UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended March 31, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the
transition period
from to
Commission
file number 001-14895
AVI
BIOPHARMA, INC.
(Exact name of
registrant as specified in its charter)
Oregon
|
|
93-0797222
|
(State or other
jurisdiction of incorporation
or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
One SW
Columbia Street, Suite 1105, Portland, Oregon
|
|
97258
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
Issuers telephone number, including area code:
503-227-0554
Indicate
by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Common
Stock with $.0001 par value
|
|
70,963,047
|
(Class)
|
|
(Outstanding at
May 8, 2008)
|
AVI BIOPHARMA,
INC.
FORM 10-Q
INDEX
1
AVI BIOPHARMA, INC.
(A Development
Stage Company)
BALANCE SHEETS
(unaudited)
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
19,960,809
|
|
$
|
24,802,562
|
|
Short-term
securitiesavailable-for-sale
|
|
274,209
|
|
271,851
|
|
Accounts
receivable
|
|
4,053,301
|
|
2,869,760
|
|
Other current
assets
|
|
1,075,033
|
|
767,278
|
|
Total Current
Assets
|
|
25,363,352
|
|
28,711,451
|
|
|
|
|
|
|
|
Property and
Equipment, net of accumulated depreciation and amortization of $12,111,844 and
$11,816,549
|
|
6,677,465
|
|
6,825,145
|
|
Patent Costs,
net of accumulated amortization of $1,766,674 and $1,725,074
|
|
3,404,340
|
|
3,066,625
|
|
Other Assets
|
|
34,709
|
|
34,709
|
|
Total Assets
|
|
$
|
35,479,866
|
|
$
|
38,637,930
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,367,551
|
|
$
|
3,026,072
|
|
Accrued employee
compensation
|
|
1,064,891
|
|
1,171,666
|
|
Long-term debt,
current portion
|
|
25,994
|
|
71,099
|
|
Warrant
liability
|
|
5,849,341
|
|
4,414,657
|
|
Deferred revenue
|
|
1,596,250
|
|
737,500
|
|
Other
liabilities
|
|
237,585
|
|
331,335
|
|
Total Current
Liabilities
|
|
12,141,612
|
|
9,752,329
|
|
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt,
non-current portion
|
|
2,098,349
|
|
2,070,704
|
|
Other long-term
liabilities
|
|
453,767
|
|
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; 70,429,110 and 64,449,094 issued
and outstanding
|
|
7,043
|
|
6,445
|
|
Additional
paid-in capital
|
|
262,151,126
|
|
252,732,858
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
Deficit
accumulated during the development stage
|
|
(241,372,031
|
)
|
(226,357,555
|
)
|
Total
Shareholders Equity
|
|
20,786,138
|
|
26,381,748
|
|
Total
Liabilities and Shareholders Equity
|
|
$
|
35,479,866
|
|
$
|
38,637,930
|
|
See accompanying
notes to financial statements.
2
AVI BIOPHARMA, INC.
(A Development
Stage Company)
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Three months ended March 31,
|
|
(Inception) to
|
|
|
|
2008
|
|
2007
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
Revenues from
license fees, grants and research contracts
|
|
$
|
5,624,617
|
|
$
|
536,042
|
|
$
|
26,590,627
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research and
development
|
|
7,472,811
|
|
6,317,641
|
|
189,880,428
|
|
General and
administrative
|
|
1,982,679
|
|
4,303,885
|
|
52,135,572
|
|
Acquired
in-process research and development
|
|
9,916,271
|
|
|
|
29,461,299
|
|
|
|
19,371,761
|
|
10,621,526
|
|
271,477,299
|
|
|
|
|
|
|
|
|
|
Other income
(loss):
|
|
|
|
|
|
|
|
Interest income,
net
|
|
167,352
|
|
362,509
|
|
8,600,870
|
|
Gain (loss) on
warrant liability
|
|
(1,434,684
|
)
|
1,498,691
|
|
8,052,617
|
|
Realized gain on
sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
3,862,502
|
|
Write-down of
short-term securitiesavailable-for-sale
|
|
|
|
|
|
(17,001,348
|
)
|
|
|
(1,267,332
|
)
|
1,861,200
|
|
3,514,641
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,014,476
|
)
|
$
|
(8,224,284
|
)
|
$
|
(241,372,031
|
)
|
|
|
|
|
|
|
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.23
|
)
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common shares outstanding for computing basic and diluted loss per
share
|
|
65,321,986
|
|
53,241,730
|
|
|
|
See accompanying
notes to financial statements.
3
AVI BIOPHARMA, INC.
(A Development
Stage Company)
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Three months ended March 31,
|
|
(Inception) to
|
|
|
|
2008
|
|
2007
|
|
March 31, 2008
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,014,476
|
)
|
$
|
(8,224,284
|
)
|
$
|
(241,372,031
|
)
|
Adjustments to
reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
348,554
|
|
479,630
|
|
15,182,652
|
|
Loss on disposal
of assets
|
|
439
|
|
53,498
|
|
374,998
|
|
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
|
|
|
|
300,000
|
|
2,075,000
|
|
Compensation
expense on issuance of common stock and partnership units
|
|
118,045
|
|
|
|
979,700
|
|
Compensation
expense to non-employees on issuance of options and warrants to purchase
common stock or partnership units
|
|
103,459
|
|
312,637
|
|
3,059,149
|
|
Stock-based
compensation
|
|
1,278,705
|
|
2,360,770
|
|
10,879,112
|
|
Conversion of
interest accrued to common stock
|
|
|
|
|
|
7,860
|
|
Acquired
in-process research and development
|
|
9,916,271
|
|
|
|
29,461,299
|
|
(Gain) loss on
warrant liability
|
|
1,434,684
|
|
(1,498,691
|
)
|
(8,052,617
|
)
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
(1,408,122
|
)
|
(473,488
|
)
|
(5,045,160
|
)
|
Other assets
|
|
|
|
|
|
(34,709
|
)
|
Net increase
(decrease) in accounts payable, accrued employee compensation, deferred
revenue, and other liabilities
|
|
(1,203,592
|
)
|
1,195,910
|
|
4,733,141
|
|
Net cash used in
operating activities
|
|
(4,426,033
|
)
|
(5,494,018
|
)
|
(174,612,760
|
)
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
(149,651
|
)
|
(464,029
|
)
|
(16,718,042
|
)
|
Patent costs
|
|
(189,315
|
)
|
(145,933
|
)
|
(5,521,559
|
)
|
Purchase of
marketable securities
|
|
(2,358
|
)
|
|
|
(112,978,571
|
)
|
Sale of
marketable securities
|
|
|
|
909,694
|
|
117,613,516
|
|
Acquisition
costs
|
|
(11,375
|
)
|
|
|
(2,388,991
|
)
|
Net cash
provided by (used in) investing activities
|
|
(352,699
|
)
|
299,732
|
|
(19,993,647
|
)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
215,015,674
|
|
Repayments of
long-term debt
|
|
(63,021
|
)
|
|
|
(63,021
|
)
|
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 (used in) financing activities
|
|
(63,021
|
)
|
|
|
214,567,216
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
(4,841,753
|
)
|
(5,194,286
|
)
|
19,960,809
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Beginning of
period
|
|
24,802,562
|
|
20,159,201
|
|
|
|
End of period
|
|
$
|
19,960,809
|
|
$
|
14,964,915
|
|
$
|
19,960,809
|
|
|
|
|
|
|
|
|
|
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 loss on short-term securitiesavailable-for-sale
|
|
$
|
|
|
$
|
(2,041
|
)
|
$
|
|
|
Issuance of
common stock and warrants in satisfaction of liabilities
|
|
$
|
|
|
$
|
|
|
$
|
545,000
|
|
Issuance of
common stock for building purchase
|
|
$
|
|
|
$
|
|
|
$
|
750,000
|
|
Assumption of
long-term debt for building purchase
|
|
$
|
|
|
$
|
|
|
$
|
2,199,792
|
|
Issuance of
common stock for Ercole assets
|
|
$
|
7,918,059
|
|
$
|
|
|
$
|
|
|
Assumption of
liabilities for Ercole assets
|
|
$
|
2,280,850
|
|
$
|
|
|
$
|
|
|
See accompanying
notes to financial statements.
4
AVI BIOPHARMA,
INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein
for the three-month period ended March 31, 2008 and 2007 and the financial
information as of March 31, 2008 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods. The financial information as of December 31, 2007 is derived from
AVI BioPharma, Inc.s (the Companys) Form 10-K. The interim
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Companys Form 10-K. The
results of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
Stock-based
compensation costs are generally based on the fair value calculated from the
Black-Scholes option-pricing model on the date of grant for stock options and
on the date of enrollment for the Plan. The fair value of stock grants is
amortized as compensation expense on a straight-line basis over the vesting
period of the grants. Stock options granted to employees are service-based and
typically vest over four years
.
The fair market values of
stock options granted during the periods presented were measured on the date of
grant using the Black-Scholes option-pricing model, with the following weighted
average assumptions:
Three Months Ended March 31,
|
|
2008
|
|
2007
|
|
Risk-free
interest rate
|
|
2.28
|
%
|
4.91
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
8.3 years
|
|
8.0 years
|
|
Expected
volatility
|
|
89
|
%
|
90
|
%
|
The risk-free interest rate is estimated using an average of treasury
bill interest rates. The expected dividend yield is zero as the Company has not
paid any dividends to date and does not expect to pay dividends in the future.
The expected lives are estimated using expected and historical exercise
behavior. The expected volatility is estimated using historical calculated
volatility and considers factors such as future events or circumstances that
could impact volatility.
As
part of the requirements of FSAS 123R, the Company is required to estimate
potential forfeiture of stock grants and adjust compensation cost recorded
accordingly. The estimate of forfeitures 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
.
5
A summary of the Companys stock option compensation activity with
respect to the fiscal quarter ended March 31, 2008 follows:
Stock Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2008
|
|
6,304,453
|
|
$
|
4.60
|
|
|
|
|
|
Granted
|
|
1,401,807
|
|
$
|
1.25
|
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
Canceled or
expired
|
|
(509,087
|
)
|
$
|
6.48
|
|
|
|
|
|
Outstanding at
March 31, 2008
|
|
7,197,173
|
|
$
|
3.81
|
|
6.29
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at
March 31, 2008 and expected to vest
|
|
7,153,905
|
|
$
|
3.82
|
|
6.27
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
March 31, 2008
|
|
5,033,748
|
|
$
|
4.37
|
|
5.07
|
|
$
|
|
|
The weighted average fair
value per share of stock-based payments granted to employees during the three
months ended March 31, 2008 and March 31, 2007 was $0.99 and $2.25,
respectively. During the same periods, the total intrinsic value of stock
options exercised were $0 and $0, and the total fair value of stock options
that vested were $877,204 and $1,303,398, respectively.
As of March 31,
2008, there was $3,315,423 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. These
costs are expected to be recognized over a weighted-average period of 2.0
years.
During the first quarter
of fiscal 2008, no stock options were exercised. The Company is obligated to
issue shares reserved under the
2002 Equity
Incentive Plan
upon the exercise of stock options. The Company does not
currently expect to repurchase shares from any source to satisfy its
obligations under the Plan.
The following are the
stock-based compensation costs recognized in the Companys statements of
operations:
|
|
Three Months Ended
March 31, 2008
|
|
Three Months Ended
March 31, 2007
|
|
Research and
development
|
|
$
|
504,018
|
|
$
|
397,037
|
|
General and
administrative
|
|
373,186
|
|
1,963,733
|
|
Total
|
|
$
|
877,204
|
|
$
|
2,360,770
|
|
The
2000 Employee Stock Purchase Plan (ESPP) provides
that eligible employees may contribute, through payroll, deductions, up to 10%
of their earnings toward the purchase of the Companys Common Stock at 85% of the
fair market value at specific dates. On January 1, 2006, the Company
adopted SFAS 123R, which requires the measurement and recognition of
compensation expense for all share based payment awards made to the Companys
employees and directors related to the Employee Stock Purchase Plan, based on
estimated fair values.
6
During
the first quarter of 2008 the total compensation expense for participants in
the ESPP was $7,490 using the Black-Scholes option-pricing model with a
weighted average estimated fair value per share of $0.86, expected life of six
months, risk free interest rate of 3.57%, volatility of 43.12%, and no dividend
yield.
During the
first quarter of 2007 the total compensation expense for participants in the
ESPP was $7,849 using the Black-Scholes option-pricing model with a weighted
average estimated fair value per share of $1.26, expected life of six months,
risk free interest rate of 5.17%, volatility of 70.90%, and no dividend yield.
At March 31, 2008, 208,585 shares remain
available for purchase through the plan and there were 86 employees eligible to
participate in the plan, of which 28 were participants
.
After the acquisition of
Ercole Biotechnology, Inc (Ercole), the Company recognized severance payments
to certain Ercole employees of $401,501 in the first quarter of 2008 to be paid
using the Companys common stock.
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.
The Company records the
fair value of stock options granted to non-employees in exchange for services
in accordance with EITF 96-18
Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
. The fair value of the
options granted is expensed when the measurement date is known. The performance
for services was satisfied on the grant date for stock options granted to
non-employees. The total fair value of the options granted to non-employees
during the three months ended March 31, 2008 and March 31, 2007 was
$103,459 and $312,637 which was expensed to research and development
, respectively
.
Warrants.
Certain of the Companys warrants issued
in connection with financing arrangements are classified as liabilities in
accordance with EITF 00-19,
Accounting for derivative
financial instruments indexed to, and potentially settled in, a Companys own
stock
. The fair market value of these warrants is recorded on the
balance sheet at issuance and marked to market at each financial reporting
period. The change in the fair value of the warrants is recorded in the
Statement of Operations as a non-cash gain (loss) and is estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended March 31,
|
|
2008
|
|
2007
|
|
Risk-free
interest rate
|
|
1.6%-2.5
|
%
|
4.4%-4.5
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
.7-4.7 years
|
|
1.7-3.1 years
|
|
Expected
volatility
|
|
61.2%-77.0
|
%
|
79.8%-88.9
|
%
|
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.
7
For warrants classified
as permanent equity in accordance with EITF 00-19, the fair value of the
warrants is recorded in shareholders equity and no further adjustments are
made.
Commitments and Contingencies.
In the normal course of business, the Company may be named as a party to
various legal claims, actions and complaints, including matters involving
employment, intellectual property, effects from the use
of drugs utilizing our technology, or others. It is impossible to
predict with certainty whether any resulting liability would have a
material adverse effect on the Companys financial position, results of
operations or cash flows.
Fair
Value of Financial Instruments.
The Company measures at fair
value certain financial assets and liabilities, including cash equivalents.
SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Companys market assumptions.
These two types of inputs have created the following fair-value hierarchy:
Level 1Quoted
prices for identical instruments in active markets;
Level 2Quoted
prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-derived
valuations in which all significant inputs and significant value drivers are
observable in active markets; and
Level 3Valuations
derived from valuation techniques in which one or more significant value
drivers are unobservable.
|
|
Fair Value Measurement as of March 31, 2008
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
19,960,809
|
|
$
|
19,960,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term securitiesavailable-for-sale
|
|
$
|
274,209
|
|
$
|
274,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,235,018
|
|
$
|
20,235,018
|
|
|
|
|
|
The Company has
deferred the adoption of SFAS No. 157 with respect to nonfinancial assets
and liabilities in accordance with the provisions of FSP FAS 157-2, Effective
Date of FASB Statement No. 157. Items in this classification include
goodwill, intangible assets, long term investments, pension obligations, and
certain other items.
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.
8
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.
Government
Research Contract Revenue.
The Company recognizes
revenues from federal research contracts during the period in which the related
expenditures are incurred. The Company presents these revenues and related
expenses at gross in the consolidated financial statements in accordance with
EITF 99-19
Reporting Revenue Gross as a Principal versus Net
as an Agent
.
Income
Taxes.
In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The provisions of FIN 48 are effective for the
Company as of January 1, 2007, with cumulative effect, if any, of applying
FIN 48 recorded as an adjustment to opening retained earnings in the year of
adoption. The Company adopted FIN 48 on January 1, 2007, which did not
have a material impact on the consolidated financial statements. See Note 7.
Note 2.
Liquidity
Since its inception in 1980 through March 31, 2008, the Company has
incurred losses of approximately $241 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
9
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
quarter ended March 31, 2008, the Company recognized $3,945,072 in
research contract revenue from this contract. Funding
under this
contract is expected over three years, with approximately $24.5 million committed
through the end of 2008 (including amounts received in 2007), and the remainder
anticipated in the first five months of
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 quarter ended March 31,
2008, the Company recognized $1,630,760 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.
10
Note 3.
Earnings Per Share
Basic EPS is
calculated using the weighted average number of common shares outstanding for
the period and diluted EPS is computed using the weighted average number of
common shares and dilutive common equivalent shares outstanding. Given that the Company is in a loss position,
there is no difference between basic EPS and diluted EPS since the common stock
equivalents would be antidilutive.
Three Months Ended March 31,
|
|
2008
|
|
2007
|
|
Net loss
|
|
$
|
(15,014,476
|
)
|
$
|
(8,224,284
|
)
|
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
|
|
65,321,986
|
|
53,241,730
|
|
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
|
|
65,321,986
|
|
53,241,730
|
|
Net loss per
share - basic and diluted
|
|
$
|
(0.23
|
)
|
$
|
(0.15
|
)
|
* Warrants and stock options to purchase
21,499,569 and 15,173,475 shares of common stock as of March 31, 2008 and
2007, respectively, were excluded from the earnings per share calculation as
their effect would have been antidilutive.
Note 4. Comprehensive loss and
securities available for sale
Comprehensive loss
includes charges or credits to equity that did not result from transactions
with shareholders. The Companys only component of other comprehensive loss
is unrealized gain (loss) on cash equivalents and short-term
securitiesavailable-for-sale.
Accordingly,
such investment securities are stated on the balance sheet at their fair market
value. The Company classifies its investment securities with an original
maturity of three months or less from the date of purchase as cash equivalents.
The Company classifies its investment securities with an original maturity of
more than three months from the date of purchase as short-term securities
available-for-sale. At March 31, 2008 and December 31,
2007, the Companys investments in marketable securities had gross unrealized
gains (losses) of $0 and $0, respectively. The unrealized difference between
the adjusted cost and the fair market value of these securities has been
reflected as a separate component of shareholders equity. The following table
sets forth the calculation of comprehensive income for the periods indicated:
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,014,476
|
)
|
$
|
(8,224,284
|
)
|
Unrealized loss
on marketable securities
|
|
|
|
(2,041
|
)
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$
|
(15,014,476
|
)
|
$
|
(8,226,325
|
)
|
11
Note 5. Acquisition of Ercole
On March 20, 2008,
the Company acquired all of the stock of Ercole Biotechnology, Inc (Ercole)
in exchange for 5,647,016 shares of AVI common stock. The transaction included
assumption of $1.5 million in liabilities of Ercole. The AVI common stock was
valued at approximately $8.1 million. AVI also issued warrants to purchase AVI
stock to settle certain outstanding warrants held in Ercole. These warrants are
classified in equity. The acquisition was aimed at consolidating AVIs position
in directed alternative RNA splicing therapeutics. Ercole and the Company had
been collaborating since 2006 to develop drug candidates, including AVI-4658,
currently in clinical testing in the United Kingdom for the treatment of
Duchenne muscular dystrophy. Ercole has other ongoing discovery research
programs.
Ercole has been a
development stage company since inception and does not have a product for sale.
The Company is retaining a limited number of Ercole employees and plans on
incorporating in-process technology of Ercole into the Companys processes. The
acquisition of Ercole did not meet the definition of a business under EITF 98-3
Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business
. and,
therefore, is being accounted for as an asset acquisition.
The total estimated
purchase price of $10.3 million has been allocated as follows:
Cash
|
|
$
|
54,000
|
|
A/R
|
|
$
|
76,000
|
|
Prepaid Expenses
|
|
$
|
7,000
|
|
Fixed Assets
|
|
$
|
10,000
|
|
Patents
|
|
$
|
190,000
|
|
Acquired
In-Process Research and Development
|
|
$
|
9,916,000
|
|
The acquired pending
patents have an expected expiration date of 2026. Acquired in-process research
and development consists of other discovery research programs in areas
including beta thalassemia and soluble tumor necrosis factor receptor. As these
programs were in development at the time of acquisition, there were significant
risks associated with completing these projects, and there were no alternative
future uses for these projects, the associated value has been considered
acquired in-process research and development.
Note 6. Other current assets
Amounts included in other current assets are as follows:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
670,773
|
|
$
|
388,371
|
|
Prepaid rents
|
|
118,740
|
|
96,077
|
|
Restricted cash
|
|
285,520
|
|
282,830
|
|
|
|
|
|
|
|
Other current
assets
|
|
$
|
1,075,033
|
|
$
|
767,278
|
|
12
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 March 31,
2008, restricted cash including accrued interest was $285,520. The remaining
components of other current assets include normally occurring prepaid expenses
and rents.
Note 7. Income Taxes
The
Company adopted the provisions of FIN 48 on January 1, 2007, which did not
materially impact its consolidated financial statements. No unrecognized tax
benefits were recorded as of the date of adoption. As a result of the
implementation of FIN 48, the Company did not recognize any liability for
unrecognized tax benefits. There are no unrecognized tax benefits included in
the balance sheet that would, if recognized, affect the effective tax rate.
The Companys
policy is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company had no accrual for interest or penalties on
its balance sheet at March 31, 2008 and at December 31, 2007, and has
not recognized interest and/or penalties in the statement of operations for the
three months ended March 31, 2008.
At March 31,
2008, the Company had net deferred tax assets of approximately $95,000,000. The
deferred tax assets are primarily composed of federal and state tax net
operating loss carryforwards, federal and state R&D credit carryforwards,
share-based compensation expense and intangibles. Due to uncertainties
surrounding its ability to generate future taxable income to realize these
assets, a full valuation allowance has been established to offset its net
deferred tax asset. Additionally, the Internal Revenue Code rules under Section 382
could limit the future use of its net operating loss and R&D credit
carryforwards to offset future taxable income based on ownership changes and
the value of the Companys stock.
Item 2.
Managements Discussion and Analysis or Plan of Operations
This section should be
read in conjunction with the same titled section contained in our Annual Report
on Form 10-K as filed with the SEC for the year ended December 31,
2007 and the Risk Factors contained in such report.
Forward-Looking Information
The Financial Statements and Notes
thereto should be read in conjunction with the following discussion. The
discussion in this Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act. Forward looking statements are identified by such words as
believe, expect, anticipate and words of similar import. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Such forward-looking statements
involve risks and uncertainties, including, but not limited to, the results of
research and development efforts, the success of raising funds in the current
offering or future offerings under our current shelf registration, the results
of pre-clinical and clinical testing, the effect of regulation by FDA and other
agencies, the impact of competitive products, product development,
commercialization and technological difficulties, and other risks detailed in
the Companys Securities and Exchange Commission filings, that could cause
actual results to differ materially from the expected results reflected in such
forward looking statements.
13
Overview
From our inception in
1980, we have devoted our resources primarily to fund our research and
development efforts. We have been unprofitable since inception and, other than
limited interest, license fees, grants and research contracts, we have had no
material revenues from the sale of products or other sources, other than from
government grants and research contracts, and we do not expect material
revenues for the foreseeable future. We expect to continue to incur losses for
the foreseeable future as we continue our research and development efforts and
enter additional collaborative efforts. As of March 31, 2008, our
accumulated deficit was $241,372,031.
Results of Operations
Revenues, from license
fees, grants and research contracts, increased to $5,624,617 in the first
quarter of 2008 from $536,042 in the comparable period in 2007, due to
increases in research contracts revenues of $5,105,575, partially offset by
decreases in grants revenues of $19,500.
Operating expenses
increased to $19,371,761 in the first quarter of 2008 from $10,621,526 in the
first quarter of 2007, due primarily to $9,916,271 of acquired in-process
research and development associated with the acquisition of Ercole
Biotechnology, Inc (Ercole), as well as increases in research and development
which increased to $7,472,811 in the first quarter of 2008 from $6,317,641 in
the first quarter of 2007. These increases were partially offset by decreases
in general and administrative, which decreased to $1,982,679 in the first quarter
of 2008 from $4,303,885 in the comparable period in 2007. Research and
development increased to $7,472,811 in the first quarter of 2008 from
$6,317,641 in the first quarter of 2007. This research and development increase
was due primarily to government research contract expense of approximately
$800,000, increases in compensation costs of approximately $580,000, severance
payments to certain Ercole employees of approximately $402,000, increases in
net clinical expenses of approximately $400,000, partially offset by decreases
in professional consultant costs of approximately $425,000, decreases in
chemical costs of approximately $245,000, decreases in purchases of government
contract related equipment of approximately $225,000 and decreases in
amortization of patents and leaseholds of approximately $190,000. The general
and administrative decrease was due primarily to decreases in employee costs of
approximately $2,160,000, of which approximately $1,620,000 (including $562,500
in cash compensation and $1,057,372 in SFAS 123R expenses) was related to the
Separation and Release Agreement with the Companys former Chief Executive
Officer during the first quarter of 2007, as well as, decreases in SFAS 123R
expenses of approximately $530,000. General and administrative expenses also
includes a decrease in legal expenses of approximately $150,000. Net interest
income decreased to $167,352 in the first quarter of 2008 from $362,509 in the
first quarter of 2007 due to decreases in average cash, cash equivalents and short-term
securities, as well as, decreases in average interest rates of the Companys
interest earning investments. For the first quarter of 2008, the Company
recognized a loss on warrant liability of $1,434,684 compared to a gain on
warrant liability in the first quarter of 2007 of $1,498,691. The gain (loss)
on warrant liability is a function of the Companys stock price and fluctuates
as the market price of the Companys stock fluctuates.
14
Liquidity and Capital Resources
The
Company does not expect any material revenues in 2008 or 2009 from its business
activities, other than from potential government grants and research contracts.
The Company
expects
that its cash requirements through 2008 will be satisfied by existing cash
resources. To fund its operations beyond 2008, the Company will need to secure
additional funds. Such funds could come from technology license fees,
government grants and research contracts, and accessing capital markets.
In December 2006,
the Company announced the execution of a two-year $28 million research contract
with the Defense Threat Reduction Agency (DTRA), an agency of the United States
Department of Defense (DoD). In February 2008, the contract was extended
into the first five months of 2009. The contract is directed toward funding the
Companys development of antisense therapeutics to treat the effects of Ebola,
Marburg and Junin hemorrhagic viruses, which are seen by DoD as potential
biological warfare and bioterrorism agents. Funding under this contract is
expected over three years, with approximately $24.5 million committed through
the end of 2008 (including amounts received in 2007), and the remainder
anticipated in the first five months of 2009. In the first quarter of 2008, the
Company recognized $3,945,072 in research contract revenue from this contract.
In January 2006, the
Company announced that the final version of the 2006 defense appropriations act
had been approved, which included an allocation of $11.0 million to fund the
Companys ongoing defense-related programs. Net of government administrative
costs, it is anticipated that the Company will receive up to $9.8 million under
this allocation. The Companys NEUGENE
®
technology is expected to be
used to continue developing therapeutic agents against Ebola, Marburg and
dengue viruses, as well as to continue developing countermeasures for anthrax
exposure and antidotes for ricin toxin. The Company has received signed
contracts for all four of these projects. The Company expects that funding
under these signed contracts will be received over the next 12 months. In the
first quarter of 2008, the Company recognized $1,630,760 in research contract
revenue from this contract.
The Companys cash, cash
equivalents and short-term securities were $20,235,018 at March 31, 2008,
compared with $25,074,413 at December 31, 2007. The decrease of $4,839,395
was due primarily to $4,426,033 used in operations and $338,966 used for
purchases of property and equipment and patent related costs. This decrease
included approximately $900,000 advanced to Ercole for its use in retiring
certain of its debts prior to closing of the Ercole asset purchase.
The Companys short-term
securities may 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).
15
The Companys future
expenditures and capital requirements depend on numerous factors, most of which
are difficult to project beyond the short term, including without limitation,
the progress of its research and development programs, the progress of its pre-clinical
and clinical trials, the time and costs involved in obtaining regulatory
approvals, the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, competing technological and
market developments, its ability to establish collaborative arrangements and
the terms of any such arrangements, and the costs associated with
commercialization of its products. The Companys cash requirements are expected
to continue to increase each year as the Company expands its activities and
operations. There can be no assurance, however, that the Company will ever be
able to generate product revenues or achieve or sustain profitability.
The
Company expects to continue to incur losses as it continues its research and development
activities and related regulatory work and collaborative efforts. 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 increase if the Company undertakes
additional collaborative efforts. If necessary, however, the Companys
management has the ability to significantly curtail certain expenditures
because a significant amount of the Companys costs are variable.
Critical Accounting Policies and Estimates
The discussion and
analysis of the Companys financial condition and results of operations are
based upon its financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. The Companys critical accounting policies and estimates are
consistent with the disclosure in the Companys Form 10-K, with the
exception of FIN 48, see Note 7.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
There has been no
material change in the Companys market risk exposure since the filing of our
2007 Annual Report on Form 10-K.
16
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
As
of March 31, 2008, the Company carried out an evaluation, under the
supervision and with the participation of its management, including its Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to Rule 13a-15(e) under
the Securities Exchange Act of 1934. Based on this review of its disclosure
controls and procedures, the Chief Executive Officer and the Chief Financial
Officer have concluded that its disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company that is required to be included in our periodic SEC filings.
Internal Controls and Procedures
There
were no significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A.
Risk Factors.
There has been no
substantial changes in the Companys Risk Factors contained in our Annual
Report on Form 10-K as filed with the SEC for the year ended December 31,
2007.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds.
None
Item 3 Defaults Upon Senior
Securities.
None
Item 4. Submission of Matters to
a Vote of Securities Holders.
None
Item 5. Other Information.
None
17
Item 6
.
Exhibits
|
|
|
|
Incorporated by Reference to Filings Indicated
|
Exhibit No
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
2.1
|
|
Agreement and Plan of
Merger dated March 12, 2008 by and among AVI BioPharma, Inc., EB
Acquisition Corp., and Ercole Biotech, Inc. and Stockholder
Representative
|
|
8-K
|
|
1-14895
|
|
2.1
|
|
3/13/08
|
|
|
3.1
|
|
Third Restated Articles
of Incorporation of AntiVirals Inc.
|
|
SB-2
|
|
333-20513
|
|
3.1
|
|
5/29/97
|
|
|
3.2
|
|
First Restated Bylaws
of AVI BioPharma, Inc.
|
|
8-K
|
|
1-14895
|
|
3.5
|
|
2/7/08
|
|
|
3.3
|
|
First Amendment to
Third Restated Articles of Incorporation
|
|
8-K
|
|
0-22613
|
|
3.3
|
|
9/30/98
|
|
|
3.4
|
|
Amendment to
Article 2 of the Companys Third Restated Articles of Incorporation
|
|
DEF 14A
|
|
1-14895
|
|
N/A
|
|
4/11/02
|
|
|
10.63
|
|
Employment Agreement
dated February 8, 2008 by and between AVI BioPharma, Inc. and
Leslie Hudson, Ph.D.
|
|
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Certification of the
Companys Chief Executive Officer, K. Michael Forrest, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification of Chief
Financial Officer, Mark M. Webber pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
X
|
32
|
|
Certification of the
Companys Chief Executive Officer, K. Michael Forrest, and Chief Financial
Officer, Mark M. Webber, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
Materials in the
exhibit marked with a + have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
Omitted portions have been filed separately with the Securities and Exchange
Commission.
18
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date:
|
May 12, 2008
|
AVI BIOPHARMA, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ LESLIE HUDSON,
Ph.D.
|
|
|
Leslie Hudson, Ph.D.
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ MARK M. WEBBER
|
|
|
Mark M. Webber
|
|
|
Chief Financial Officer and Chief Information
Officer
|
|
|
(Principal Financial
and Accounting Officer)
|
19
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