|
|
Issuance of
common stock to vendors
|
|
|
|
518,439
|
|
52
|
|
1,449,948
|
|
|
|
|
|
1,450,000
|
|
Compensation
expense related to issuance of options for common stock
|
|
|
|
|
|
|
|
312,637
|
|
|
|
|
|
312,637
|
|
Issuance of
common stock for cash and securities, net of offering costs
|
|
|
|
10,696,616
|
|
1,070
|
|
14,447,180
|
|
|
|
|
|
14,448,250
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
4,718,937
|
|
|
|
|
|
4,718,937
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
on short-term securitiesavailable-for-sale, net
|
|
|
|
|
|
|
|
|
|
(18,418
|
)
|
|
|
(18,418
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(27,167,725
|
)
|
(27,167,725
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,186,143
|
)
|
BALANCE AT
DECEMBER 31, 2007
|
|
|
|
64,449,094
|
|
$
|
6,445
|
|
$
|
252,732,858
|
|
$
|
|
|
$
|
(226,357,555
|
)
|
$
|
26,381,748
|
|
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
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
December 31,
2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,167,725
|
)
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
$
|
(226,357,555
|
)
|
Adjustments to
reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
2,013,859
|
|
2,090,375
|
|
1,997,672
|
|
14,834,098
|
|
Loss on disposal
of assets
|
|
59,381
|
|
192,369
|
|
35,862
|
|
374,559
|
|
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
|
|
1,375,000
|
|
|
|
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
|
|
394,225
|
|
2,955,690
|
|
Stock-based compensation
|
|
4,718,937
|
|
4,881,470
|
|
|
|
9,600,407
|
|
Conversion of
interest accrued to common stock
|
|
|
|
|
|
|
|
7,860
|
|
Acquired
in-process research and development
|
|
|
|
|
|
|
|
19,545,028
|
|
(Gain) loss on
warrant liability
|
|
(4,955,875
|
)
|
(2,385,502
|
)
|
1,530,021
|
|
(9,487,301
|
)
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
(2,849,257
|
)
|
814,531
|
|
(919,237
|
)
|
(3,637,038
|
)
|
Other assets
|
|
|
|
2,900
|
|
|
|
(34,709
|
)
|
Net increase in
accounts payable, accrued employee compensation, long-term debt, deferred
revenue, and other liabilities
|
|
2,490,888
|
|
577,872
|
|
498,375
|
|
5,936,733
|
|
Net cash used in
operating activities
|
|
(24,677,155
|
)
|
(20,613,369
|
)
|
(14,668,967
|
)
|
(170,186,727
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(1,269,880
|
)
|
(767,282
|
)
|
(1,070,801
|
)
|
(16,568,391
|
)
|
Patent costs
|
|
(857,214
|
)
|
(686,607
|
)
|
(397,081
|
)
|
(5,332,244
|
)
|
Purchase of
marketable securities
|
|
(110,417
|
)
|
(14,969,926
|
)
|
(13,140,581
|
)
|
(112,976,213
|
)
|
Sale of
marketable securities
|
|
12,813,079
|
|
14,435,793
|
|
3,693,329
|
|
117,613,516
|
|
Acquisition costs
|
|
|
|
|
|
|
|
(2,377,616
|
)
|
Net cash provided
by (used in) investing activities
|
|
10,575,568
|
|
(1,988,022
|
)
|
(10,915,134
|
)
|
(19,640,948
|
)
|
|
|
|
|
|
|
|
|
|
|
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
|
|
18,744,948
|
|
8,162,858
|
|
43,527,006
|
|
215,015,674
|
|
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
|
|
18,744,948
|
|
8,162,858
|
|
43,527,006
|
|
214,630,237
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
4,643,361
|
|
(14,438,533
|
)
|
17,942,905
|
|
24,802,562
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
20,159,201
|
|
34,597,734
|
|
16,654,829
|
|
|
|
End of period
|
|
$
|
24,802,562
|
|
$
|
20,159,201
|
|
$
|
34,597,734
|
|
$
|
24,802,562
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
$
|
5,450
|
|
$
|
145,609
|
|
$
|
|
|
Issuance of
common stock and warrants in satisfaction of liabilities
|
|
$
|
|
|
$
|
175,000
|
|
$
|
|
|
$
|
545,000
|
|
Issuance of
common stock for building purchase
|
|
$
|
750,000
|
|
$
|
|
|
$
|
|
|
$
|
750,000
|
|
Assumption of
long-term debt for building purchase
|
|
$
|
2,199,792
|
|
$
|
|
|
$
|
|
|
$
|
2,199,792
|
|
See accompanying notes to financial statements.
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 $24,802,562 and
$20,159,201 as of December 31, 2007 and 2006, 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 $0 and $18,418 as of December 31, 2007 and 2006, 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 collectability of individual accounts receivable is known by the company.
Amounts included in accounts receivable are as follows:
As of December 31,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Research contract
|
|
$
|
2,837,615
|
|
$
|
45,846
|
|
Grant
|
|
11,899
|
|
5,652
|
|
Miscellaneous
|
|
20,246
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
2,869,760
|
|
$
|
51,498
|
|
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,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Property
|
|
$
|
3,300,000
|
|
$
|
|
|
Lab equipment
|
|
5,501,883
|
|
4,770,021
|
|
Office equipment
|
|
702,969
|
|
676,323
|
|
Leasehold improvements
|
|
9,136,842
|
|
8,804,831
|
|
Construction in process
|
|
|
|
253,120
|
|
|
|
18,641,694
|
|
14,504,295
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
(11,816,549
|
)
|
(10,174,712
|
)
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
6,825,145
|
|
$
|
4,329,583
|
|
Depreciation expense was $1,718,227, $1,844,599 and $1,749,314 for the
years ended December 31, 2007, 2006 and 2005, 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 $295,632, $245,776 and $248,385 for the years ended December 31,
2007, 2006 and 2005, respectively. Estimated aggregate amortization expense
over the five succeeding fiscal years is expected to be $1,500,000.
Revenue Recognition
The Company records
revenue from research contracts and grants as the services are performed and
payment is reasonably assured. In 2007, the Company recognized $10,710,330 in
research contracts revenues from government funding for work performed on viral
disease projects.
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,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
388,371
|
|
$
|
480,003
|
|
Prepaid rents
|
|
96,077
|
|
100,838
|
|
Restricted cash
|
|
282,830
|
|
155,442
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
767,278
|
|
$
|
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 December 31, 2007, restricted cash
including accrued interest was $282,830. 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.
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
6.
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,
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,167,725
|
)
|
$
|
(28,687,510
|
)
|
$
|
(18,205,885
|
)
|
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
|
|
53,942,015
|
|
52,660,711
|
|
44,655,008
|
|
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
|
|
53,942,015
|
|
52,660,711
|
|
44,655,008
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.50
|
)
|
$
|
(0. 54)
|
|
$
|
(0. 41)
|
|
*
Warrants and stock options to purchase 20,160,864, 14,079,573 and
17,025,547 shares of common stock as of December 31, 2007, 2006 and 2005,
respectively, were excluded from earnings per share calculation as their effect
would have been antidilutive.
Stock-based Compensation
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 2007, 2006 and 2005 were measured on the date of
grant using the Black-Scholes option-pricing model, with the following weighted
average assumptions:
Year Ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Risk-free interest rate
|
|
4.81
|
%
|
4.14
|
%
|
3.38
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected lives
|
|
8.1 Years
|
|
9.3 Years
|
|
9.1 Years
|
|
Expected volatility
|
|
89
|
%
|
91
|
%
|
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.
F-11
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 is 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 are recognized through a cumulative catch-up in the period of
change and 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, 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
|
|
1,263,548
|
|
$
|
2.80
|
|
|
|
|
|
Exercised
|
|
(11,639
|
)
|
$
|
2.49
|
|
|
|
|
|
Canceled or expired
|
|
(518,926
|
)
|
$
|
5.88
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
6,304,453
|
|
$
|
4.60
|
|
5.38
|
|
$
|
(11,990,260
|
)
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2007 and expected to
vest
|
|
6,268,314
|
|
$
|
4.60
|
|
5.36
|
|
$
|
(11,936,459
|
)
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
4,497,526
|
|
$
|
4.76
|
|
4.23
|
|
$
|
(9,300,172
|
)
|
The weighted average fair value per share of stock-based payments
granted to employees during 2007, 2006 and 2005 was $2.27, $6.09 and $2.12,
respectively. During 2007, 2006 and 2005, the total intrinsic value of stock
options exercised were $4,937, $779,563 and $36,344, and the total fair value
of stock options that vested were $3,661,565, $4,047,970 and $2,219,446,
respectively.
As
of December 31, 2007, there was $2,901,838 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 1.7 years.
During the year ended December 31, 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:
|
|
Year Ended
December 31, 2007
|
|
Year Ended
December 31, 2006
|
|
Research and development
|
|
$
|
1,877,743
|
|
$
|
2,408,132
|
|
General and administrative
|
|
2,841,194
|
|
1,639,838
|
|
Total
|
|
$
|
4,718,937
|
|
$
|
4,047,970
|
|
F-12
T
he 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,
2007 the total compensation expense for participants in the ESPP was $39,359
using the Black-Scholes option-pricing model with a weighted average estimated
fair value per share of $1.02, expected life of six months, risk free interest
rate of 4.52%, volatility of 52.79%, and no dividend yield. At December 31,
2007, 208,585 shares remain available for purchase through the plan and there
were 110 employees eligible to participate in the plan, of which 30 were
participants. 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 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 year ended December 31, 2006 the total
compensation expense for stock-based compensation was $4,881,470
.
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 in 2007, 2006 and 2005 was $
312,637
, $525,126 and $394,225, 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
.
F-13
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:
Year Ended
December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Risk-free interest rate
|
|
3.1%-3.5
|
%
|
4.6%-4.7
|
%
|
4.3
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected lives
|
|
.9-5.0 Years
|
|
1.9-3.4 Years
|
|
2.9-4.4 Years
|
|
Expected volatility
|
|
58.2%-80.7
|
%
|
76.1%-87.2
|
%
|
83.2%-86.1
|
%
|
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.
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 cash equivalents and
short-term securitiesavailable-for-sale.
Accordingly,
such investment securities are stated on the balance sheet at their fair market
value
.
Recent Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157), which defines fair value of certain assets
and liabilities, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement does not require any
new fair value measurements, but may change current practice for certain
entities. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2008 and interim periods within
those years. The application of SFAS No. 157 is not expected to have a
material impact on the Companys financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been elected be
reported in earnings. SFAS No. 159 is effective for the Company beginning
in the first quarter of fiscal year 2008, although earlier adoption is
permitted. The application of SFAS No. 159 is not expected to have a
material impact on the Companys financial statements.
In
December 2007, the FASB ratified EITF Issue No. 07-01, Accounting
for Collaborative Arrangements (EITF 07-01). EITF 07-01 defines
collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in
the arrangement and third parties. EITF 07-01 also establishes the appropriate
income statement presentation and classification for joint operating activities
and payments between participants, as well as the sufficiency of the
disclosures related to these arrangements. EITF 07-01 is effective for fiscal
years beginning after December 15, 2008. We are currently evaluating the
impact of adopting EITF 07-01 on our financial statements.
F-14
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)), and SFAS No. 160, Non-Controlling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51
(SFAS 160). These new standards will significantly change the accounting for
and reporting for business combination transactions and non-controlling
interests in consolidated financial statements. SFAS 141(R) and SFAS 160
are required to be adopted simultaneously and are effective for the first
annual reporting period beginning on or after December 15, 2008. We are
currently evaluating the impact of adopting SFAS 141(R) and SFAS 160 on
our financial statements.
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.
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.
Long-Lived
Asset Impairment
Long-lived assets held
and used by us and intangible assets with determinable lives are reviewed for
impairment whenever events or circumstances indicate that the carrying amount
of assets may not be recoverable in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We evaluate recoverability of assets to be held
and used by comparing the carrying amount of an asset to future net
undiscounted cash flows to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Such reviews assess the fair value of the assets based upon estimates
of future cash flows that the assets are expected to generate.
Government Research Contract Revenue.
The Company recognizes revenues from federal research contracts during
the period in which the related expenditures are incurred. The Company receives
reimbursement of costs incurred, overhead and, in some cases, a fixed fee. 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
.
F-15
3. LIQUIDITY:
Since its inception in 1980 through December 31,
2007, the Company has incurred losses of approximately $226 million, and is
still in the development stage. 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 2009, inclusive of future
receipts from billings on existing government contracts, as described below. For
2008, the Company expects expenditures for operations, net of government
funding, including collaborative efforts and GMP facilities to be approximately
$19 to $22 million. Expenditures for 2008 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. During the
year ended December 31, 2007, the Company recognized $8,018,389 in
research contract revenue from this contract. Funding of $24.5 million has been
committed through 2008, with the reminder of the contract anticipated in 2009.
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 year ended December 31, 2007, the Company
recognized $2,691,941 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 complex
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
4. 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.
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.
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.
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.
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 December 2007, the Company closed a private equity financing
for net proceeds of $18,626,206 with several
institutional investors. In the private equity financing, the Company sold
units consisting of one share of common stock, and one-half warrant to purchase
a share of common stock for $1.90 per unit. A total of 10,696,616 shares of
common stock and warrants for the purchase of 5,348,308 common shares at $2.45
per share were sold. These warrants are exercisable starting June 19, 2008
and expire on December 18, 2012.
F-17
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 2007, employees elected to
purchase a total of 39,559 shares of the Companys common stock at $2.27 per
share. 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, 2007,
208,585 shares remained available to purchase.
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
8,138,988 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, 2007, 4,824,328
options are outstanding at a weighted-average exercise price of $4.75 under
equity compensations plans approved by security holders. At December 31,
2007, 2,043,120 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:
|
|
2007
|
|
2006
|
|
2005
|
|
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
|
|
5,571,470
|
|
$
|
5.12
|
|
4,812,396
|
|
$
|
4.55
|
|
3,803,278
|
|
$
|
5.22
|
|
Granted
|
|
1,263,548
|
|
2.80
|
|
1,172,700
|
|
7.13
|
|
1,245,937
|
|
2.47
|
|
Exercised
|
|
(11,639
|
)
|
2.49
|
|
(218,353
|
)
|
3.40
|
|
(37,029
|
)
|
2.56
|
|
Canceled
|
|
(518,926
|
)
|
5.88
|
|
(195,273
|
)
|
5.03
|
|
(199,790
|
)
|
4.73
|
|
Options
outstanding at end of year
|
|
6,304,453
|
|
4.60
|
|
5,571,470
|
|
5.12
|
|
4,812,396
|
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of year
|
|
4,497,526
|
|
$
|
4.76
|
|
3,660,483
|
|
$
|
5.10
|
|
3,308,714
|
|
$
|
5.40
|
|
F-18
At December 31, 2007, 1,834,535 shares were available for future
grant.
The following
table summarizes information about stock options outstanding at December 31,
2007:
Exercise Price
|
|
Outstanding Shares at December 31, 2007
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Exercisable Options
|
|
$
|
1.76
|
|
20,000
|
|
1.62
|
|
20,000
|
|
2.00
|
|
100,000
|
|
7.03
|
|
100,000
|
|
2.06
|
|
20,000
|
|
6.75
|
|
20,000
|
|
2.20
|
|
60,000
|
|
5.78
|
|
53,334
|
|
2.24
|
|
50,000
|
|
7.38
|
|
50,000
|
|
2.26
|
|
2,500
|
|
7.72
|
|
2,500
|
|
2.29
|
|
23,333
|
|
7.36
|
|
13,334
|
|
2.43
|
|
3,333
|
|
2.36
|
|
2,001
|
|
2.45
|
|
450,000
|
|
9.24
|
|
225,000
|
|
2.53
|
|
828,921
|
|
6.70
|
|
623,897
|
|
2.55
|
|
63,000
|
|
6.48
|
|
54,750
|
|
2.60
|
|
5,000
|
|
7.21
|
|
2,500
|
|
2.64
|
|
33,000
|
|
7.17
|
|
16,500
|
|
2.83
|
|
66,000
|
|
9.83
|
|
|
|
2.89
|
|
100,000
|
|
6.24
|
|
75,000
|
|
2.92
|
|
183,334
|
|
6.22
|
|
137,501
|
|
3.00
|
|
663,709
|
|
8.14
|
|
103,626
|
|
3.02
|
|
33,334
|
|
6.23
|
|
25,001
|
|
3.03
|
|
60,000
|
|
9.39
|
|
34,998
|
|
3.25
|
|
20,000
|
|
7.88
|
|
13,334
|
|
3.29
|
|
10,000
|
|
1.28
|
|
10,000
|
|
3.31
|
|
25,000
|
|
1.76
|
|
25,000
|
|
3.45
|
|
100,000
|
|
6.25
|
|
75,000
|
|
3.69
|
|
28,000
|
|
1.05
|
|
28,000
|
|
3.81
|
|
15,000
|
|
0.64
|
|
15,000
|
|
4.16
|
|
20,000
|
|
5.28
|
|
20,000
|
|
4.25
|
|
20,000
|
|
0.98
|
|
20,000
|
|
4.34
|
|
49,031
|
|
3.10
|
|
49,031
|
|
4.55
|
|
30,000
|
|
0.62
|
|
30,000
|
|
4.64
|
|
83,000
|
|
8.39
|
|
58,250
|
|
4.87
|
|
20,000
|
|
5.01
|
|
20,000
|
|
4.89
|
|
10,000
|
|
5.01
|
|
10,000
|
|
5.35
|
|
745,800
|
|
4.93
|
|
745,800
|
|
5.53
|
|
40,000
|
|
2.92
|
|
40,000
|
|
5.75
|
|
503,000
|
|
2.00
|
|
503,000
|
|
5.88
|
|
45,000
|
|
5.38
|
|
45,000
|
|
6.63
|
|
510,000
|
|
0.11
|
|
510,000
|
|
6.65
|
|
40,000
|
|
4.37
|
|
40,000
|
|
6.88
|
|
132,000
|
|
2.62
|
|
132,000
|
|
6.98
|
|
100,000
|
|
8.22
|
|
33,334
|
|
7.19
|
|
33,334
|
|
2.58
|
|
33,334
|
|
7.35
|
|
959,824
|
|
7.54
|
|
481,501
|
|
|
|
6,304,453
|
|
|
|
4,497,526
|
|
|
|
|
|
|
|
|
|
|
F-19
The Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. A summary of the
status of the Companys warrants and changes are presented in the following
table:
|
|
2007
|
|
2006
|
|
2005
|
|
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
|
|
8,508,103
|
|
$
|
11.68
|
|
12,213,151
|
|
$
|
10.79
|
|
10,014,330
|
|
$
|
12.34
|
|
Granted
|
|
5,348,308
|
|
2.45
|
|
|
|
|
|
2,645,921
|
|
5.00
|
|
Exercised
|
|
|
|
|
|
(705,048
|
)
|
3.32
|
|
|
|
|
|
Expired
|
|
|
|
|
|
(3,000,000
|
)
|
10.00
|
|
(447,100
|
)
|
9.14
|
|
Warrants
outstanding at end of year
|
|
13,856,411
|
|
8.12
|
|
8,508,103
|
|
11.68
|
|
12,213,151
|
|
10.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of year
|
|
6,842,225
|
|
$
|
5.85
|
|
6,842,225
|
|
$
|
5.85
|
|
10,061,353
|
|
$
|
6.95
|
|
The following
table summarizes information about warrants outstanding at December 31,
2007:
Exercise Price
|
|
Outstanding Warrants at December 31, 2007
|
|
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
|
|
2.45
|
|
5,348,308
|
|
4.96
|
|
|
|
5.00
|
|
2,645,921
|
|
1.70
|
|
2,645,921
|
|
5.50
|
|
1,613,637
|
|
0.94
|
|
1,613,637
|
|
7.00
|
|
2,565,000
|
|
0.34
|
|
2,565,000
|
|
35.63
|
|
1,665,878
|
|
2.25
|
|
|
|
|
|
13,856,411
|
|
|
|
6,842,225
|
|
|
|
|
|
|
|
|
|
|
The warrants issued in 2005 and 2007 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 9,607,866, 4,259,558, and 4,350,467
liability classified warrants outstanding at December 31, 2007, 2006, and
2005, respectively.
F-20
5. 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 Incorporated (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, paid cash and sold fixed assets 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 A-2
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
.
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 $125,000 in license fees in the
year ended December 31, 2007; the remaining $375,000 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.
F-21
On
March 27, 2007, the Board of Directors appointed K.Michael Forrest as
interim Chief Executive Officer and set his compensation as follows: (a) annual
salary - $385,000 and (b) options to acquire 300,000 shares of the Companys
common stock. The stock options granted to Mr. Forrest become
exercisable starting one month after the grant date, with one-twelfth of the
options becoming exercisable at that time and an additional one-twelfth of the
options becoming exercisable each month thereafter. The exercise price is
$2.45 per share.
On
March 27, 2007, in connection with the resignation of AVIs Chairman
and Chief Executive Officer, the Company entered into a Separation and Release
Agreement, pursuant to which the former Chairman and CEO is entitled to receive
his base compensation for 18 months ($562,500 in the aggregate)
and medical insurance for the same 18 month period and may
exercise his previously granted options until the earlier of the
termination date of the respective stock option grant agreements or March 28,
2010. The Company recognized $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 A-2
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.
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. T he award will allow the Company to accelerate
its development of new therapeutics for DMD. In the fourth quarter of 2007 the
Company received $400,000 from Charleys Fund. The Company recognized $37,500
in research contract revenue in the year ended December 31, 2007; the
remaining $362,500 has been classified as deferred revenue.
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 was paid when due on December 7, 2007.
F-22
6. INCOME TAXES:
As of December 31, 2007 the Company has net operating loss
carryforwards of approximately $170,938,000, available to reduce future taxable
income, which expire 2008 through 2027. Of this $170,938,000, 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 $168,338,000 in losses based on ownership changes
and the value of the Companys stock. Approximately $3,927,000 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 $94,631,000 and $79,398,000
at December 31, 2007 and 2006, 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 $15,233,000, $11,769,000 and
$9,056,000 for the years ended December 31, 2007, 2006 and 2005,
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,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
66,666,000
|
|
$
|
58,688,000
|
|
Difference in depreciation and amortization
|
|
1,786,000
|
|
1,413,000
|
|
Capital loss carryforward
|
|
5,007,000
|
|
5,007,000
|
|
Research and development tax credits
|
|
17,850,000
|
|
12,575,000
|
|
FAS 123R stock compensation
|
|
2,268,000
|
|
946,000
|
|
Stock options for consulting services
|
|
887,000
|
|
765,000
|
|
Deferred Rent
|
|
147,000
|
|
0
|
|
Other
|
|
20,000
|
|
4,000
|
|
|
|
94,631,000
|
|
79,398,000
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(94,631,000
|
)
|
(79,398,000
|
)
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
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.
F-23
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 December 31,
2007 and at December 31, 2006, and has not recognized interest and/or
penalties in the statement of operations for the year ended December 31,
2007.
At December 31, 2007, the Company had net deferred
tax assets of $94,631,000. 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.
7. COMMITMENTS:
Lease Obligations
The Company leases office and laboratory facilities under various
noncancelable operating leases through December 2020. Rent expense under
these leases was $1,388,000, $1,333,000 and $1,160,000 for the years ended December 31,
2007, 2006 and 2005, respectively, and $9,931,000 for the period from July 22,
1980 through December 31, 2007.
At December 31, 2007, the aggregate noncancelable future minimum
payments under these leases are as follows:
Year ending December 31,
|
|
|
|
2008
|
|
$
|
1,222,000
|
|
2009
|
|
1,210,000
|
|
2010
|
|
1,177,000
|
|
2011
|
|
1,264,000
|
|
2012
|
|
1,302,000
|
|
Thereafter
|
|
11,925,000
|
|
Total minimum lease payments
|
|
$
|
18,100,000
|
|
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,
2007, 2006 and 2005, respectively, and $1,108,750 for the period from July 22,
1980 through December 31, 2007.
At December 31, 2007, the aggregate future minimum royalty payments
under these agreements are as follows:
Year ending December 31,
|
|
|
|
2008
|
|
$
|
125,000
|
|
2009
|
|
125,000
|
|
2010
|
|
125,000
|
|
2011
|
|
125,000
|
|
2012
|
|
105,000
|
|
Thereafter
|
|
1,275,000
|
|
Total minimum royalty payments
|
|
$
|
1,880,000
|
|
F-24
8. FINANCIAL INFORMATION BY QUARTER (UNAUDITED):
2007 for quarter ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
Revenues from license fees, grants and research
contracts
|
|
$
|
5,186,319
|
|
$
|
2,911,406
|
|
$
|
2,351,424
|
|
$
|
536,042
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
9,401,465
|
|
9,880,480
|
|
9,160,816
|
|
6,317,641
|
|
General and
administrative
|
|
1,453,172
|
|
1,544,512
|
|
2,030,796
|
|
4,303,885
|
|
|
|
10,854,637
|
|
11,424,992
|
|
11,191,612
|
|
10,621,526
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
135,579
|
|
182,320
|
|
303,568
|
|
362,509
|
|
Gain (loss) on warrant
liability
|
|
1,405,545
|
|
1,296,322
|
|
755,317
|
|
1,498,691
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,127,194
|
)
|
$
|
(7,034,944
|
)
|
$
|
(7,781,303
|
)
|
$
|
(8,224,284
|
)
|
Net income (loss) per share basic
|
|
$
|
(0.07
|
)
|
$
|
(0.13
|
)
|
$
|
(0.15
|
)
|
$
|
(0.15
|
)
|
Net income (loss) per share diluted
|
|
$
|
(0.07
|
)
|
$
|
(0.13
|
)
|
$
|
(0.15
|
)
|
$
|
(0.15
|
)
|
Shares used in per share calculations basic
|
|
55,252,905
|
|
53,693,693
|
|
53,560,360
|
|
53,241,730
|
|
Shares used in per share calculations diluted
|
|
55,252,905
|
|
53,693,693
|
|
53,560,360
|
|
53,241,730
|
|
2006 for quarter ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
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
|
|
F-25
9. SUBSEQUENT EVENTS:
On February 11,
2008, AVI BioPharma, Inc. (the Company) announced that its Board of
Directors had appointed Leslie Hudson, Ph.D. as the Companys Chief Executive
Officer, effective as of February 8, 2008. As of that date, Dr. Hudson
assumed the responsibilities of the Companys Chief Executive Officer from K.
Michael Forrest, who had served as the Companys interim Chief Executive
Officer since March 2007, pending the appointment of a new chief executive
officer for the Company.
Effective with Dr. Hudsons
appointment as the Companys Chief Executive Officer, Mr. Forrest ceased
to serve as an officer of the Company. Mr. Forrest will continue as
a member of the Board of Directors. Also effective February 8, 2008,
Dr. Hudson was appointed as a member of the Companys Board of Directors.
On
March 13, 2008, the Company announced the execution of a definitive
Agreement and Plan of Merger (the Merger Agreement) pursuant to which Ercole
Biotech, Inc. (Ercole) will become a wholly-owned subsidiary of the
Company. Under the terms of the Merger Agreement, subject to adjustment as
provided in the Merger Agreement and described below, the Company will issue up
to $7.5 million of the Companys common stock, valued at $1.3161 per share, in
exchange for all outstanding shares of Ercole stock not already owned by the
Company. In addition, the Company will
assume up to $1.5 million in liabilities of Ercole, to be paid by the Company
through a combination of cash and the Companys common stock. Liabilities in excess of $1.5 million will be
deducted from the $7.5 million in common stock.
Certain warrants to purchase shares of Ercoles common stock will be
exchanged for warrants exercisable for shares of the Companys common
stock. Subject to the satisfaction of
customary closing conditions, including approval of Ercoles stockholders, the
transaction is expected to close by March 21, 2008.
In
addition, in anticipation of the closing of the merger, on March 12, 2008,
the Company loaned Ercole approximately $900,000 to be used by Ercole to repay
its debt obligation to Isis Pharmaceuticals, Inc. In exchange, Ercole issued a convertible
promissory note to the Company. In the
event the merger closes, this debt will be forgiven. If the merger does not close, Ercole will
either repay the amounts owing or the Company may convert such amounts into
shares of Ercole Class A Voting Common Stock.
F-26
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