Table of
Contents
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
September 30, 2009
|
|
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.)
|
|
|
|
3450 Monte Villa Parkway, Suite 101, Bothell,
Washington
|
|
98021
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Issuers telephone number, including area code:
425-354-5038
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
has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer or a non-accelerated filer. See
the definition of accelerated filer large 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
(Do not check if a smaller reporting company)
|
|
Smaller Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). 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: 110,435,315 outstanding at November 8,
2009.
Table of Contents
PART I FINANCIAL
INFORMATION
Item 1. Financial Statements.
AVI BIOPHARMA, INC.
(A Development Stage Company)
BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
50,268
|
|
$
|
11,192
|
|
Short-term
securitiesavailable-for-sale
|
|
169
|
|
282
|
|
Accounts
receivable
|
|
5,671
|
|
4,971
|
|
Other
current assets
|
|
839
|
|
599
|
|
Total
Current Assets
|
|
56,947
|
|
17,044
|
|
|
|
|
|
|
|
Property
and Equipment, net of accumulated depreciation and amortization of $13,735
and $12,919
|
|
2,102
|
|
5,189
|
|
Patent
Costs, net of accumulated amortization of $1,959 and $1,927
|
|
3,580
|
|
3,268
|
|
Assets
held for sale
|
|
2,373
|
|
|
|
Other
assets
|
|
121
|
|
35
|
|
Total
Assets
|
|
$
|
65,123
|
|
$
|
25,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,303
|
|
$
|
2,014
|
|
Accrued
employee compensation
|
|
1,098
|
|
1,306
|
|
Long-term
debt, current portion
|
|
76
|
|
74
|
|
Warrant
valuation
|
|
35,400
|
|
1,254
|
|
Deferred
revenue
|
|
2,096
|
|
2,190
|
|
Other
liabilities
|
|
86
|
|
450
|
|
Total
Current Liabilities
|
|
43,059
|
|
7,288
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, non-current portion
|
|
1,950
|
|
2,001
|
|
Other
long-term liabilities
|
|
610
|
|
515
|
|
|
|
|
|
|
|
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; 110,433,113 and
71,161,072 issued and outstanding
|
|
11
|
|
7
|
|
Additional
paid-in capital
|
|
298,487
|
|
266,035
|
|
Deficit
accumulated during the development stage
|
|
(278,994
|
)
|
(250,310
|
)
|
Total
Shareholders Equity
|
|
19,504
|
|
15,732
|
|
Total
Liabilities and Shareholders Equity
|
|
$
|
65,123
|
|
$
|
25,536
|
|
See accompanying notes to financial statements
2
Table of Contents
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
July 22, 1980
(Inception) through
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from license fees, grants and research contracts
|
|
$
|
6,349
|
|
$
|
5,171
|
|
$
|
12,444
|
|
$
|
15,778
|
|
$
|
54,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
7,473
|
|
7,680
|
|
17,771
|
|
22,261
|
|
223,807
|
|
General
and administrative
|
|
1,800
|
|
3,429
|
|
6,226
|
|
8,165
|
|
71,550
|
|
Acquired
in-process research and development
|
|
|
|
|
|
|
|
9,916
|
|
29,461
|
|
Operating
loss
|
|
(2,924
|
)
|
(5,938
|
)
|
(11,553
|
)
|
(24,564
|
)
|
(270,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income and other, net
|
|
(127
|
)
|
60
|
|
(142
|
)
|
308
|
|
8,635
|
|
(Increase)
decrease on warrant valuation
|
|
(5,039
|
)
|
(169
|
)
|
(16,989
|
)
|
1,444
|
|
(4,341
|
)
|
Realized
gain on sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
3,863
|
|
Write-down
of short-term securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(17,001
|
)
|
|
|
(5,166
|
)
|
(109
|
)
|
(17,131
|
)
|
1,752
|
|
(8,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,090
|
)
|
$
|
(6,047
|
)
|
$
|
(28,684
|
)
|
$
|
(22,812
|
)
|
$
|
(278,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
$
|
(0.33
|
)
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for computing
basic and diluted loss per share (in thousands)
|
|
95,261
|
|
71,151
|
|
87,493
|
|
69,160
|
|
|
|
See accompanying notes to financial statements.
3
Table of Contents
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
|
Nine months ended September 30,
|
|
(Inception) through
|
|
|
|
2009
|
|
2008
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(28,684
|
)
|
$
|
(22,812
|
)
|
$
|
(278,994
|
)
|
Adjustments
to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
1,080
|
|
1,043
|
|
17,383
|
|
Loss
on disposal of assets
|
|
221
|
|
11
|
|
1,179
|
|
Realized
gain on sale of short-term securitiesavailable-for-sale
|
|
|
|
|
|
(3,863
|
)
|
Write-down
of short-term securitiesavailable-for-sale
|
|
|
|
|
|
17,001
|
|
Impairment
charge on real estate owned
|
|
128
|
|
|
|
928
|
|
Stock-based
compensation
|
|
1,592
|
|
4,121
|
|
21,915
|
|
Conversion
of interest accrued to common stock
|
|
|
|
|
|
8
|
|
Acquired
in-process research and development
|
|
|
|
9,916
|
|
29,461
|
|
Increase
(decrease) on warrant valuation
|
|
16,989
|
|
(1,444
|
)
|
4,341
|
|
Net
(increase) in:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
(940
|
)
|
(1,181
|
)
|
(6,426
|
)
|
Other
assets
|
|
(86
|
)
|
(235
|
)
|
(121
|
)
|
Net
increase in accounts payable, accrued employee compensation, and other
liabilities
|
|
1,957
|
|
716
|
|
6,919
|
|
Net
cash used in operating activities
|
|
(7,743
|
)
|
(9,865
|
)
|
(190,269
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
(276
|
)
|
(364
|
)
|
(17,214
|
)
|
Patent
costs
|
|
(751
|
)
|
(419
|
)
|
(6,931
|
)
|
Sale
(purchase) of marketable securities
|
|
113
|
|
(8
|
)
|
(112,873
|
)
|
Sale
of marketable securities
|
|
|
|
|
|
117,613
|
|
Acquisition
costs
|
|
|
|
(11
|
)
|
(2,389
|
)
|
Net
cash used in investing activities
|
|
(914
|
)
|
(802
|
)
|
(21,794
|
)
|
|
|
|
|
|
|
|
|
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
|
|
47,782
|
|
44
|
|
262,879
|
|
Repayments
of long-term debt
|
|
(49
|
)
|
(99
|
)
|
(162
|
)
|
Buyback
of common stock pursuant to rescission offering
|
|
|
|
|
|
(289
|
)
|
Withdrawal
of partnership net assets
|
|
|
|
|
|
(177
|
)
|
Issuance
of convertible debt
|
|
|
|
|
|
80
|
|
Net
cash provided by (used in) financing activities
|
|
47,733
|
|
(55
|
)
|
262,331
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
39,076
|
|
(10,722
|
)
|
50,268
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Beginning
of period
|
|
11,192
|
|
24,803
|
|
|
|
End
of period
|
|
$
|
50,268
|
|
$
|
14,081
|
|
$
|
50,268
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
65
|
|
$
|
33
|
|
$
|
273
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING ACTIVITIES AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Short-term
securitiesavailable-for-sale received in connection with the private
offering
|
|
$
|
|
|
$
|
|
|
$
|
17,897
|
|
Issuance
of common stock and warrants in satisfaction of liabilities
|
|
$
|
|
|
$
|
|
|
$
|
545
|
|
Issuance
of common stock for building purchase
|
|
$
|
|
|
$
|
|
|
$
|
750
|
|
Assumption
of long-term debt for building purchase
|
|
$
|
|
|
$
|
|
|
$
|
2,200
|
|
Issuance
of common stock for Ercole assets
|
|
$
|
|
|
$
|
8,075
|
|
$
|
8,075
|
|
Assumption
of liabilities for Ercole assets
|
|
$
|
|
|
$
|
2,124
|
|
$
|
2,124
|
|
Issuance
of common stock and warrants in satisfaction of employee bonuses
|
|
$
|
239
|
|
$
|
|
|
$
|
239
|
|
See accompanying notes to financial statements.
4
Table
of Contents
AVI BIOPHARMA, INC.
NOTES TO
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included
herein for the three and nine-month period ended September 30, 2009 and
2008 and the financial information as of September 30, 2009 is unaudited;
however, such information reflects all adjustments consisting 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, 2008 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.
Reclassifications.
Certain prior year amounts have been reclassified to conform to current
year presentation. These changes did not have a significant impact on Companys
net loss, assets, liabilities, shareholders equity or cash flows.
Estimates and Uncertainties.
The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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.
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.
Note 2. Fair Value Measurements
The
Company measures at fair value certain financial assets and liabilities. U.S.
generally accepted account principles (US GAAP), 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.
The Company invests its cash in money market funds and certificates of
deposits. The Company has not experienced credit losses on investments in these
instruments. The Companys assets
measured at fair value on a recurring basis consisted of the following as of
September 30, 2009:
|
|
Fair Value Measurement as of September 30, 2009
|
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term securitiesavailable-for-sale
|
|
$
|
50,608
|
|
$
|
50,156
|
|
452
|
|
|
|
Total
|
|
$
|
50,608
|
|
$
|
50,156
|
|
$
|
452
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Table
of Contents
The Companys liabilities measured at fair value on a recurring basis
consisted of the following as of the date indicated:
|
|
Fair Value Measurement as of September 30, 2009
|
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
35,400
|
|
|
|
|
|
$
|
35,400
|
|
Total
|
|
$
|
35,400
|
|
$
|
|
|
$
|
|
|
$
|
35,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the change in value of the Companys warrant
liability valuation for the three months ended September 30, 2009 is as
follows:
|
|
Fair Value Measurements Using
|
|
|
|
Significant
Unobservable Inputs
|
|
(in thousands)
|
|
(Level
3)
|
|
|
|
|
|
Balance at July 1, 2009
|
|
$
|
21,387
|
|
Total increase in liability included in
earnings
|
|
5,039
|
|
Issuances
|
|
8,974
|
|
Balance at September 30, 2009
|
|
$
|
35,400
|
|
|
|
|
|
The increase in the third quarter liability
relating to warrants still held at September 30, 2009
|
|
$
|
5,039
|
|
A reconciliation of the change in value of the Companys warrant
liability valuation for the nine months ended September 30, 2009 is as
follows:
|
|
Fair Value Measurements Using
|
|
|
|
Significant
Unobservable Inputs
|
|
(in thousands)
|
|
(Level
3)
|
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
1,254
|
|
Total increase in liability included in
earnings
|
|
16,989
|
|
Issuances
|
|
17,157
|
|
Balance at September 30, 2009
|
|
$
|
35,400
|
|
|
|
|
|
The increase in the year to date liability
relating to warrants still held at September 30, 2009
|
|
$
|
16,989
|
|
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.
Note 3. Revenue Recognition
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 gross in the financial statements in accordance
with ASC 605 45
Reporting Revenue Gross as a Principal
versus Net as an Agent
.
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. At September 30, 2009, the Company had deferred revenue of
$2.1 million, which represents up-front fees received from third parties
pursuant to certain contractual arrangements. The Company will recognize the
revenue from these contracts upon the achievement of certain performance
milestones, as specified in the agreements.
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.
6
Table
of Contents
Note
4. Patents
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.
Note
5. Acquisition of Ercole
On March 20, 2008, the Company acquired all of the stock of Ercole
Biotech, Inc. (Ercole) in exchange for 5,811,721 shares of AVI common
stock. The transaction included the assumption of approximately $1.8 million in
liabilities of Ercole. As a result of the transfer, Ercole became and remains a
wholly owned subsidiary of the Company. The AVI common stock was valued at approximately
$8.4 million. AVI also issued warrants to purchase AVI stock to settle certain
outstanding warrants held in Ercole, which were valued at $436,535. 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.
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
pending patents acquired as part of the Ercole acquisition 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.
Ercole
has been a development stage company since inception and does not have a
product for sale. The Company has retained a limited number of Ercole employees
and has incorporated in-process technology of Ercole into the Companys
processes. The acquisition of Ercole did not meet the definition of a business
under in accordance with U.S. GAAP and, therefore, was accounted for as an
asset acquisition
.
Note 6. Other Current Assets
Amounts included in other current assets are as follows:
(in thousands)
|
|
September 30,
2009
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
438
|
|
$
|
316
|
|
Other receivables
|
|
118
|
|
|
|
Restricted cash
|
|
283
|
|
283
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
839
|
|
$
|
599
|
|
The Company has pledged $150,000 as collateral for company credit cards
issued to certain employees and $125,000 as collateral for payments on
long-term debt. The Company classifies these amounts as restricted cash. As of September 30, 2009, restricted
cash, including accrued interest, was $283,000. The remaining components of
other current assets include normally occurring prepaid expenses and other
receivables.
7
Table
of Contents
Note 7. Liquidity
The Company is in the development stage. Since its inception in 1980
through September 30, 2009, the Company has incurred losses of
approximately $279 million, substantially all of which resulted from
expenditures related to research and development, general and administrative
charges and acquired in-process research and development resulting from two
acquisitions. 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 RNA-based
products, obtaining regulatory approvals for such products, and bringing these
products to market. During the period required to develop these products, the
Company may require substantial additional financing. There can be 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 following twelve
months, exclusive of future receipts from billings on existing government
contracts. For 2009, the Company expects expenditures for operations, net of
government funding, including collaborative efforts and research and
development activities to be approximately $10 to $12 million. This could increase
if the Company undertakes additional collaborative efforts. However, if
necessary in 2009, the Company believes it can reduce its expenditures because
a significant amount of its costs are variable. Those estimated expenditures
include amounts necessary to fulfill the Companys obligations under its
various collaborative, research and licensing agreements during 2009. The
Company believes it will continue to receive funding from government and other
sources to pursue the development of its product candidates, and has assumed
certain revenues from these awards in providing this guidance. Should the Company not continue to receive
funding from its current contracts or receive additional funding, or should the
timing be delayed, it may have a significant negative impact on the Companys
guidance.
The
Company currently has a total of $61.7 million of contracted development
studies. As of September 30, 2009, $44
million has been billed, of which $38.3 million has been received in cash and
$5.7 million is in accounts receivable. The Company has $17.7 in development
contracts remaining that have not yet been completed and have not been billed.
The Company expects to complete the remaining contract activity and receive the
contracted revenue in 2010 and early 2011.
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. In May 2009, the Company
received an amendment from DTRA to extend the contract performance period to
November 29, 2009 and a cost modification of an additional $5.9 million,
increasing the total contract amount to $33.9 million. In September 2009,
the Company received a second amendment from DTRA to extend the contract
performance period to February 28, 2011 and a cost modification of an
additional $11.5 million, increasing the total contract amount to $45.4
million.
During the three month periods ended
September 30, 2009 and 2008, the Company recognized $4.4 million and $4.9
million, respectively, in research contract revenue from this contract. During
the nine month periods ended September 30, 2009 and 2008, the Company
recognized $7.5 million and $13.6 million, respectively, in research contract
revenue from this contract. To date, the Company has recognized revenues of
$32.3 million from this contract.
Funding of the remainder of the contract is anticipated in 2010 and
2011.
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
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 of these projects. The Company expects
that funding under these signed contracts will be completed over the next 12
months. During the three month periods ended September 30, 2009 and 2008,
the Company recognized $0.3 million and $0.2 million, respectively, in research
contract revenue from these contracts.
During the nine month periods ended September 30, 2009 and 2008,
the Company recognized $1.9 million and $2.1 million, respectively, in research
contract revenue from this contract. To date, the Company has recognized
revenues of $8.8 million on these contracts. Funding of the remainder of these
contracts is anticipated in 2010.
In
May 2009, the Company entered into a contract with the U.S. Defense Threat
Reduction Agency (DTRA) to develop swine flu drugs. Under this contract, DTRA
will pay up to $4.1 million to the Company for the work to be performed by the
Company. The work will involve the application of the Companys proprietary PMO
and PMO
plu
s antisense chemistry and the Company
plans to
8
Table
of Contents
conduct
preclinical development of at least one drug candidate and demonstrate it is
effective by testing it on animals. During the three month period ended
September 30, 2009, the Company recognized $0.7 million in revenue under
this contract. During the nine month
period ended September 30, 2009, the Company recognized $1.1 million in
revenue under this contract.
Also
in May 2009, the Company entered into a
$2.5 million contract with Childrens National
Medical Center in Washington, D.C. to support preclinical studies in the
development of AVI-4658 for treatment of Duchenne Muscular Dystrophy. The work
will be conducted with Childrens National collaborators Eric Hoffman, Ph.D.,
an authority on DMD and Professor of Pediatrics, and Edward Connor, M.D.,
Director, Office of Investigational Therapeutics and Professor of Pediatrics.
AVI will serve as a subcontractor to a grant awarded to Childrens National by
the U.S. Department of Defense. During
the three month period ended September 30, 2009, the Company recognized
$0.8 million in revenue under this contract. During the nine month period ended
September 30, 2009, the Company recognized $1.8 million in revenue under
this contract.
In
September 2009, the Company and Charleys Fund, Inc. (Charleys
Fund), a nonprofit organization that funds drug discovery and development
initiatives specific to DMD, entered into the First Amendment to an existing
Sponsored Research Agreement (the Amendment). The Amendment pertains to
certain provisions of the Sponsored Research Agreement by and between the
Company and Charleys Fund entered into effective October 12, 2007 (the
Agreement). Under the terms of the Amendment, the Company was awarded an
additional $3 million in
sponsored research funds, for a total of $5 million from Charleys Fund to support a new product
development program using proprietary exon skipping technologies developed by
the Company to overcome the effects of certain genetic errors in the dystrophin
gene.
In
July 2009, the Company entered into a lease agreement with BMR-3450 Monte
Villa Parkway LLC relating to the lease of 19,108 square feet of laboratory and
office space in Bothell, Washington. The Company began occupying this space in
August 2009, and has moved its headquarters and R&D functions to this
new location. The term of the lease is
approximately 63 months, although the Company has a one-time option to
terminate the lease after 3 years time upon payment of a termination fee. The
Company will commence paying base rent of approximately $43,000 per month after
approximately 3 months. The amount of base rent is subject to an annual
increase of 3%.
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.
Note 8. Stock 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 three years.
The fair market values of stock options granted during the periods
presented were measured on the date of grant using the Black-Scholes
option-pricing model, with the following weighted average assumptions:
Three and Nine Months Ended
September 30,
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
1.2%-1.6
|
%
|
1.9%-4.4
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
9.0 years
|
|
3.6-9.1 years
|
|
Expected volatility
|
|
92.0%-94.2
|
%
|
81.0%-90.7
|
%
|
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 prescribed by ASC 718 10, 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.
9
Table
of Contents
A summary of the Companys stock option compensation activity with
respect to the nine months ended September 30, 2009 follows:
Stock Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2009
|
|
7,540,873
|
|
$
|
3.34
|
|
|
|
|
|
Granted
|
|
2,566,000
|
|
$
|
1.07
|
|
|
|
|
|
Exercised
|
|
(48,433
|
)
|
$
|
1.71
|
|
|
|
|
|
Canceled or expired
|
|
(1,129,337
|
)
|
$
|
2.81
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
8,929,103
|
|
$
|
2.79
|
|
6.51
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2009 and
expected to vest
|
|
8,853,919
|
|
$
|
2.80
|
|
3.73
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009
|
|
5,169,920
|
|
$
|
3.94
|
|
4.73
|
|
$
|
|
|
The weighted average fair value per share of stock-based payments
granted to employees during the nine months ended September 30, 2009 and
September 30, 2008 was $1.07 and $1.04, respectively. During the same
periods, the total intrinsic values of stock options exercised were $1.71 and
$1.31. The total fair value of stock options that vested for the three and nine
month periods ended September 30, 2009, was $446,000 and $1,450,000,
respectively. The total fair value of stock options that vested for the three
and nine months of 2008 was $1,019,000 and $2,637,000, respectively.
As of September 30, 2009, there was $3,262,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. These costs are expected to be recognized
over a weighted-average period of 2.3 years. As of September 30, 2008, there
was $3,022,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plan. These costs were
expected to be recognized over a weighted-average period of 2.0 years.
During the three and nine month periods ended September 30, 2009,
43,439 and 48,433 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
2000 Employee Stock Purchase Plan (ESPP) provides that eligible
employees may contribute, through payroll deductions, of up to 10% of their
cash compensation 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 ASC 718 10, 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 ESPP, based on estimated fair values.
During the three month and nine month
periods ended September 30, 2009 and 2008, the total compensation expense for participants in the ESPP was
immaterial.
In
the three month period ended June 30, 2009, the Company granted a total of
25,000 shares of restricted stock to members of its Board of Directors. These
shares vest over a period of one year.
During the three and nine month periods ended September 30, 2009,
the Company recognized compensation expense related to these shares of $24,000
and $27,000, respectively.
Also
in the three month period ended June 30, 2009, the Company granted 100,000
shares of restricted stock to its Vice President of Business Development. These
shares vest
upon
the achievement of certain performance milestones. During the three and nine
month periods ended September 30, 2009, the Company did not recognize any
compensation expense related to these shares as
the achievement of the performance
milestones was not considered probable.
In the
three
month period ended March 31, 2009, the Company granted 60,000 shares of
restricted stock to its Chief Medical Officer. These shares vest over a period
of 181 days. During the three and nine month periods ended
September 30, 2009 the Company recognized compensation expense related to
these shares of $11,000 and $82,000, respectively.
In
the three month period ended March 31, 2008, the Company granted 333,000 shares
of restricted stock to its new Chief Executive Officer. Of these shares, 100,000 vested immediately
and the remaining 233,000 vest over a period of four years. During the three month periods ended
September 30, 2009 and 2008, the Company recognized compensation expense
related to these shares of $16,000 and $16,000, respectively. During the nine month period ended
September 30, 2009 and 2008, the Company recognized compensation expense
related to these shares of $48,000 and $150,000, respectively.
10
Table
of Contents
The following are the stock-based compensation costs recognized in the
Companys statements of operations:
(in thousands)
|
|
Three Months Ended
September 30, 2009
|
|
Nine Months Ended
September 30, 2009
|
|
Research and development
|
|
$
|
205
|
|
$
|
826
|
|
General and administrative
|
|
241
|
|
624
|
|
Total
|
|
$
|
446
|
|
$
|
1,450
|
|
(in thousands)
|
|
Three Months Ended
September 30, 2008
|
|
Nine Months Ended
September 30, 2008
|
|
Research and development
|
|
$
|
342
|
|
$
|
1,233
|
|
General and administrative
|
|
677
|
|
1,404
|
|
Total
|
|
$
|
1,019
|
|
$
|
2,637
|
|
The Company records the fair value of stock options granted to
non-employees in exchange for services in accordance with ASC 505 50,
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 September 30, 2009 and 2008 was $64,000 and $63,000
respectively,
which was expensed to general and administration. The total fair value of the options
granted to non-employees during the nine months ended September 30, 2009
and 2008 was $142,000 and $180,000 respectively, which was expensed to general and administration.
Note 9. Warrants
Certain of the Companys warrants issued in connection with financing
arrangements are classified as liabilities in accordance with ASC 815 40,
Accounting for derivative financial instruments indexed to, and
potentially settled in, a Companys own stock
. These are non-cash
liabilities; the Company is not required to expend any cash to settle these
liabilities. 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 an (increase) decrease of the warrant liability and is estimated
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
Three and Nine Months Ended
September 30,
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
0.2%-2.4
|
%
|
0.9%-3.0
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
0.1-5.0 years
|
|
0.2-4.2 years
|
|
Expected volatility
|
|
83.2%-140.6
|
%
|
63.6%-78.50
|
%
|
Warrants classified as liabilities
|
|
30,203,466
|
|
9,121,946
|
|
Warrants classified as equity
|
|
2,129,530
|
|
2,129,530
|
|
Market value of stock at beginning of year
|
|
$
|
0.66
|
|
$
|
1.41
|
|
Market value of stock at end of period
|
|
$
|
1.72
|
|
$
|
1.21
|
|
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.
11
Table
of Contents
For warrants classified as permanent equity in accordance with ASC 815
40, the fair value of the warrants is recorded as additional paid-in capital
and no further adjustments are made. A
summary of the Companys warrant activity with respect
to the nine months ended
September 30, 2009 is as follows:
Warrants
|
|
Shares
|
|
Weighted
Average
Exercisable
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding at January 1, 2009
|
|
10,123,759
|
|
$
|
8.54
|
|
|
|
Granted (Note 12)
|
|
24,369,238
|
|
$
|
1.41
|
|
|
|
Canceled or expired
|
|
(2,160,001
|
)
|
$
|
|
|
|
|
Outstanding at September 30, 2009
|
|
32,332,996
|
|
$
|
3.40
|
|
4.26
|
|
Note 10. Earnings Per Share
Basic earnings per share (EPS) is calculated using the weighted
average number of common shares outstanding for the period and diluted EPS is
computed using the weighted average number of common shares and dilutive common
equivalent shares outstanding. Given
that the Company is in a loss position, there is no difference between basic
EPS and diluted EPS since the common stock equivalents would be antidilutive.
Three
Months Ended September 30,
(amounts in thousands, except per-share data)
|
|
2009
|
|
2008
|
|
Net loss
|
|
$
|
(8,090
|
)
|
$
|
(6,047
|
)
|
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
|
|
95,261
|
|
71,151
|
|
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
|
|
95,261
|
|
71,151
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
Nine
Months Ended September 30,
(amounts in thousands, except per-share data)
|
|
2009
|
|
2008
|
|
Net loss
|
|
$
|
(28,684
|
)
|
$
|
(22,812
|
)
|
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
|
|
87,493
|
|
69,160
|
|
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
|
|
87,493
|
|
69,160
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.33
|
)
|
$
|
(0.33
|
)
|
* Warrants and stock options to
purchase 41,262,099 and 19,877,459 shares of common stock as of
September 30, 2009 and 2008, respectively, were excluded from the earnings
per share calculation as their effect would have been anti-dilutive.
Note 11. Comprehensive Loss and Securities Available for Sale
For the three and nine month periods ended September 30, 2009 and
2008, the Companys comprehensive loss was equal to the net loss.
Note 12. Equity Financing
On
January 30, 2009, the Company closed a registered equity financing for net
proceeds of $15.5 million with several institutional investors. The Company
sold 14,224,202 shares of common stock at $1.16 per share, and also issued
warrants for the purchase of 14,224,202 common shares at $1.16 per share. These
warrants are exercisable starting July 30, 2009 and expire on
July 30, 2014. In connection with the equity financing, the placement
agent received a warrant for the purchase of an additional 426,726 common
shares at $1.45 per share. This warrant is exercisable starting January 30,
2009 and expires on January 30, 2014.
All of these warrants have been classified as liabilities as discussed
in Note 9, as they require the issuance of registered shares.
12
Table
of Contents
On
August 25, 2009, the Company closed a registered equity financing for net
proceeds of $32.3 million with several institutional investors. The Company
sold 24,295,775 shares of common stock at $1.42 per share, and also issued
warrants for the purchase of 9,718,310 common shares at $1.78 per share. These
warrants are exercisable starting February 25, 2010 and expire on
August 25, 2014. All of these
warrants have been classified as liabilities as discussed in Note 9, as they
require the issuance of registered shares.
These warrants are non-cash
liabilities; the Company is not required to expend any cash to settle these
liabilities.
The
Company plans to use the net proceeds from the offering to fund clinical trials
for its lead product candidates, to fund the advancement of its pre-clinical
programs, and for other research and development and general corporate
purposes.
Note 13. Income Taxes
The Companys policy is to recognize interest and/or penalties related
to income tax matters in income tax expense. The Company had no accrual for
interest or penalties on its balance sheet at September 30, 2009 and at
December 31, 2008, and has not recognized interest and/or penalties in the
statement of operations for the three and nine month periods ended
September 30, 2009.
At September 30, 2009, the Company had net deferred tax assets of
approximately $103 million. The deferred tax assets are primarily composed of
federal and state tax net operating loss carryforwards, federal and state
R&D credit carryforwards, share-based compensation expense and intangibles.
Due to uncertainties surrounding its ability to generate future taxable income
to realize these assets, a full valuation allowance has been established to
offset its net deferred tax asset. Additionally, the Internal Revenue Code
rules under Section 382 could limit the future use of its net
operating loss and R&D credit carryforwards to offset future taxable income
based on ownership changes and the value of the Companys stock.
Note 14. Property Held for Sale
The Company has listed for sale an industrial property located in
Corvallis Oregon for a sales price of $2.5 million. Selling and closing
expenses are estimated to be $0.1 million.
The Company has decided to outsource its large scale manufacturing
activities and has listed this property for sale with a commercial real estate
agent.
Note 15. Recent Accounting
Pronouncements
During
the first fiscal quarter of 2009, the Financial Accounting Standards Board
(FASB) issued ASC 820 10 65-65-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability has Significantly Decreased and
the Identifying Transactions That Are Not Orderly, ASC 320 10 65-65-1, Recognition
and Presentation of Other-Than-Temporary Impairments, and ASC 825 10 65 65-1,
Interim Disclosures about Fair Value of Financial Instruments. These were
issued to clarify the application of ASC 820 10 65-65-4, Fair Value
Measurements in the current economic environment, modify the recognition of
other-than-temporary impairments of debt securities, and require companies to
disclose the fair value of financial instruments in interim periods. These
accounting updates are effective for interim and annual periods ending after
September 15, 2009, with early adoption permitted for periods ending after
March 15, 2009, if all three or both the fair-value measurement and
other-than-temporary impairment are adopted simultaneously. The Company has adopted
all three of these updates in the third quarter of 2009, and there was no
material impact on the Companys Financial Statements or related disclosures.
In
May 2009, the FASB issued ASC 855 10, Subsequent Events, which
establishes the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the Company to disclose the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued or the date the financial statements were
available to be issued. The Company adopted ASC 855 10 during the second
quarter of 2009. There was no material
impact on the Companys financial statements.
In
April 2009, the FASB issued ASC 320 10 65-65-1, Recognition and
Presentation of Other-Than-Temporary Impairments, which requires the Company
to disclose information for interim and annual periods that enables users of
its financial statements to understand the types of available-for-sale and
held-to-maturity debt and equity securities held, including information about
investments in an unrealized loss position for which an other-than-temporary
impairment has or has not been recognized. The provisions of this update and
were adopted in the second quarter of 2009. There was no material impact on the
Companys financial statements.
In
April 2009, the FASB issued ASC 825 10 65 65-1, Interim Disclosures about
Fair Value of Financial Instruments, which requires publicly traded companies
to include disclosures about the fair value of its financial instruments
whenever it issues summarized financial information for interim reporting
periods. The provisions of this update were adopted in the second quarter of 2009.
There was no material impact on the Companys financial statements.
13
Table
of Contents
Note 16. Subsequent Events
The
Company has evaluated all other subsequent events through November 9, 2009, the
date of this filing, and determined there are no material recognized or
unrecognized subsequent events.
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results 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, 2008 and the Risk Factors contained in the 10-K
and this 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.
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, government and other
grants and research contracts, we have had no material revenues from the sale
of products or other sources and we do not expect material revenues for the
foreseeable future. We expect to continue to incur losses for the foreseeable
future as we continue our research and development efforts and enter into
additional collaborative efforts. As of September 30, 2009, our
accumulated deficit was $279 million.
Revenues for the third quarter of 2009 were $6.3 million, compared to
$5.2 million in the prior-year period, reflecting increases in research
contract revenue of $1.1 million. Revenues for the first nine months of 2009
were $12.4 million, compared to $15.8 million in the first nine months of 2008,
reflecting decreases in research contract revenues of $3.4 million.
The operating loss for the three months ended
September 30, 2009 decreased to $2.9 million from an operating loss of $5.9
million from the same period in the prior year.
The operating loss for the nine months ended September 30, 2009
decreased to $11.6 million from $24.6 million for the prior year period. The
operating loss for the third quarter of 2009 was less than the loss from the
third quarter of 2008 as the result of lower general and administrative costs
associated with the resignation of former executive officers and relocation
costs of new executive officers.
Additionally, the operating loss reduction for the nine months period
reflects the $9.9 million expense for acquired in-process research and
development from the Ercole acquisition present only in 2008 and lower spending
in 2009 on research and development related primarily to government research
contracts.
The net loss for the third quarter of 2009 was
$8.1 million, or $(0.08) per share, compared with a net loss for the third
quarter of 2008 of $6.0 million, or $(0.08) per share.
The net loss for the third quarter of 2009
includes a non-cash expense for an increase in the warrant valuation liability
of $5.0 million compared to a loss from the same source of $0.2 million during
the third quarter of 2008. For the nine months ending September 30, 2009, the
Company reported a net loss of $28.7 million, or $(0.33) per share, compared
with a net loss for the comparable period in 2008 of $22.8 million, or $(0.33)
per share. The net loss for the
nine months ending September 30, 2009 includes a non-cash expense for warrant
liability of $17.0 million compared to a gain of $1.4 million during the same period of
2008. These are non-cash
charges, the Company is not required to expend any cash to settle these
liabilities. An increase in warrant valuation is a non-cash expense and
is the result of new warrants issued and the increase in the Companys stock
price subsequent to the issuance of new warrants as a part of the equity
financings that closed in January and August of 2009. The increase or decrease on the warrant
valuation will fluctuate as the market price of the Companys stock fluctuates.
14
Table of Contents
Results of Operations
Three Months Ended September 30, 2009 Compared to the Three Months
Ended September 30, 2008
Revenues
from license fees, grants and research contracts increased to $6.3 million in
the three months ended September 30, 2009 from $5.2 million in the
comparable period in 2008. The increase in research contracts revenues was the
result of the increase in revenues from government research contracts.
Operating
loss decreased to $2.9 million in the three months ended September 30,
2009 compared to $5.9 million in the comparable period in 2008. The operating
loss declined in the third quarter of 2009 as the result of higher government
revenues combined with lower research and development expenses and lower
general and administrative expenses.
Research
and development expenses decreased to $7.5 million in the three months ended September 30,
2009 compared to $7.7 million in the comparable period in 2008. This decrease
was due primarily to decreases in research and development costs related to the
government research contracts. General
and administrative expenses declined to $1.8 million in the three months ended September 30,
2009 compared to $3.4 million in the comparable period in 2008. The third
quarter of 2008 contained higher severance and stock compensation expenses from
the resignation of a former executive officer and the relocation costs of new
executive officers.
Interest
expense and other net for the three months ended September 30, 2009
includes a write down of $0.1 million for property held for sale. The increase on warrant liability valuation
for the three months ended September 30, 2009 of $5.0 million is a non-cash expense and is the
result of the increase in the Companys stock price subsequent to the issuance
of warrants as a part of the equity financings that closed in January and August of 2009.
The decrease or increase on the warrant liability valuation will fluctuate as
the market price of the Companys stock fluctuates.
Nine Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Revenues
from license fees, grants and research contracts decreased to $12.4 million in
the nine months ended September 30, 2009 compared to $15.8 million in the
comparable period in 2008. The decrease in research contracts revenues was the
result of the decline in revenues from government research contracts.
Operating
loss decreased to $11.6 million in the nine months ended September 30,
2009 compared to $24.6 million in the comparable period in 2008. In the nine
months ended September 30, 2008, the operating loss included a one-time
charge of $9.9 million for acquired in-process research and development
associated with the acquisition of Ercole Biotech, Inc. The operating loss
in the nine months ended September 30, 2009 also decreased compared to the
comparable period in 2008 as a result of lower research and development
expenses and lower general and administrative expenses.
Research
and development expenses decreased to $17.8 million in the nine months ended September 30,
2009 compared to $22.3 million in the comparable period in 2008 due to lower
spending in 2009 on research and development related primarily to government
research projects.
General
and administrative expenses decreased to $6.2 million in the nine months ended September 30,
2009 compared to $8.2 million in the comparable period in 2008. The decrease in
general and administrative expenses was due primarily to non-cash costs
recognized in the nine months ended September 30, 2008 primarily due to
stock compensation paid to Ercole executives related to the 2008 acquisition,
severance and stock compensation expenses related to the resignation of former
executive officers, and relocation costs for new executive officers.
Net
interest income declined in the nine months ended September 30, 2009 as
compared to the comparable period in 2008 primarily due to declines in market
rates of interest on the Companys interest-earning investments and the write
off of valuations for patents, property and equipment.
The
increase in the warrant liability valuation of $17.0 million for the nine
months ended September 30, 2009 compared to the decrease in the warrant
liability valuation of $1.4 million in the comparable period in 2008, is a
non-cash expense and is the result of new warrants issued and the increase in
the Companys stock price subsequent to the issuance of new warrants as a part of the equity
financings that closed in January and August of 2009.
The decrease or increase on the warrant liability valuation fluctuates
as the market price of the Companys stock fluctuates.
Liquidity
and Capital Resources
We
have financed our operations since inception primarily through sales of common
stock and other forms of equity totaling $262.9 million and from revenues from
license fees, grants and research contracts of $54.7 million from various
sources. In January 2009, we raised net proceeds of $15.5 million in
financing through the sale of 14,224,202 shares of common stock pursuant to a
registered direct offering to a select group of institutional investors. The
investors also received warrants to purchase 14,224,202 shares of the Companys
common stock.
These warrants are exercisable starting July 30,
2009 and expire on July 30, 2014.
In addition, the placement
agent used for the equity financing received a warrant for the purchase of an
additional 426,726 common shares at $1.45 per share. This warrant is
exercisable starting January 30, 2009 and expires on January 30,
2014. All of these warrants have been
classified as liabilities as discussed in Note 9, as they require the issuance
of registered shares.
15
Table of Contents
On
August 25, 2009, the Company closed a registered equity financing for net
proceeds of $32.3 million with several institutional investors. The Company
sold 24,295,775 shares of common stock at $1.42 per share, and also issued
warrants for the purchase of 9,718,310 common shares at $1.78 per share. These
warrants are exercisable starting February 25, 2010 and expire on August 25,
2014. All of these warrants have been
classified as liabilities as discussed in Note 9, as they require the issuance
of registered shares.
These warrants are non-cash liabilities; the Company
is not required to expend any cash to settle these liabilities.
We
plan to use the net proceeds from these offering to fund clinical trials for
our lead product candidates, to fund the advancement of our pre-clinical
programs, and for other research and development and general corporate
purposes.
We
expect to continue to incur losses as we continue to expand our research and
development activities and related regulatory work and increase our
collaborative efforts. For 2009, we expect our expenditures for operations, net
of government funding, including our collaborative efforts, and our GMP
facilities to be approximately $10 to $12 million. This cost could increase if
we undertake additional collaborative efforts. However, if necessary in 2009,
we believe we can reduce our expenditures because a significant amount of our
costs are variable. Those estimated expenditures include amounts necessary to
fulfill our obligations under our various collaborative, research and licensing
agreements during 2009.
The Company believes it will continue to receive funding
from government and other sources to pursue the development of its product
candidates, and has assumed certain revenues from these awards in providing
this guidance. Should the Company not
continue to receive funding from its current contracts or not receive
additional funding, or should the timing be delayed, it may have a significant
negative impact on the Companys guidance.
Because
of the cost (up to $1.318 billion) and timeframe (of 10 to 15 years) as
published (Wiley InterScience,
ã
2007
John Wiley and Sons, LTD), and generally associated with developing a potential
drug or pharmaceutical product to the point of approval by the FDA or other
regulatory agencies for human use, our business strategy is to develop our
products up to Phase II human clinical trials and then look for third parties
to fund further development of the product and to market the product through
strategic partnerships, license agreements or other relationships. We also look
for collaborative and other efforts, such as our relationship with Cook, to
utilize other technology to increase the potential variety and reduce the cost
of identifying products. We believe that this strategy will reduce the
potential costs we would otherwise incur in developing a product and bringing
it to market. Our expected costs under our various contracts and for various
drug development products can be estimated for the next year or two, but not
much beyond that due to the uncertainty of clinical trial results, research
results and the timing of securing one or more partners to develop and market a
potential drug.
Because
of the various factors noted above and the expectation that, until we establish
revenue sources, we will license or jointly develop our prospective products to
or with strategic partners, we review, at least annually, each research program
and clinical trial based on results and progress during the prior year and
estimate our needs for that program or trial for the coming year, making
adjustments based on the progress of the program during the year.
The
Company is in the development stage. Since its inception in 1980 through September 30,
2009, the Company has incurred losses of approximately $279 million,
substantially all of which resulted from expenditures related to research and
development, general and administrative charges and acquired in-process
research and development resulting from two acquisitions. 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 RNA-based
products, obtaining regulatory approvals for such products, and bringing these
products to market. During the period required to develop these products, the
Company may require substantial additional financing. There can be 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 following twelve months, exclusive
of future receipts from billings on existing government contracts. For 2009,
the Company expects expenditures for operations, net of government funding,
including collaborative efforts and research and development activities to be
approximately $10 to $12 million. This could increase if the Company undertakes
additional collaborative efforts. However, if necessary in 2009, the Company
believes it can reduce its expenditures because a significant amount of its
costs are variable. Those estimated expenditures include amounts necessary to
fulfill the Companys obligations under its various collaborative, research and
licensing agreements during 2009. The
Company believes it will continue to receive funding from government and other
sources to pursue the development of its product candidates, and has assumed
certain revenues from these awards in providing this guidance. Should the Company not continue to receive
funding from its current contracts or not receive additional funding, or should
the timing be delayed, it may have a significant negative impact on the Companys
guidance.
16
Table of Contents
The
Company currently has a total of $61.7 million of contracted development
studies. As of September 30, 2009,
$44 million has been billed, of which $38.3 million has been received in cash
and $5.7 million is in accounts receivable.
The Company has $17.7 in development contracts remaining that have not
yet been completed and have not been billed.
The Company expects to complete the remaining contract activity and
receive the contracted revenue in 2010 and early 2011.
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. In May 2009, the Company
received an amendment from DTRA to extend the contract performance period to November 29,
2009 and a cost modification of an additional $5.9 million, increasing the
total contract amount to $33.9 million. In September 2009, the Company
received a second amendment from DTRA to extend the contract performance period
to February 28, 2011 and a cost modification of an additional $11.5
million, increasing the total contract amount to $45.4 million.
During the three month periods ended
September 30, 2009 and 2008, the Company recognized $4.4 million and $4.9
million, respectively, in research contract revenue from this contract. During
the nine month periods ended September 30, 2009 and 2008, the Company
recognized $7.5 million and $13.6 million, respectively, in research contract
revenue from this contract. To date, the Company has recognized revenues of
$32.3 million from this contract.
Funding of the remainder of the contract is anticipated in 2010 and
2011.
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 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 of these projects. The Company expects that funding
under these signed contracts will be completed over the next 12 months. During
the three month periods ended September 30, 2009 and 2008, the Company
recognized $0.3 million and $0.2 million, respectively, in research contract
revenue from these contracts. During the
nine month periods ended September 30, 2009 and 2008, the Company
recognized $1.9 million and $2.1 million, respectively, in research contract
revenue from this contract. To date, the Company has recognized revenues of
$8.8 million on these contracts. Funding of the remainder of these contracts is
anticipated in 2010.
In
May 2009, the Company entered into a contract with the U.S. Defense Threat
Reduction Agency (DTRA) to develop swine flu drugs. Under this contract, DTRA
will pay up to $4.1 million to the Company for the work to be performed by the
Company. The work will involve the application of the Companys proprietary PMO
and PMO
plu
s antisense chemistry and the Company
plans to conduct preclinical development of at least one drug candidate and
demonstrate it is effective by testing it on animals. During the three month
period ended September 30, 2009, the Company recognized $0.7 million in
revenue under this contract. During the
nine month period ended September 30, 2009, the Company recognized $1.1
million in revenue under this contract.
Also
in May 2009, the Company entered into a
$2.5 million contract with Childrens National Medical Center in
Washington, D.C. to support preclinical studies in the development of AVI-4658
for treatment of Duchenne Muscular Dystrophy. The work will be conducted with
Childrens National collaborators Eric Hoffman, Ph.D., an authority on DMD and
Professor of Pediatrics, and Edward Connor, M.D., Director, Office of
Investigational Therapeutics and Professor of Pediatrics. AVI will serve as a
subcontractor to a grant awarded to Childrens National by the U.S. Department
of Defense.
During the three month period ended September 30,
2009, the Company recognized $0.8 million in revenue under this contract.
During the nine month period ended September 30, 2009, the Company
recognized $1.8 million in revenue under this contract.
In
September 2009, the Company and Charleys Fund, Inc. (Charleys Fund),
a nonprofit organization that funds drug discovery and development initiatives
specific to DMD, entered into the First Amendment to an existing Sponsored
Research Agreement (the Amendment). The Amendment pertains to certain
provisions of the Sponsored Research Agreement by and between the Company and
Charleys Fund entered into effective October 12, 2007 (the Agreement).
Under the terms of the Amendment, the Company was awarded an additional $3
million in
sponsored research funds, for
a total of $5 million
from Charleys Fund to support a new product
development program using proprietary exon skipping technologies developed by
the Company to overcome the effects of certain genetic errors in the dystrophin
gene.
17
Table of Contents
In
July 2009, the Company entered into a lease agreement with BMR-3450 Monte
Villa Parkway LLC relating to the lease of 19,108 square feet of laboratory and
office space in Bothell, Washington. The Company began occupying this space in August 2009,
and has moved its headquarters and R&D functions to this new location. The term of the lease is approximately 63
months, although the Company has a one-time option to terminate the lease after
3 years time upon payment of a termination fee. The Company will commence
paying base rent of approximately $43,000 per month after approximately 3
months. The amount of base rent is subject to an annual increase of 3%.
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.
Our
cash, cash equivalents and short-term securities were $50.4 million at September 30,
2009, compared with $11.5 million at December 31, 2008. The increase of
$38.9 million was due primarily to net proceeds of $47.8 million from the sale
of common stock and issuance of stock warrants from two separate equity
financing transactions that closed in January and August of 2009.
The cash from financing activities was partially
offset by cash used in operations of $7.7 million and costs related to
acquisitions of patents and fixed assets of $1.0 million.
We
do not expect any material revenues in 2009 from our business activities except
for revenues from U.S. government contracts and other agreements. We expect
that our cash requirements for the next twelve months will be satisfied by existing
cash resources and these revenues. To fund our operations beyond the next
twelve months, we may need to raise additional capital. We will continue to
look for opportunities to finance our ongoing activities and operations through
accessing corporate partners or the public equity markets, as we currently have
no credit facility and do not intend to seek one.
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.
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 2008 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As
of September 30, 2009, 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.
Changes in Internal Controls Over Financial
Reporting
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.
18
Table of Contents
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
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. In addition, there may be additional risks not known to us or understood
by us, which may adversely affect our financial condition, results of
operations, and the price of our stock.
If we fail to continue to attract significant 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 next
twelve months. 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, 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 were 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 in the early stages of clinical development with respect to our RNA-based
pharmaceutical products. We have devoted almost all of our resources to
research and development of our product candidates, 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
approvals. 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 approvals.
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 rely on U.S. government contracts to support
several important R&D programs
.
We
rely on U.S. government contracts and awards to fund several of our development
programs, including those for the Ebola, Marburg, Junin and swine flu
viruses. The termination of one or more
of these contracts, whether due to lack of funding, for convenience, or
otherwise, or the occurrence of delays or product failures in connection with
one or more of these contracts, could negatively impact our financial
condition. Furthermore, we can give no assurance that we would be able to
procure new U.S. government contracts to offset the revenues lost as a result
of any termination of our contracts.
The
funding of U.S. government programs is subject to Congressional appropriations.
Congress generally appropriates funds on a fiscal year basis even though a
program may extend over several fiscal years. Consequently, programs are often
only partially funded initially and additional funds are committed only as
Congress makes further appropriations. In the event that appropriations for one
of our programs become unavailable, or are reduced or delayed, our contracts
may be terminated or adjusted by the government, which could have a negative
impact on our future sales under such a contract or subcontract. From time to
time, when a formal appropriation bill has not been signed into law before the
end of the U.S. governments fiscal year, Congress may pass a continuing
resolution that authorizes agencies of the U.S. government to continue to
operate, generally at the same funding levels from the prior year, but does not
authorize new spending initiatives, during a certain period. During such a
period (or until the regular appropriation bills are passed), delays can occur
in government procurement due to lack of funding, and such delays can affect
our operations during the period of delay.
In
addition, U.S. government contracts generally also permit the government to
terminate the contract, in whole or in part, without prior notice, at the
governments convenience or for default based on performance. If one of our
contracts is terminated for convenience, we would generally be entitled to
payments for our allowable costs and would receive some allowance for profit on
the work performed. If one of our contracts is terminated for default, we would
generally be entitled to payments for our work that has been accepted by the
government. A termination arising out of our default could expose us to
liability and have a negative impact on our ability to obtain future contracts.
19
Table of Contents
If we fail to receive or experience delays in receiving
necessary regulatory approvals, we will be unable to develop and 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 preclinical and 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 expect
to develop the therapeutic product candidates to treat Ebola Virus and Marburg
Virus under defined regulatory pathways using the Animal Rule mechanism.
This mechanism has become available only relatively recently and has been
infrequently used. This process has yet to be well tested and may present
challenges for gaining final regulatory approval for these product candidates.
If we lose key personnel or are unable to attract and retain
additional, highly skilled personnel required for our activities, our business
will suffer.
The
loss of 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 now
have added emphasis on product development in our business plan. In addition,
we are building a new chemistry-led research capability in Bothell, Washington
and have outsourced our large scale manufacturing capability in Corvallis,
Oregon. This short term transformation of our skill base has placed additional
emphasis on our ability to attract and retain skilled personnel.
Asserting, defending and maintaining our intellectual
property rights could be challenging and costly, and our failure to do so could
harm our ability to compete and impair the outcome of our operations. The pharmaceutical environment is highly
competitive and competing intellectual property could limit our ability to
protect our products.
Our
success will depend on our existing patents and licenses (185 patents (domestic
and foreign) issued or licensed to us and 176 (domestic and foreign) pending
patent applications) and our ability to obtain additional patents in the
future. We license patents from other parties for certain complementary
technologies.
Some
of our patents on core technologies expired in 2008, including for our general
PMO chemistry. Based on patented improvements and inventive additions to such
core patents, however, we believe the patent protection for our products in
development extend beyond 2020.
We
cannot be certain that 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. Pharmaceutical research and development is
highly competitive; others may file patents first.
We are aware of a patent
that has issued that may provide the basis for the patent holder to assert that
our drug AVI-4658 infringes on such patent.
We intend to vigorously defend any such claim if it should be asserted
and believe that we may be able to invalidate some or all of the claims covered
by this patent. In any case, we believe that we have freedom to and are moving
forward with our ongoing clinical trials and drug development efforts for this
drug candidate.
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. 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.
20
Table of Contents
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.
We depend on our partners and contractors for critical functions.
Therefore, if our collaborations or strategic relationships are unsuccessful,
our business could be harmed.
Our
strategic relationships are important to our success. The discovery,
development and marketing of many of our key therapeutic products are or will
be dependent in large part on the efforts of our strategic partners. Our strategic partners may be unsuccessful in
their attempt to develop our potential products due to circumstances that are
beyond our control. 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.
We
anticipate entering into relationships with larger pharmaceutical companies to
conduct late stage clinical trials and to market our products. We also plan to
use contract manufacturing for late stage clinical and commercial quantities of
our products. We may be unable to enter into partnerships or other
relationships, which could impede our ability to bring our products to market
.
Any such partnerships, if entered into at
all, may be on less than favorable terms and may not result in the successful
development or marketing of our products. If we are unsuccessful in
establishing advantageous clinical testing, manufacturing and marketing
relationships, we are not likely to generate significant revenues and become
profitable.
To
fully realize the potential of our products, including development, production
and marketing, we may need to establish other strategic relationships.
We may get unexpected results from, or encounter challenges
from our clinical studies.
All
clinical studies, including phase III or pivotal studies, need to be agreed
with regulatory authorities beforehand and successfully executed. Preclinical as well as clinical studies are
experiments designed to test a theory or hypothesis, and by their very nature,
the result is unknown at the time the study is started. Sometimes unexpected results
occur and the product does not demonstrate effectiveness (even though it might
be effective), or an unexpected safety issue may be encountered.
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 for the nine months ended September 30,
2009 and $24.0 million for the year ended December 31, 2008. As of September 30,
2009, our accumulated deficit was $279 million. Our losses have resulted
principally from expenses incurred in research and development of our
technology and products and from general and administrative expenses that we
have incurred while building our business infrastructure. We expect to continue
to incur significant operating losses in the future as we continue our research
and development efforts and seek to obtain regulatory approval of our products.
Our ability to achieve profitability depends on our ability to raise additional
capital, complete development of our products, obtain regulatory approvals and
market our products. It is uncertain when, if ever, we will become profitable.
Our
ability to be successful against our competitors cannot be assured.
The
biopharmaceutical industry is highly competitive, with a number of
well-established firms performing leading-edge research for the development of
new products to treat a wide range of diseases. These companies have obtained
patents for their intellectual property rights that could preclude other
companies from using similar technologies in their product development.
Moreover, companies that are focused on the treatment of similar diseases are
in effect competing for the same limited number of potential patients. Even if we are able to develop new products for
market, there can be no assurance that we will be able to compete effectively
or profitably against our competitors.
We may be subject to clinical trial claims and our insurance
may not be adequate to cover damages.
We
believe we carry adequate insurance for our current product development activities.
In the future, commercial sale and use of our products may or might expose us
to the risk of clinical trial 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.
21
Table of Contents
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 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 the Washington Department of Ecology (DOE) and local fire departments,
without any material noncompliance issues in such inspections to date. 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 million shares of common stock and 20
million 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 holders of any preferred shares
that our Board of Directors may issue in the future may affect the rights of
the holders of shares of common stock. For example, our Board of Directors may
allow the issuance of preferred shares with more voting rights, preferential
dividend payments or more favorable rights upon dissolution than the shares of
common stock or special rights to elect directors.
In
addition, we have a classified Board of Directors, which means that only
one-half of our directors are eligible for election each year. Therefore, if
shareholders wish to change the composition of our Board of Directors, it could
take at least two years to remove a majority of the existing directors or to
change all directors. Having a classified Board of Directors may, in some
cases, delay mergers, tender offers or other possible transactions that may be
favored by some or a majority of our shareholders and may delay or frustrate
action by shareholders to change the then current Board of Directors and management.
The
Oregon Control Share Act and Business Combination Act may limit parties that
acquire a significant amount of voting shares from exercising control over us
for specific periods of time. These acts may lengthen the period for a proxy
contest or for a person to vote their shares to elect the majority of our Board
and change management.
Our stock price is volatile and may fluctuate due to factors
beyond our control.
Historically,
the market price of our stock has been highly volatile. The following types of
announcements could have a significant impact on the price of our common stock:
positive or negative results of testing and clinical trials by ourselves,
strategic partners, or competitors; delays in entering into corporate
partnerships; technological innovations or commercial product introductions by
ourselves or competitors; changes in government regulations; developments
concerning proprietary rights, including patents and litigation matters; public
concern relating to the commercial value or safety of any of our products;
financing or other corporate transactions; or general stock market conditions.
The significant number of our shares of Common Stock
eligible for future sale may cause the price of our common stock to fall.
We
have outstanding 110,433,113 shares of common stock as of September 30,
2009 and all are eligible for sale under Rule 144 or are otherwise freely
tradable. In addition:
·
Our employees and others
hold options to buy a total of 8,929,103 shares of common stock, of which
5,169,920 options were exercisable at September 30, 2009. The options
outstanding have exercise prices between $0.60 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.
·
There are outstanding warrants to buy
32,332,996 shares of common stock as of September 30, 2009 with exercise
prices ranging from $.0003 to $35.63 per share. Outstanding warrants to buy
30,203,466 shares of common stock are issuable upon exercise of outstanding
warrants for common stock registered for resale and may be freely sold when
issued, subject to the limitations imposed by applicable securities laws.
22
Table of Contents
Warrants
to purchase an aggregate of 2,129,530 shares of common stock are not registered
for resale. These warrants include warrants to purchase an aggregate of shares
of common stock were issued to ISIS Pharmaceuticals, Inc. (ISIS) in
exchange for warrants to purchase shares of Ercole capital stock previously
issued by Ercole to ISIS prior to the Companys acquisition of Ercole. Warrants
to purchase an aggregate of 1,683,545 shares of common stock issued in 2000 and
prior were issued as a part of a technology licensing agreement and to a former
employee.
·
We may issue options to purchase up to an
additional 703,374 shares of common stock as of September 30, 2009 under
our stock option plans, which also will be fully saleable when issued except to
the extent limited under Rule 144 for resales by our officers and
directors.
·
We are authorized to sell up to 48,196 shares
of common stock under our Employee Stock Purchase Plan to our full-time
employees, nearly all of whom are eligible to participate.
Sales
of substantial amounts of shares into the public market could lower the market
price of our common stock.
Our common
stock is listed on The NASDAQ Global Market and we may not be able to maintain
that listing, which may make it more difficult for investors to sell shares of
our common stock.
Our common stock is listed
on The NASDAQ Global Market. The NASDAQ Global Market has several quantitative
and qualitative requirements with which companies must comply in order to
maintain this listing, including a $1.00 minimum bid price per share and $50
million minimum value of listed securities. If a listed company fails to meet
the $1.00 minimum bid price per share requirement for 30 consecutive days, it
will receive a notice from NASDAQ mandating that the company achieve compliance
with the minimum bid price per share listing requirement within 90 calendar
days. Our stock price is currently above
$1.00; however, our stock price was priced at $0.99 as recently as May 11,
2009. There can be no assurance that we
will be able to maintain compliance with the minimum bid price per share
requirement in the future.
On October 16, 2008,
NASDAQ suspended the minimum bid price per share requirement and market value
for publicly held shares requirements for all listed companies through August 2,
2009. Recently, NASDAQ announced that it
reinstated the minimum bid price per share requirement and market value for
publicly held shares requirements for all listed companies on August 3,
2009. As of the date of this report, we meet these listing requirements.
In addition to the foregoing,
if we are not listed on The NASDAQ Stock Market and/or if our public float
remains below $75 million, we may be limited in our ability to file new shelf
registration statements on SEC Form S-3 and/or to fully use one or more
registration statements on SEC Form S-3. We have relied significantly on
shelf registration statements on SEC Form S-3 for most of our financings
in recent years, so any such limitations might have a material adverse effect
on our ability to raise the capital we need.
We do
not expect to pay dividends in the foreseeable future.
We
have never paid dividends on our shares of common stock and do not intend to
pay dividends in the foreseeable future. Therefore, you should only invest in
our common stock with the expectation of realizing a return through capital
appreciation on your investment. You should not invest in our common stock if
you are seeking dividend income.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None
Item 4. Submission of Matters to
a Vote of Security Holders.
None.
Item 5. Other Information.
None.
23
Table of Contents
Item 6. Exhibits
|
|
|
|
Incorporated by Reference to Filings Indicated
|
Exhibit No
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
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
|
|
|
4.4
|
|
Form of
Common Stock Purchase Warrant
|
|
8-K
|
|
1-14895
|
|
4.4
|
|
1/30/09
|
|
|
4.5
|
|
Form of
Common Stock Purchase Warrant
|
|
8-K
|
|
1-14895
|
|
4.1
|
|
8/24/09
|
|
|
10.76
|
|
Lease
by and between BMR-3450 MONTE VILLA PARKWAY LLC, a Delaware limited liability
company, and AVI BIOPHARMA, INC., an Oregon corporation
|
|
|
|
|
|
|
|
|
|
X
|
10.77
|
|
Amendment
of Contract between AVI BioPharma, inc. and the U.S. Defense Threat Reduction
Agency (contract no HDTRA 1-07-C-0010), effective September 30, 2009
|
|
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Certification
of the Companys President and Chief Executive Officer, Leslie Hudson, Ph.D,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of Chief Financial Officer, J
. David
Boyle II, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
32
|
|
Certification
of the Companys Chief Executive Officer, Leslie Hudson, Ph.D, and Chief
Financial Officer, J. David Boyle II, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
Portions
of the materials in the exhibits 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
24
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 9,
2009
|
AVI
BIOPHARMA, INC.
|
|
|
|
|
|
By:
|
/s/
LESLIE HUDSON, Ph.D.
|
|
Leslie
Hudson, Ph.D.
|
|
President,
Chief Executive Officer and Director
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
By:
|
/s/
J. DAVID BOYLE II
|
|
J.
David Boyle II
|
|
Senior
Vice President and Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
25
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