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 June 30,
2010
OR
o
|
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
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.)
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|
|
|
3450 Monte Villa Parkway, Suite 101,
Bothell, Washington
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98021
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Issuers telephone number, including area
code: (
425) 354-5038
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark 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
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer
o
|
|
Accelerated filer
x
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|
|
|
Non-accelerated filer
o
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|
Smaller Reporting Company
o
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(Do not check if a smaller reporting
company)
|
|
|
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.
Common Stock with $0.0001 par value
|
|
111,959,610
|
(Class)
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|
(Outstanding as of August 6, 2010)
|
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)
|
|
|
|
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June 30,
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December 31,
|
|
|
|
2010
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2009
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|
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|
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Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,742
|
|
$
|
48,275
|
|
Accounts receivable
|
|
2,153
|
|
2,085
|
|
Other current assets
|
|
1,037
|
|
950
|
|
Total Current Assets
|
|
39,932
|
|
51,310
|
|
|
|
|
|
|
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Property held for sale
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2,372
|
|
2,372
|
|
Property and Equipment, net of accumulated depreciation
and amortization of $14,393 and $14,026
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|
2,184
|
|
2,466
|
|
Patent Costs, net of accumulated amortization of $1,829
and $1,762
|
|
4,068
|
|
3,759
|
|
Other assets
|
|
111
|
|
120
|
|
Total Assets
|
|
$
|
48,667
|
|
$
|
60,027
|
|
|
|
|
|
|
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Liabilities and Shareholders
Equity
|
|
|
|
|
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Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,369
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|
$
|
1,381
|
|
Accrued employee compensation
|
|
1,837
|
|
922
|
|
Long-term debt, current portion
|
|
79
|
|
77
|
|
Warrant valuation
|
|
29,540
|
|
27,609
|
|
Deferred revenue
|
|
3,366
|
|
3,428
|
|
Other liabilities
|
|
77
|
|
90
|
|
Total Current Liabilities
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|
37,268
|
|
33,507
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
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Long-term debt, non-current portion
|
|
1,883
|
|
1,924
|
|
Other long-term liabilities
|
|
1,075
|
|
966
|
|
|
|
|
|
|
|
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; 110,339,777 and 110,495,587 issued and outstanding
|
|
11
|
|
11
|
|
Additional paid-in capital
|
|
301,139
|
|
299,088
|
|
Deficit accumulated during the development stage
|
|
(292,709
|
)
|
(275,469
|
)
|
Total Shareholders Equity
|
|
8,441
|
|
23,630
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
48,667
|
|
$
|
60,027
|
|
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)
|
|
|
|
|
|
|
|
|
|
July 22, 1980
|
|
|
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Three months ended June 30,
|
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Six months ended June 30,
|
|
(Inception) through
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from license fees, grants and research
contracts
|
|
$
|
3,997
|
|
$
|
2,945
|
|
$
|
5,201
|
|
$
|
6,095
|
|
$
|
65,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
6,931
|
|
5,804
|
|
13,020
|
|
10,299
|
|
243,452
|
|
General and administrative
|
|
4,733
|
|
2,206
|
|
7,577
|
|
4,426
|
|
81,597
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
29,461
|
|
Operating loss
|
|
(7,667
|
)
|
(5,065
|
)
|
(15,396
|
)
|
(8,630
|
)
|
(289,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income and other, net
|
|
51
|
|
(31
|
)
|
87
|
|
(15
|
)
|
8,410
|
|
(Increase) decrease on warrant valuation
|
|
(9,040
|
)
|
(14,572
|
)
|
(1,931
|
)
|
(11,950
|
)
|
1,519
|
|
Realized gain on sale of short-term
securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
3,863
|
|
Write-down of short-term
securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
(17,001
|
)
|
|
|
(8,989
|
)
|
(14,603
|
)
|
(1,844
|
)
|
(11,965
|
)
|
(3,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(16,656
|
)
|
$
|
(19,668
|
)
|
$
|
(17,240
|
)
|
$
|
(20,595
|
)
|
$
|
(292,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.15
|
)
|
$
|
(0.23
|
)
|
$
|
(0.16
|
)
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
for computing basic and diluted loss per share (in thousands)
|
|
110,383
|
|
85,664
|
|
110,404
|
|
83,235
|
|
|
|
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
|
|
|
|
Six months ended June 30,
|
|
(Inception) through
|
|
|
|
2010
|
|
2009
|
|
June 30, 2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(17,240
|
)
|
$
|
(20,595
|
)
|
$
|
(292,709
|
)
|
Adjustments to reconcile net loss to net cash
flows used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
698
|
|
723
|
|
18,380
|
|
Loss on disposal of assets
|
|
237
|
|
221
|
|
1,542
|
|
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
|
|
|
|
|
|
928
|
|
Stock-based compensation
|
|
2,031
|
|
1,081
|
|
24,728
|
|
Conversion of interest accrued to common stock
|
|
|
|
|
|
8
|
|
Acquired in-process research and development
|
|
|
|
|
|
29,461
|
|
Increase (decrease) on warrant valuation
|
|
1,931
|
|
11,950
|
|
(1,519
|
)
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
Accounts receivable and other current assets
|
|
(143
|
)
|
1,446
|
|
(3,043
|
)
|
Net increase in accounts payable, accrued employee
compensation, and other liabilities
|
|
1,938
|
|
(831
|
)
|
7,212
|
|
Net cash used in operating activities
|
|
(10,548
|
)
|
(6,005
|
)
|
(201,874
|
)
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(340
|
)
|
(142
|
)
|
(18,209
|
)
|
Patent costs
|
|
(622
|
)
|
(555
|
)
|
(7,865
|
)
|
Purchase of marketable securities
|
|
|
|
114
|
|
(112,986
|
)
|
Sale of marketable securities
|
|
|
|
|
|
117,724
|
|
Acquisition costs
|
|
(3
|
)
|
|
|
(2,392
|
)
|
Net cash used in investing activities
|
|
(965
|
)
|
(583
|
)
|
(23,728
|
)
|
|
|
|
|
|
|
|
|
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
|
|
19
|
|
15,513
|
|
262,956
|
|
Repayments of long-term debt
|
|
(39
|
)
|
(37
|
)
|
(226
|
)
|
Buyback of common stock pursuant to rescission
offering
|
|
|
|
|
|
(289
|
)
|
Withdrawal of partnership net assets
|
|
|
|
(43
|
)
|
(177
|
)
|
Issuance of convertible debt
|
|
|
|
|
|
80
|
|
Net cash provided by (used in) financing
activities
|
|
(20
|
)
|
15,433
|
|
262,344
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
(11,533
|
)
|
8,845
|
|
36,742
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
48,275
|
|
11,192
|
|
|
|
End of period
|
|
$
|
36,742
|
|
$
|
20,037
|
|
$
|
36,742
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
47
|
|
$
|
48
|
|
$
|
352
|
|
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
|
|
Assumption of liabilities for Ercole assets
|
|
$
|
|
|
$
|
|
|
$
|
2,124
|
|
See accompanying notes to financial statements.
4
Table of
Contents
AVI BIOPHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements reflect the accounts of AVI
BioPharma, Inc. (the Company) and its consolidated subsidiaries. The
accompanying unaudited condensed consolidated balance sheet data as of December 31,
2009 was derived from audited financial statements not included in this report.
The accompanying unaudited condensed consolidated financial statements were
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP) and the rules and regulations of the
U.S. Securities and Exchange Commission (SEC). Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements.
Management has determined that the
Company operates one segment: the development of pharmaceutical products on its
own behalf or in collaboration with others.
The accompanying unaudited
condensed consolidated financial statements reflect all adjustments consisting
only of normal recurring adjustments, which, in the opinion of management, are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Companys annual
report on Form 10-K for the year ended December 31, 2009. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
Estimates and Uncertainties
The
preparation of financial statements in conformity with GAAP 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Commitments and Contingencies
As
of the date of this report, the Company is not a party to any material legal
proceedings with respect to itself, its subsidiaries, or any of its material
properties. In the normal course of business, the Company may from time to time
be named as a party to various legal claims, actions and complaints, including
matters involving employment, intellectual property, effects from the use
of therapeutics utilizing its 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 in accordance with 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. There are three levels of inputs that may be used to measure
fair-value:
·
Level 1
quoted prices for identical instruments in active markets;
·
Level 2
quoted 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 3
valuations derived from valuation techniques in which one or more significant
value drivers are unobservable.
5
Table of Contents
The
Companys assets and liabilities measured at fair value on a recurring basis
consisted of the following as of the date indicated:
|
|
Fair Value Measurement as of June 30, 2010
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Cash equivalents
|
|
$
|
36,742
|
|
$
|
36,742
|
|
|
|
|
|
Other current assets
|
|
|
457
|
|
|
|
|
$
|
457
|
|
|
|
Total assets
|
|
$
|
37,199
|
|
$
|
36,742
|
|
$
|
457
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of June 30, 2010
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
29,540
|
|
|
|
|
|
$
|
29,540
|
|
Total liabilities
|
|
$
|
29,540
|
|
$
|
|
|
$
|
|
|
$
|
29,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Cash equivalents
|
|
$
|
48,275
|
|
$
|
48,275
|
|
|
|
|
|
Other current assets
|
|
|
455
|
|
|
|
|
$
|
455
|
|
|
|
Total assets
|
|
$
|
48,730
|
|
$
|
48,275
|
|
$
|
455
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Warrants
|
|
$
|
27,609
|
|
$
|
|
|
$
|
|
|
$
|
27,609
|
|
Total liabilities
|
|
$
|
27,609
|
|
$
|
|
|
$
|
|
|
$
|
27,609
|
|
A
reconciliation of the change in value of the Companys warrants for the three
months ended June 30, 2010 is as follows:
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
20,500
|
|
Change in value of warrants
|
|
9,040
|
|
Balance at June 30, 2010
|
|
$
|
29,540
|
|
A
reconciliation of the change in value of the Companys warrants for the six
months ended June 30, 2010 is as follows:
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
27,609
|
|
Change in value of warrants
|
|
1,931
|
|
Balance at June 30, 2010
|
|
$
|
29,540
|
|
See Note 6 Warrants for
additional information related to the determination of fair value of the
warrants. The carrying amounts reported in the balance sheets for cash,
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.
6
Table of Contents
Note 3.
Property Held for Sale
The
Company has decided to outsource its large scale manufacturing activities. As a
result, the Company has listed for sale at a sales price of $2.5 million an
industrial property located in Corvallis, Oregon where it had previously
intended to manufacture its product candidates and products. Selling and
closing expenses are estimated to be $0.1 million. The Company has used a Level
3 fair value measure with the use of an independent appraisal to value this
property.
Note 4.
U.S. Government Contracts
In
the periods presented, substantially all of the revenue generated by the
Company was derived from research contracts with the U.S. government. As of June 30,
2010, the Company had contracts with the U.S. government pursuant to which its
is entitled to receive up to an aggregate of $83.7 million for development of
its product candidates, of which $53.5 million had been billed to the U.S.
government and $30.2 million of which relates to development that has not yet
been completed and has not been billed. The following is a description of such
contracts.
January 2006 Agreements (Ebola and Marburg
Host Factors, Dengue, Anthrax and Ricin)
In
January 2006, the final version of the 2006 defense appropriations act was
enacted, which act included an allocation of $11.0 million to fund the Companys
ongoing defense-related programs under certain executed contracts. 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 RNA-based drugs against Ebola and Marburg
viruses. As of June 30, 2010, the Company has recognized revenue of $9.7
million with respect to these contracts.
December 2006 Agreement (Ebola, Marburg and
Junín Viruses)
In
December 2006, the Company entered into a two-year research contract with
Defense Threat Reduction Agency (DTRA), an agency of the U.S. Department of
Defense (the DoD), pursuant to which the Company was entitled to $28.0
million to fund its development of antisense therapeutics to treat the effects
of Ebola, Marburg and Junín hemorrhagic fever viruses. In May 2009, this
contract was amended to extend the term of the contract until November 2009
and to increase funding by $5.9 million to an aggregate of $33.9 million. In June 2009,
the contract was amended again to extend the term of the contract to February 2011
and to increase funding by an additional $11.5 million to an aggregate of $45.4
million. As of June 30, 2010, the Company has recognized revenue of $37.8
million with respect to this contract.
May 2009 Agreement (H1N1/Influenza)
In
May 2009, the Company entered into a contract with DTRA to develop swine
flu drugs. Under this contract, DTRA will pay up to $4.1 million to the Company
for the work involving 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. In March 2010,
the contract was amended to include testing against additional influenza
strains including H5N1 (avian flu), Tamiflu®-resistant H1N1 (swine flu) and
H3N2 (seasonal flu) and funding increased by $4.0 million to an aggregate of
$8.1 million. As of June 30, 2010, the Company has recognized revenue of
$3.2 million with respect to this contract.
June 2010 Agreement (H1N1/Influenza)
On
June 4, 2010, the Company entered into a contract with the DTRA to
advance the development of AVI-7100, which was previously designated AVI-7367
and which has been renumbered by the Company, as a medical countermeasure
against the pandemic H1N1 influenza virus in cooperation with the Transformational
Medical Technologies program (TMT) of the DoD. The contract provides for
funding of up to $18 million to advance the development of AVI-7100, including
studies enabling an Investigational New Drug (IND) application with the U.S.
Food and Drug Administration (FDA), the development of an intranasal delivery
formulation, and the funding of a Phase 1 clinical program to obtain human
safety data to support potential use under an Emergency Use Authorization. As
of June 30, 2010, the Company has recognized revenue of $0.4 million with
respect to this contract.
7
Table of Contents
The
following table sets forth the impact on revenue of each of the contracts with
the U.S. government on the Companys results of operations for the three and
six months ended June 30, 2010 and 2009.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
January 2006 Agreements
(Ebola and
Marburg host factor, Dengue, Anthrax and Ricin)
|
|
$
|
147
|
|
$
|
243
|
|
$
|
468
|
|
$
|
1,623
|
|
December 2006 Agreement
(Ebola,
Marburg and Junín Viruses)
|
|
2,063
|
|
1,333
|
|
2,608
|
|
3,066
|
|
May 2009 Agreement
(H1N1)
|
|
1,187
|
|
356
|
|
1,444
|
|
356
|
|
June 2010 Agreement
(H1N1)
|
|
433
|
|
|
|
433
|
|
|
|
Other Agreements
|
|
167
|
|
1,013
|
|
248
|
|
1,050
|
|
Total
|
|
$
|
3,997
|
|
$
|
2,945
|
|
$
|
5,201
|
|
$
|
6,095
|
|
Note 5.
Stock Compensation
Valuation Assumptions
Stock-based
compensation costs are based on the fair value calculated from the
Black-Scholes option-pricing model on the date of grant for stock options. 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 assumptions:
|
|
Three and Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Risk-free interest rate
|
|
1.9%-2.8
|
%
|
1.2%-1.4
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
5.3-5.8 years
|
|
9.0 years
|
|
Expected volatility
|
|
83.3%-87.9
|
%
|
92.0%-92.8
|
%
|
The
risk-free interest rate is estimated using an average of treasury bill interest
rates that correlate to the prevailing interest rates at the time of grant. 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 of the Companys
common stock. The amounts estimated according to the Black-Scholes option
pricing model may not be indicative of the actual values realized upon the
exercise of these options by the holders.
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.
Stock Options
The
Company sponsors a 2002 Equity Incentive Plan (the Plan) pursuant to which it
may issue options to purchase its common stock to the Companys employees,
directors and service providers. In general, stock options granted under the
Plan vest over a three year period, with one-third of the underlying shares
vesting on each anniversary of grant, and have a ten year term. As of June 30,
2010, 2,425,755 shares of common stock remain available for future grant under
the Plan.
8
Table of Contents
A
summary of the Companys stock option compensation activity with respect to the
six months ended June 30, 2010 follows:
Stock
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2009
|
|
8,932,811
|
|
$
|
2.79
|
|
|
|
|
|
Granted
|
|
2,641,365
|
|
|
1.43
|
|
|
|
|
|
Exercised
|
|
(16,955
|
)
|
|
1.11
|
|
|
|
|
|
Canceled or expired
|
|
(2,195,253
|
)
|
|
4.52
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
9,361,968
|
|
|
2.00
|
|
5.97
|
|
$
|
2,394,171
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2010 and expected to vest
|
|
9,200,698
|
|
|
2.01
|
|
5.91
|
|
|
2,351,800
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
5,469,467
|
|
|
2.47
|
|
3.80
|
|
|
1,231,691
|
|
The
weighted-average fair value per share of stock-based awards, including stock
options and restricted stock grants, granted to employees during the six months
ended June 30, 2010 and 2009 was $1.03 and $0.87, respectively. During the
same periods, the total intrinsic value of stock options exercised was $4,278
and $1,991, respectively, and the total fair value of stock options that vested
was $2,288,000 and $973,000, respectively. The total fair value of stock
options vested for the three months ended June 30, 2010 and 2009 was $1,629,000
and $456,000, respectively.
Restricted Stock Awards
In
the three period ended June 30, 2010, the Company granted a total of
20,000 shares of restricted stock to members of its Board of Directors. These
shares vest over a period of approximately one year. During the three and
six month periods ended June 30, 2010, the Company recognized compensation
expense related to these shares of $3,000.
In
the three months ended June 30, 2009, the Company granted 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 six months ended June 30,
2009, the Company recognized compensation expense related to these shares of $0
and $3,000, respectively.
Also
in the three months ended June 30, 2009, the Company granted 100,000
shares of restricted stock to its Chief Business Officer. These shares vest
upon the achievement
of certain performance milestones. During the three and six months ended
June 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 and the restricted stock was cancelled.
In
the three months ended March 31, 2009, the Company granted 60,000 shares
of restricted stock to its Chief Medical Officer. These shares vested over a
period of 181 days. During the three and six months ended June 30,
2009 the Company recognized compensation expense related to these shares of
$41,000 and $70,000, respectively.
In
the three months ended March 31, 2008, the Company granted 333,000 shares
of restricted stock to its former Chief Executive Officer. Of these
shares, 100,000 vested immediately and the remaining 233,000 vest over a period
of four years. In April 2010, the former Chief Executive Officer
tendered his resignation at the request of the Board of Directors and pursuant
to the terms of the related separation agreement, 116,500 shares of previously
granted restricted stock immediately became fully vested and exercisable at the
effective date of the separation agreement. During the three months ended
June 30, 2010 and 2009, the Company recognized compensation expense
related to these shares of $118,000 and $16,000, respectively. During the
six month periods ended June 30, 2010 and 2009, the Company recognized
compensation expense related to these shares $134,000 and $35,000, respectively.
|
|
Restricted
Stock
Awards
|
|
Weighted-Average
Grant Date Fair
Value
|
|
|
|
(in thousands)
|
|
Balance as of December 31, 2009
|
|
300
|
|
$
|
1.09
|
|
Granted
|
|
20
|
|
1.30
|
|
Vested
|
|
(200
|
)
|
1.09
|
|
Forfeited or canceled
|
|
(100
|
)
|
1.10
|
|
Balance as of June 30, 2010
|
|
20
|
|
$
|
1.30
|
|
9
Table of Contents
The weighted-average grant-date fair value of
restricted stock awards is based on the market price of the Companys common
stock on the date of grant. The grant-date fair value of the restricted stock
award made
during the three and six months ended June 30, 2010 was $1.30. The
grant-date fair value of the restricted stock awards made during the three and
six month periods ended June 30, 2009 was $1.10 and $1.01, respectively.
The total grant-date fair values of restricted stock awards that vested during
the six months ended June 30, 2010 and June 30, 2009 were
approximately $219,000 and $303,000, respectively.
Stock-based Compensation Expense
The amount of stock-based
compensation expense recognized in the three months ended June 30, 2010
and 2009 related to stock options was $1,605,000 and $456,000, respectively.
For the six months ended June 30, 2010 and 2009, stock-based compensation
expense was $2,031,000 and $1,081,000, respectively. A summary of the stock
based compensation expense recognized in the statement of operations is as
follows:
|
|
Three Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
216
|
|
$
|
272
|
|
General and administrative
|
|
1,389
|
|
184
|
|
Total
|
|
$
|
1,605
|
|
$
|
456
|
|
The
following are the stock-based compensation expense recognized in the Companys
statements of operations for the six months ended June 30, 2010 and 2009:
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
415
|
|
$
|
628
|
|
General and administrative
|
|
1,616
|
|
453
|
|
Total
|
|
$
|
2,031
|
|
$
|
1,081
|
|
As
of June 30, 2010, there was $3,150,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements, including
stock options and restricted stock, granted under the Plan. These costs are
expected to be recognized over a weighted-average period of 2.02 years.
On April 20,
2010, the Companys Chief Executive Officer and President, Leslie Hudson,
Ph.D., tendered his resignation at the request of the Board of
Directors. Pursuant to the terms of the separation agreement between Dr. Hudson
and the Company, unvested options previously granted to Dr. Hudson to
purchase 1,166,833 shares of common stock and 116,500 shares of restricted
stock immediately became fully vested and exercisable at the effective date of
the separation agreement. The Company recorded a charge of stock compensation
expense of $1,181,292 as a result of the accelerated vesting of these shares in
the second quarter of 2010.
Note 6.
Warrants
Warrants
issued in connection with the Companys December 2007, January 2009, and
August 2009 financings are classified as liabilities as opposed to equity
due to their settlement terms. These warrants are non-cash liabilities; the
Company is not required to expend any cash to settle these liabilities.
The
fair market value of these warrants was recorded on the balance sheet at
issuance and the warrants are marked to market at each financial reporting
period, with changes in the fair value recorded as a gain or loss in the
statement of operations. The fair value of the warrants is determined using the
Black-Scholes option-pricing model, which requires the use of significant
judgment and estimates for the inputs used in the model. The following reflects
the weighted-average assumptions for each of the periods indicated:
|
|
Three and Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Risk-free interest rate
|
|
0.1%-2.6
|
%
|
0.2%-2.4
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected lives
|
|
0.1-4.4 years
|
|
0.1-5.0 years
|
|
Expected volatility
|
|
62.3%-95.8
|
%
|
83.2%-140.6
|
%
|
Shares underlying warrants classified as
liabilities
|
|
29,717,546
|
|
22,645,157
|
|
|
|
Three and Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Market value of stock at beginning of year
|
|
$
|
1.58
|
|
$
|
0.66
|
|
Market value of stock at end of period
|
|
|
1.61
|
|
|
1.58
|
|
Weighted average exercise price
|
|
|
1.59
|
|
|
4.18
|
|
10
Table of Contents
The
risk-free interest rate is estimated using an average of treasury bill interest
rates that correlate to the prevailing interest rates at the time of issuance.
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 volatility of the Companys common
stock, taking into account factors such as future events or circumstances that
could impact volatility. The amounts estimated according to the Black-Scholes
option pricing model may not be indicative of the actual values realized upon
the exercise of these warrants by the holders.
All
other warrants issued by the Company other than the warrants issued in
connection with its December 2007, January and August 2009
financings are classified as permanent equity in accordance with GAAP; the fair
value of the warrants was recorded as additional paid-in capital and no further
adjustments are made. For the three months ended June 30, 2010 and 2009,
255,895 and 2,129,530 shares, respectively, were underlying such warrants.
A
summary of the Companys warrant activity with respect to the six months ended June 30,
2010 is as follows:
Warrants
|
|
Shares
|
|
Weighted
Average
Exercisable
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding at January 1, 2010
|
|
32,332,996
|
|
$
|
3.40
|
|
|
|
Granted
|
|
|
|
|
|
|
|
Canceled or expired
|
|
(2,359,555
|
)
|
26.50
|
|
|
|
Outstanding at June 30, 2010
|
|
29,973,441
|
|
1.59
|
|
3.81
|
|
|
|
|
|
|
|
|
|
|
Note 7.
Earnings Per Share
Basic
net loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding. Diluted net loss per share is computed by
dividing net loss by the weighted-average number of common shares and dilutive
common stock equivalent shares outstanding. Given that the Company was in a loss
position for each of the periods presented, there is no difference between
basic and diluted net loss per share since the effect of common stock
equivalents would be anti-dilutive and are therefore excluded from the diluted
net loss per share calculation.
|
|
Three Months Ended June 30,
|
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands, except per-share data)
|
|
Net loss
|
|
$
|
(16,656
|
)
|
$
|
(19,668
|
)
|
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
|
|
110,383
|
|
85,664
|
|
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
|
|
110,383
|
|
85,664
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.15
|
)
|
$
|
(0.23
|
)
|
11
Table of Contents
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands, except per-share data)
|
|
Net loss
|
|
$
|
(17,240
|
)
|
$
|
(20,595
|
)
|
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
|
|
110,404
|
|
83,235
|
|
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
|
|
110,404
|
|
83,235
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.16
|
)
|
$
|
(0.25
|
)
|
*
Warrants and
stock options to purchase 39,335,409 and 33,838,997 shares of common stock as
of June 30, 2010 and 2009, respectively, were excluded from the net loss
per share calculation as their effect would have been anti-dilutive.
Note 8. Liquidity
Since
its inception in 1980 through June 30, 2010 the Company has incurred
losses of approximately $292.7 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 revenue
from product sales will be achieved. Moreover, even if the Company does achieve
revenue from product sales, the Company expects to incur operating losses over
the next several years.
At
June 30, 2010, cash, cash equivalents and short-term investments were
$37.2 million, compared to $48.7 million at December 31, 2009. The Companys
principal sources of liquidity have been revenue from its U.S. government
research contracts and equity financings. The Companys principal uses of cash
have been research and development expenses, general and administrative
expenses and other working capital requirements.
In
the periods presented, substantially all of the revenue generated by the
Company was derived from research contracts with the U.S. government. As of June 30,
2010, the Company had contracts with the U.S. government pursuant to which its
is entitled to receive up to an aggregate of $83.7 million for development of
its product candidates, of which $53.5 million had been billed to the U.S. government
and $30.2 million of which relates to development that has not yet been
completed and has not been billed. See Note 4 U.S. Government Contracts for
additional information.
In
January 2009, the Company sold approximately 14.2 million shares of its
common stock and also issued warrants to purchase approximately 14.2 million
shares of its common stock in an offering registered under the Securities Act
of 1933 (the Securities Act). The offering generated net proceeds of
approximately $15.5 million.
In
August 2009, the Company sold approximately 24.3 million shares of its common
stock and also issued warrants to purchase approximately 9.7 million shares of
its common stock in an offering registered under the Securities Act. The
offering generated net proceeds of approximately $32.3 million. The warrants
issued to the investors in the offering have an exercise price of $1.78 per
share and are exercisable at any time on or before August 25, 2014.
See Note 9 Equity Financing for more information.
Note 9. Equity Financing
In
January 2009, the Company sold approximately 14.2 million shares of its
common stock and also issued warrants to purchase approximately 14.2 million
shares of its common stock in an offering registered under the Securities Act.
The offering generated net proceeds of approximately $15.4 million. The
warrants issued to the investors in the offering have an exercise price of
$1.16 per share and are exercisable at any time on or before July 30,
2014. In connection with the offering, the Company also issued to the placement
agent a warrant to purchase approximately 427,000 shares of the Companys
common stock at an exercise price of $1.45 per share. The warrant issued to the
placement agent is exercisable on or before January 30, 2014.
In
August 2009, the Company sold approximately 24.3 million shares of its
common stock and also issued warrants to purchase approximately 9.7 million
shares of its common stock in an offering registered under the Securities Act.
The offering generated net proceeds of approximately $32.3 million. The
warrants issued to the investors in the offering have an exercise price of
$1.78 per share and are exercisable at any time on or before August 25,
2014. The warrants issued in connection with the January and August 2009
offerings are classified as a liability due to their settlement terms. These
warrants are non-cash liabilities; the Company is not required to expend any
cash to settle these liabilities. Accordingly, the fair value of the warrants is
recorded on the consolidated balance sheet as a liability, and such fair value
is adjusted at each financial reporting period with the adjustment to fair
value reflected in the consolidated statement of operations as described in
greater detail in Note 6 Warrants.
12
Table of
Contents
Note
10. Income Taxes
The
Company has not recognized any liability for unrecognized tax benefits. There
are no unrecognized tax benefits included in the balance sheet that would, if
recognized, affect the effective tax rate.
The
Companys policy is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had no accrual for interest or
penalties on its balance sheet at June 30, 2010 or December 31, 2009,
and has not recognized interest and/or penalties in the statement of operations
for the three and six months ended June 30, 2010.
At
December 31, 2009, the Company had net deferred tax assets of approximately
$111 million. The deferred tax assets are primarily composed of U.S. federal
and state tax net operating loss carryforwards, U.S. federal and state research
and development 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 could limit the future use of its net operating loss
and research and development credit carryforwards to offset future taxable
income based on ownership changes and the value of the Companys stock.
Note 11. Recent Accounting
Pronouncements
In January 2010, the Financial
Accounting Standards Board (FASB), issued guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair
value measurement hierarchy, including the reasons and the timing of the
transfers. The guidance became effective for the Company with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
the Company with the reporting period beginning July 1, 2011. Other than
requiring additional disclosures, adoption of this new guidance did not have a
material impact on the Companys financial statements.
In
April 2010, the FASB issued guidance on applying the milestone method of
revenue recognition for milestone payments for achieving specific performance
measures when those payments are related to uncertain future events. The scope of this guidance is limited to
transactions involving research or development. Under the guidance, the
milestone method is a valid application of the proportional performance model
for revenue recognition if the milestones are substantive and there is
substantive uncertainty about whether the milestone will be achieved. The guidance is effective on a prospective
basis to milestones achieved in fiscal years, and interim periods within those
years, beginning after June 15, 2010, with early adoption permitted. The
Company is still evaluating the impact of this guidance to determine the
potential effects on the Companys financial statements.
Note
12. Subsequent Events
On
July 14, 2010, the Company was awarded a new contract with the U.S.
Department of Defense Chemical and Biological Defense Program through the U.S.
Army Space and Missile Defense Command for the advanced development of the
Companys hemorrhagic fever virus therapeutic candidates, AVI-6002 and
AVI-6003, for Ebola and Marburg viruses, respectively. The contract is
funded as part of the TMT program, which was instigated to develop innovative
platform-based solutions countering biological threats. The contract is
structured into four segments with potential funding of up to approximately
$291 million. Activity under the first segment is to begin immediately
and provides for funding to the Company of up to approximately $80 million. Activities under the first segment include
Phase 1 studies in healthy volunteers as well as preclinical studies, and are
scheduled over an 18-month period.
After
completion of the first segment, and each successive segment, TMT has the
option to proceed to the next segment for either or both AVI-6002 and AVI-6003.
If TMT exercises its options for all four segments, contract activities would
include all clinical and licensure activities necessary to obtain FDA
regulatory approval of each therapeutic candidate and would provide for a total
funding award to the Company of up to approximately $291 million over a period
of approximately six years. The contract was granted in response to proposals
the Company submitted to a request for proposal issued in November 2009
and initially submitted by the Company in January 2010. Under an earlier
contract, the Company completed development activities that culminated in the
opening of IND applications for both AVI-6002 and AVI-6003.
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations.
This section should be read in conjunction with
our
condensed consolidated financial statements and related notes included in
Part I, Item 1 of this report
and
the section contained in our annual report on Form 10-K for the year ended
December 31, 2009 under the caption Part II-Item 7
Managements
Discussion and Analysis of Financial Condition and Results of Operations. This
discussion contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
13
Table of Contents
Section 21E
of the Exchange Act. Forward-looking statements are identified by such words as
believe, expect, anticipate and words of similar import and
are
based on current expectations that involve risks and uncertainties, such as our
plans, objectives, expectations and intentions
. 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, expectations regarding future expenses, funding from government and other
sources, the results of research and development efforts, the adequacy of funds
to support or future operations, 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.
These forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those anticipated in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this report in Part II, Item 1A Risk
Factors, and elsewhere in this report
.
These statements, like all statements in this report, speak only as of
their date, and we undertake no obligation to update or revise these statements
in light of future developments.
In this report, we, our, us, AVI, and Company refers to AVI
BioPharma, Inc.
Overview
We
are a biopharmaceutical company focused on the discovery and development of
novel RNA-based therapeutics for rare and infectious diseases, as well as other
select disease targets. Applying pioneering technologies developed and
optimized by AVI, we are able to target a broad range of diseases and disorders
through distinct RNA-based mechanisms of action. Unlike other RNA-based
approaches, our technologies can be used to directly target both messenger RNA
(mRNA) and precursor messenger RNA (pre-mRNA) to either down-regulate (inhibit)
or up-regulate (promote) the expression of targeted genes or proteins. We
believe that these broad capabilities represent highly competitive RNA-based
technology platforms and a strong intellectual property position, both of which
are the result of advances across several areas of science, including over 20
years of research and development work in chemistry and biology. Our patent
estate includes 205 patents (foreign and domestic) issued to or licensed by us
and 184 patent applications (domestic and foreign).
We
are leveraging our discovery and development capabilities to build a pipeline
of RNA-based therapeutic drug candidates to develop independently and in
collaboration with larger pharmaceutical and biotechnology partners. Current
applications of our RNA technology platform include genetic diseases (Duchenne
Muscular Dystrophy, or DMD), infectious diseases (including Ebola, Marburg and
H1N1 Influenza viruses), and other early discovery targets. Several of
our antiviral programs, including Ebola, Marburg, Junín and H1N1, have been or
are currently funded by the U.S. government as described in greater detail
below. Some of our other programs have received funding from non-government
sources.
On
June 4, 2010, we entered into a new contract with the U.S. Defense Threat
Reduction Agency, or DTRA, and agency of the U.S. Department of Defense, or
DoD, to advance the development of AVI-7100, as a medical countermeasure
against the pandemic H1N1 influenza virus (swine flu) in cooperation with the
Transformational Medical Technologies program, or TMT, of the DoD. The contract
provides for funding of up to $18 million to advance the development of
AVI-7100, including studies enabling an Investigational New Drug, or IND,
application with the U.S. Food and Drug Administration, or FDA, the development
of an intranasal delivery formulation, and the funding of a Phase 1 clinical
program to obtain human safety data to support potential use under an Emergency
Use Authorization.
On
July 14, 2010, we were awarded a new contract with the U.S. Department of
Defense Chemical and Biological Defense Program through the U.S. Army Space and
Missile Defense Command for the advanced development of our hemorrhagic fever
virus therapeutic candidates, AVI-6002 and AVI-6003, for Ebola and Marburg
viruses, respectively. The contract is funded as part of the TMT program, which
was instigated to develop innovative platform-based solutions countering
biological threats. The contract is structured into four segments with
potential funding of up to approximately $291 million. Activity under the first
segment is to begin immediately and provides us funding of up to approximately
$80 million. After completion of the first segment, and each successive
segment, TMT has the option to proceed to the next segment for either or both
AVI-6002 and AVI-6003. If TMT exercises its options for all four segments,
contract activities would include all clinical and licensure activities
necessary to obtain FDA regulatory approval of each therapeutic candidate and
would provide for a total funding award to us of up to approximately $291
million. The contract was granted in response to proposals we submitted to a
request for proposal, or RFP, issued in November 2009 and initially
submitted by us in January 2010. Under an earlier contract, we completed
development activities that culminated in the opening of IND applications for
both AVI-6002 and AVI-6003.
On April 20,
2010, our chief executive officer and president, Leslie Hudson, Ph.D., tendered
his resignation at the request of our Board of Directors. Pursuant to his
separation agreement, Dr. Hudson will receive total cash severance
payments of $1,412,170 (comprised of two times the sum of (i) his annual base
salary in effect as of the Separation Date ($494,400), (ii) the average of
his last two annual bonuses ($188,669), and (iii) the annual cost of
Pfizer retiree healthcare coverage for him and his spouse
($23,016). The cash severance payments will be made to Dr. Hudson
in 24 equal monthly installments, less required
14
Table of Contents
deductions and withholdings
following the effective date of the separation agreement. In
addition, as of the effective date of the separation agreement, unvested
options to purchase 1,166,833 shares of our common stock and 116,500 shares of
restricted stock previously granted to Dr. Hudson became fully vested and
exercisable, which resulted in a charge to stock compensation expense of
$1,181,292 in the second quarter of 2010.
As
previously disclosed, on April 20, 2010, we entered into a settlement
agreement with a shareholder group that had sought a special meeting of our
shareholders to replace certain members of our Board of Directors. Pursuant to
such settlement agreement, among other things, (i) our Board of Directors
sought Dr. Hudsons resignation and appointed J. David Boyle II, our Chief
Financial Officer, as interim Chief Executive Officer and President, (ii) our
bylaws were amended to reduce the size of our Board of Directors, (iii) Dr. Hudson
and K. Michael Forrest resigned as directors to facilitate the reduction in the
size of the Board of Directors, and (iv) Anthony R. Chase was appointed to
fill the vacancy created by Dr. Hudsons resignation. In addition, for a
period of one year, the shareholder group agreed not to engage in the
solicitation of any proxy relating to the voting of our common stock and not to
take certain actions relating to our Board of Directors or the management of
our company. Furthermore, for a period of six months, members of the
shareholder group also agreed not to acquire beneficial ownership of additional
shares of our common stock if such acquisition would cause their beneficial
ownership to exceed certain thresholds as set forth in the settlement
agreement.
At
our 2010 annual meeting of shareholders, Chris Garabedian and Hans Wigzell were
elected to our Board of Directors, replacing Christopher Henney and Michael D.
Casey who did not stand for reelection.
From
our inception in 1980, we have devoted our resources primarily to fund our
research and development efforts. As the
result of recent new U.S. government research contracts for H1N1/ Influenza,
Ebola and Marburg, we expect future revenues and research and development cost
to increase. We have been unprofitable since inception and, other than limited
interest, license fees, grants and research contracts, we have had no material
revenue from the sale of products or other sources, other than from government
grants and research contracts, and we do not expect material revenue for the
foreseeable future. We expect to continue to incur losses for the foreseeable
future as we continue our research and development efforts and enter additional
collaborative efforts. As of June 30, 2010, our accumulated deficit was
$292.7 million.
Government
Contracts
In
the periods presented, substantially all of the revenue generated by our
company was derived from research contracts with the U.S. government. As of June 30,
2010, we had contracts with the U.S. government pursuant to which we are
entitled to receive up to an aggregate of $83.7 million for development of its
product candidates, of which $53.5 million had been billed to the U.S.
government and $30.2 million of which relates to development that has not yet
been completed and has not been billed. The following is a description of such
contracts.
January 2006 Agreement (Ebola and Marburg Host
Factors, Dengue, Anthrax and Ricin)
In
January 2006, the final version of the 2006 defense appropriations act was
enacted, which act included an allocation of $11.0 million to fund our ongoing
defense-related programs under certain executed contracts. Net of government
administrative costs, it is anticipated that we will receive up to $9.8 million
under this allocation. Our technology is expected to be used to continue
developing RNA based drugs against Ebola and Marburg viruses. We have received
signed contracts for all of these projects. As of June 30, 2010, we have
recognized revenue of $9.7 million with respect to these contracts and expect
to receive the remaining funding under these contracts in 2010.
December 2006 Agreement (Ebola, Marburg and
Junín Viruses)
In
December 2006, we entered into a two-year research contract with the DTRA
pursuant to which we were entitled to $28 million to fund our development of
antisense therapeutics to treat the effects of Ebola, Marburg and Junín
hemorrhagic viruses. In May 2009, this contract was amended to extend the
term of the contract until November 2009 and to increase funding by $5.9
million to an aggregate of $33.9 million. In June 2009, the contract was
amended again to extend the term of the contract to February 2011 and to
increase funding by an additional $11.5 million to an aggregate of $45.4
million. As of June 30, 2010, we have recognized revenue of $37.8 million
with respect to this contract and expect to receive the remaining funding under
this contract in 2010 and 2011.
May 2009 Agreement (H1N1/Influenza)
In
May 2009, we entered into a contract with the DTRA to develop swine flu
drugs. Under this contract, DTRA will pay up to $4.1 million to our company for
the work involving the application of our proprietary PMO and PMO
plu
s antisense chemistry and we
15
Table of Contents
plan
to conduct preclinical development of at least one drug candidate and
demonstrate it is effective by testing it on animals. In March 2010,
the contract was amended to include testing against additional influenza
strains including H5N1 (avian flu), Tamiflu® resistant H1N1 (swine flu) and
H3N2 (seasonal flu) and funding increased by $4.0 million to an aggregate of
$8.1 million. As of June 30, 2010, we have recognized revenue of $3.2
million with respect to this contract and expect to receive the remaining
funding under this contract in 2010.
June 2010 Agreement (H1N1/Influenza)
On
June 4, 2010, we entered into a contract with the DTRA to advance the
development of AVI-7100, which was previously designated AVI-7367 and which has
been renumbered by us, as a medical countermeasure against the pandemic H1N1
influenza virus in cooperation with the TMT. The contract provides for funding
of up to $18 million to advance the development of AVI-7100, including studies
enabling an IND application with the FDA, the study of an intranasal delivery
formulation, and the funding of a Phase 1 clinical trial to obtain human safety
data to support potential use under an Emergency Use Authorization. As of June 30,
2010, we have recognized revenue of $0.4 million with respect to this contract
and expect to receive the remaining funding under this contract in 2010 and
2011.
The
following table sets forth the impact on revenue of each of the contracts with
the U.S. government on our results of operations for the three and six months
ended June 30, 2010 and 2009.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
January 2006 Agreements
(Ebola and
Marburg Host factors, Dengue, Anthrax and Ricin)
|
|
$
|
147
|
|
$
|
243
|
|
$
|
468
|
|
$
|
1,623
|
|
December 2006 Agreement
(Ebola,
Marburg and Junín Viruses)
|
|
2,063
|
|
1,333
|
|
2,608
|
|
3,066
|
|
May 2009 Agreement
(H1N1)
|
|
1,187
|
|
356
|
|
1,444
|
|
356
|
|
June 2010 Agreement
(H1N1)
|
|
433
|
|
|
|
433
|
|
|
|
Other Agreements
|
|
167
|
|
1,013
|
|
248
|
|
1,050
|
|
Total
|
|
$
|
3,997
|
|
$
|
2,945
|
|
$
|
5,201
|
|
$
|
6,095
|
|
Key
Financial Metrics
Revenue
Government Research Contract Revenue.
In
the periods presented, we have generated substantially all of our revenue from
U.S. government research contracts. We recognize revenues from U.S. government
research contracts during the period in which the related expenditures are
incurred and present these revenues and related expenses gross in the
consolidated financial statements.
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.
We defer recognition of
non-refundable upfront fees if we have 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 our company performance under the other elements of the
arrangement. In addition, if we have continuing involvement through research
and development services that are required because our know-how and expertise
related to the technology is proprietary to us, or can only be performed by us,
then such up-front fees are deferred and recognized over the period of
continuing involvement. As of June 30, 2010, we had deferred revenue of
$3.4 million, which represents up-front fees received from third parties
pursuant to certain contractual arrangements. We will recognize the revenue
from these contracts upon the achievement of certain performance milestones, as
specified in the agreements.
16
Table of Contents
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.
As the result of recent new
government research contracts for H1N1/Influenza, Ebola and Marburg, we expect
future revenues to increase in the near term.
Expenses
Research and Development
. Research and
development expense consists of costs associated with research activities as
well as costs associated with our product development efforts, conducting
preclinical studies, and clinical trial and manufacturing costs.
Direct research and development
expenses associated with our programs include clinical trial site costs,
clinical manufacturing costs, costs incurred for consultants and other outside
services, such as data management and statistical analysis support, and
materials and supplies used in support of the clinical programs. Indirect costs
of our clinical program include salaries, stock based compensation, and an
allocation of our facility costs. As the result of recent new government
research contracts for H1N1/Influenza, Ebola and Marburg, we expect future
research and development cost to increase.
The
amount and timing of future research and development expense will depend on our
ability to obtain U.S. government awards to fund the advanced development of
our antiviral therapeutic candidates. Without such funding, we would
likely drastically reduce our spending in these areas. Future research
and development expenses may also increase if our internal projects, such as
DMD, enter later stage clinical development. Our research and development
programs are at an early stage and may not result in any approved products.
Product candidates that appear promising at early stages of development may not
reach the market for a variety of reasons. Similarly, any of our product
candidates may be found to be ineffective during clinical trials, may take
longer to complete clinical trials than we have anticipated, may fail to
receive necessary regulatory approvals, and may prove impracticable to
manufacture in commercial quantities at reasonable cost and with acceptable
quality.
As
a result of these uncertainties and the other risks inherent in the drug
development process, we cannot determine the duration and completion costs of current
or future clinical stages of any of our product candidates. Similarly, we
cannot determine when, if, or to what extent we may generate revenue from the
commercialization and sale of any product candidate. The timeframe for
development of any product candidate, associated development costs, and the
probability of regulatory and commercial success vary widely.
General and Administrative
. General and
administrative expense consists principally of salaries, benefits, stock-based
compensation expense, and related costs for personnel in our executive,
finance, information technology, business development and human resource
functions. Other general and administrative expenses include an allocation of
our facility costs and professional fees for legal, consulting and accounting
services.
Interest Income (Expense) and Other, Net
. Interest
income and other income or expense, net, consists of interest on our cash, cash
equivalents and short-term investments and rental income and other income. Our
cash equivalents consist of money market investments and our short term
investments consist of certificates of deposit which are included in other
current assets. Interest expense includes interest paid on our mortgage loan
related to the Corvallis property held for sale. Other income includes rental
income on sublease facilities.
Change in Fair Value of Warrants.
Warrants issued
in connection with our December 2007 and January and August 2009
financings are classified as liabilities as opposed to equity due to their settlement
terms. These warrants are non-cash
liabilities; we are not required to expend any cash to settle these
liabilities. The fair market value of these warrants was recorded on the
balance sheet at issuance and the warrants are marked to market each financial
reporting period, with changes in the fair value recorded as a gain or loss in
our statement of operations. The fair
value of the warrants is determined using the Black-Scholes option-pricing
model, which requires the use of significant judgment and estimates for the
inputs used in the model. For more
information, see Note 6Warrants of the unaudited condensed consolidated
financial statements included elsewhere in this report.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements included
elsewhere in this report. The preparation of our financial statements in
accordance with accounting principles generally accepted in the United States,
or GAAP, requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities for the periods presented. Some of these
judgments can be subjective and complex, and, consequently, actual results may
differ from these estimates. For any given individual estimate or assumption we
make, there may also be other estimates or assumptions that are reasonable. We
believe that the estimates and judgments upon which we rely are reasonable
based upon historical experience and information available to us
17
Table of Contents
at
the time that we make these estimates and judgments. To the extent there are
material differences between these estimates and actual results, our
consolidated financial statements will be affected. Although we believe that
our judgments and estimates are appropriate, actual results may differ from
these estimates.
The
policies that we believe are the most critical to aid the understanding of our
financial results include:
·
revenue recognition;
·
impairment of long-lived
assets;
·
stock-based compensation; and
·
change in fair value of
warrants.
Our
critical accounting policies and significant estimates are detailed in our
annual report on Form 10-K filed with the Securities and Exchange
Commission, or SEC, on March 16, 2010 except as set forth below.
Warrant Liability
In
December 2007 and January and August of 2009, we issued warrants
to purchase an aggregate of 29.7 million shares of our common stock in
connection with a registered direct offering of our common stock and warrants.
These warrants are classified as a liability due to their settlement
terms. These warrants are non-cash
liabilities; we are not required to expend any cash to settle these
liabilities.
Accordingly,
the fair value of the warrants is recorded on our consolidated balance sheet as
a liability, and such fair value is adjusted at each financial reporting period
with the adjustment to fair value reflected in our consolidated statement of
operations. The fair value of the warrants is determined using the
Black-Scholes option pricing model. Fluctuations in the assumptions and factors
used in the Black-Scholes model can result in adjustments to the fair value of
the warrants reflected on our balance sheet and, therefore, our statement of
operations. If, for example, the market value of our common stock or its
volatility at December 31, 2009 were 10% higher or lower than used in the
valuation of such warrants, our valuation of the warrants would have increased
or decreased by up to $3.9 million or $2.1 million, respectively,
with such difference reflected in our statement of operations.
Results of Operations for the Three and Six Months Ended June 30,
2010 and 2009
The
following table sets forth selected consolidated statements of operations data
for each of the periods indicated:
|
|
Three Months Ended
June 30,
|
|
%
|
|
Six Months Ended
June 30,
|
|
%
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(In thousands, except per
share amounts)
|
|
|
|
(In thousands, except per
share amounts)
|
|
|
|
Revenue:
|
|
$
|
3,997
|
|
$
|
2,945
|
|
36
|
%
|
$
|
5,201
|
|
$
|
6,095
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
6,931
|
|
5,804
|
|
19
|
%
|
13,020
|
|
10,299
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
4,733
|
|
2,206
|
|
115
|
%
|
7,577
|
|
4,426
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(7,667
|
)
|
(5,065
|
)
|
|
|
(15,396
|
)
|
(8,630
|
)
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest(expense) income and other, net
|
|
51
|
|
(31
|
)
|
|
+
|
87
|
|
(15
|
)
|
|
+
|
(Increase) decrease on warrant valuation
|
|
(9,040
|
)
|
(14,572
|
)
|
|
+
|
(1,931
|
)
|
(11,950
|
)
|
|
+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,656
|
)
|
$
|
(19,668
|
)
|
|
|
$
|
(17,240
|
)
|
$
|
(20,595
|
)
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.15
|
)
|
$
|
(0.23
|
)
|
|
|
$
|
(0.16
|
)
|
$
|
(0.25
|
)
|
|
|
+
Not meaningful
18
Table of Contents
Revenue
Revenue for the three months ended June 30, 2010 increased by $1.1
million, or 36%, compared to the three months ended June 30, 2009 due to a
$1.1 million increase in revenue from U.S. government research contracts as set
forth in the table above, offset in part from lower revenue associated with the
Childrens National Medical Center contract related to DMD.
Revenue for the six months ended June 30, 2010 decreased by $0.9
million, or 15%, compared to the six months ended June 30, 2009 due to a
$0.9 million overall decrease in revenue from government research contracts as
set forth in the table above and our with the Childrens National Medical
Center contract.
Research and Development Expenses
Research and development expenses for the three months ended June 30,
2010 increased by $1.1 million, or 19%, compared to the three months ended June 30,
2009 due primarily to $0.7 million in additional costs for the Junin project,
animal studies for Junin and H1N1 totaling $0.4 million, and $0.2 million in
salaries for new research and development staff, offset in part by declines of
$0.2 million in spending associated with professional consultants.
Research and development expenses for the six months ended June 30,
2010 increased by $2.7 million, or 26%, compared to the six months ended June 30,
2009 due to a $1.7 million increase in spending for patient medical treatment
and clinical costs for our DMD project, $0.7 million in costs for the Junin
project and animal studies for Junin and H1N1 totaling $0.4, offset in part by
a reduction of $0.1 million in spending on lab supplies.
General and Administrative Expenses
General
and administrative expenses for the three and six months ended June 30,
2010 increased by $2.5 million and $3.2 million compared to the three and six
months ended June 30, 2009, respectively. The significant increase in both
periods was primarily attributable to $2.6 million in severance costs and stock
compensation related to the departure, in April 2010, of our former chief
executive officer. In addition, legal costs associated with our settlement with
a shareholder group (described above) and other matters increased by $0.2
million and $0.4 million, respectively in the comparative three and six month
periods. In addition, relocation to our Bothell, Washington facility resulted
in rent increases of $0.1 million and $0.4 million, respectively during the
comparative three and six month periods, offset in part by a $0.3 million
decline in consulting expenses during the second quarter of 2010.
Interest Income (Expense) and Other, Net
The small increase in interest income and other, net for the three and
six months ended June 30, 2010 compared to the three and six months ended June 30,
2009 was attributable to increased rental income from the sublease of excess
space in our Corvallis, Oregon facility.
Change in Fair Value of Warrant
Liability
The
significant changes in fair value of warrant liability for the three and six
months ended June 30, 2010 compared to the three month and six month
periods ended June 30, 2009 was attributable to changes in our stock
price. See Key Financial
MetricsChange in Fair Value of Warrants, Critical Accounting
PoliciesWarrant Liability, and Note 6 to the financial statements included
elsewhere in this report.
Net loss
The
decrease in net loss for the three and six months ended June 30, 2010 compared to the prior year period was
attributable to the change in warrant liability which more than offset the
increase in operating expenses.
Liquidity
and Capital Resources
At
June 30, 2010, cash, cash equivalents and short-term investments were
$37.2 million, compared to $48.7 million at December 31, 2009. Our
principal sources of liquidity are revenue from our U.S. government research
contracts and equity financings. Our principal uses of cash are research and
development expenses, general and administrative expenses and other working
capital requirements. Based on the factors described below, we believe that our
currently available cash, cash equivalents and short-term investments,
exclusive of receipt of future proceeds pursuant to our contracts with the U.S.
government, are sufficient to finance our operations for at least the next
12 months
19
Table of Contents
Sources of Funds
Our
primary source of revenue is from development of product candidates pursuant to
our contracts with the U.S. government.
Government funding is subject to the U.S. governments appropriations
process and the U.S. government has the right under our contracts with them to
terminate such contracts for convenience. If U.S. government funding is not
received or is delayed, our results of operations could be materially and
adversely affected and we may need to seek additional sources of capital. We do
not generate any revenue from non-government, commercial sale of our
pharmaceutical product candidates.
In
January 2009, we sold approximately 14.2 million shares of our common
stock and also issued warrants to purchase approximately 14.2 million shares of
our common stock in an offering registered under the Securities Act of 1933, or
the Securities Act. The offering generated net proceeds of approximately $15.5
million. The warrants issued to the investors in the offering have an exercise
price of $1.16 per share and are exercisable at any time on or before July 30,
2014. In connection with the offering, we also issued to the placement agent a
warrant to purchase approximately 427,000 shares of our common stock at an
exercise price of $1.45 per share. The warrant issued to the placement agent is
exercisable on or before January 30, 2014.
In
August 2009, we sold approximately 24.3 million shares of our common stock
and also issued warrants to purchase approximately 9.7 million shares of our
common stock in an offering registered under the Securities Act. The offering
generated net proceeds of approximately $32.3 million. The warrants issued to
the investors in the offering have an exercise price of $1.78 per share and are
exercisable at any time on or before August 25, 2014.
We
will require additional capital from time to time in the future in order to
continue the development of products and to expand our product portfolio. We
expect to seek additional financing primarily from, but not limited to, the
sale and issuance of equity or debt securities. We cannot assure you that
financing will be available when and as needed or that, if available, the
financings will be on favorable or acceptable terms. If we are unable to obtain
additional financing when and if we require, it would have a material adverse
effect on our business and results of operations. To the extent we issue
additional equity securities, our existing shareholders could experience
substantial dilution.
We
have never generated material commercial revenue from the sale of our
non-governmental products and cannot offer any assurances that we will be able
to do so in the future.
Uses of Funds
From
inception in 1980 through the date of this report, our accumulated deficit is
$292.7 million. Our principal uses of cash have been research and development
expenses, general and administrative expenses, costs associated with the
acquisition of in-process research and development and other working capital
requirements.
Historical Trends
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
Cash provided by (used
in):
|
|
|
|
|
|
Operating activities
|
|
$
|
(10,548
|
)
|
$
|
(6,005
|
)
|
Investing activities
|
|
(965
|
)
|
(583
|
)
|
Financing activities
|
|
(20
|
)
|
15,433
|
|
Increase (decrease) in cash and equivalents
|
|
$
|
(11,533
|
)
|
$
|
8,845
|
|
Operating Activities
. We used $10.5 million
of cash in operating activities for the six months ended June 30, 2010, an
increase of $4.5 million compared to $6.0 million of cash used in
operating activities for the six months ended June 30, 2009. The increase
net cash used in operating activities during the comparative periods was
primarily attributable to increased research and development costs and higher
general and administrative expenses.
Investing Activities
. We used $1.0 million of cash in
investing activities for the six months ended June 30, 2010, an increase
of $0.4 million compared to $0.6 million of cash used in investing
activities for the six months ended June 30, 2009. The increase of cash used
for investing activities was attributable to an increased spending on patents
and fixed assets, offset by the 2009 liquidation of a certificate of deposit.
20
Table of Contents
Financing Activities
. We had financing activities that consisted of
stock option exercises and debt repayment for the six months ended June 30,
2010. The $15.5 million of cash generated by financing activities for the six
months ended June 30, 2009 was attributable to our January 2009
equity financing.
Our
future expenditures and capital requirements depend on numerous factors, most
of which are difficult to project beyond the short term. These requirements
include the progress of our research and development programs and our
pre-clinical and clinical trials, the time and costs involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, our ability to establish collaborative
arrangements and the terms of any such arrangements, and the costs associated
with commercialization of our products. Our cash requirements are expected to
continue to increase as we advance our research, development and commercialization
programs.
Contractual
Obligations and Contingencies
In
our continuing operations, we have entered into long-term contractual
arrangements from time to time for our facilities, the provision of goods and
services, and acquisition of technology access rights, among others. The following table presents contractual
obligations arising from these arrangements as of June 30, 2010:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
|
|
(in thousands)
|
|
Operating leases premises
|
|
$
|
17,765
|
|
$
|
1,868
|
|
$
|
3,895
|
|
$
|
3,698
|
|
$
|
8,304
|
|
Royalty payments
|
|
800
|
|
80
|
|
240
|
|
160
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off Balance Sheet Arrangements
During
the periods presented, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
for another contractually narrow or limited purpose.
Recent Accounting Pronouncements
See Note 11 to the unaudited condensed consolidated
financial statements contained in Part I, Item 1 of this report.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk.
Interest Rate Sensitivity
We
had cash, cash equivalents, and short-term investments of $37.2 million
and $48.7 million at June 30, 2010 and December 31, 2009,
respectively. We do not enter into investments for trading or speculative
purposes; our cash equivalents are invested in money market accounts and our
short-term investments consisted of short-term certificates of deposit. We
believe that we do not have any material exposure to changes in the fair value
of these assets in the near term due extremely low rates of investment interest
and to the short term nature of our cash, cash equivalents, and short-term
investments. Future declines in interest rates, however, would reduce
investment income, but are not likely to be a material source of revenue to our
company in the foreseeable future.
Item 4.
Controls
and Procedures.
Evaluation of
Disclosure Controls and
Procedures
We carried out an evaluation as of
the end of period covered by this report, under the supervision and with the
participation of our management, including our interim chief executive officer
and our chief accounting officer, of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this
evaluation was to determine whether as of the evaluation date our disclosure
controls and procedures were effective to provide reasonable assurance that the
information we are required to disclose in our filings with the Securities and
Exchange Commission, or SEC, under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms and (ii) accumulated and communicated to our
management, including our interim chief executive officer and principal
financial and accounting officer, as appropriate to allow timely decisions
regarding required disclosure. Based on that evaluation, management has
concluded that as of June 30, 2010, our disclosure controls and procedures
were effective.
21
Table of Contents
Changes in Internal Control Over
Financial Reporting
There have been no changes in our
internal control over financial reporting during the quarter ended June 30,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As
of the date of this report, we are not a party to any material legal
proceedings with respect to us, our subsidiaries, or any of our material
properties. In the normal course of business, we may from time to time 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 our financial position, results of operations or
cash flows.
Item 1A.
Risk Factors
.
Set forth
below and elsewhere in this report and in other documents we file with the SEC
are descriptions of risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this report. Because of the following factors, as well
as other variables affecting our operating results, past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate or that we
currently deem immaterial also affect our results of operations and financial
condition.
Risks Relating to Our Business
Our product candidates are
at an early stage of development, and it is possible that none of our product
candidates will ever become commercial products.
Our product candidates are in
relatively early stages of development. These product candidates will require
significant further development, financial resources and personnel to obtain
regulatory approval and develop into commercially viable products, if at all.
Currently, only AVI-4658 is in clinical trials, and the rest of our product
candidates are in preclinical development. We expect that much of our effort
and many of our expenditures over the next few years will be devoted to
development activities associated with AVI-4658 in Duchenne Muscular Dystrophy,
or DMD, AVI-6002 in Ebola, AVI-6003 in Marburg and AVI-7100 in influenza, which
may restrict or delay our ability to develop our other clinical and preclinical
product candidates.
Our ability to commercialize any of
our product candidates, including AVI-4658, depends on first receiving required
regulatory approvals, and it is possible that we may never receive regulatory
approval for any of our product candidates. However we recently received notification
from the U.S. Food and Drug Administration, or FDA, that our Investigational
New Drug, or IND, application, required to start clinical testing in the United
States, had been allowed. Even if a product candidate receives regulatory
approval, the resulting product may not gain market acceptance among
physicians, patients, healthcare payors and the medical community. Assuming
that any of our product candidates receives the required regulatory approvals,
commercial success will depend on a number of factors, including:
·
establishment and
demonstration of clinical efficacy and safety;
·
cost-effectiveness
of the product;
·
the products
potential advantage over alternative treatment methods;
·
whether the
product can be produced in commercial quantities at acceptable costs; and
·
marketing and
distribution support for the product.
If we are unable to develop and
commercialize any of our product candidates, if development is delayed or if
sales revenue from any product candidate that receives marketing approval is
insufficient, we may never reach sustained profitability.
If we are not able to
obtain or maintain required regulatory approvals, we will not be able to
commercialize our product candidates, our ability to generate revenue will be
materially impaired and our business will not be successful.
The research, testing,
manufacturing, labeling, approval, selling, marketing and distribution of drug
products are subject to extensive regulation by the FDA, and other regulatory
authorities in the United States and other countries, which regulations differ
22
Table of Contents
from country to country. Marketing
of our product candidates in the United States or foreign countries is not
permitted until we obtain marketing approval from the FDA or other foreign
regulatory authorities, and we may never receive regulatory approval for the
commercial sale of any of our product candidates. Obtaining marketing approval
is a lengthy, expensive and uncertain process and approval is never assured,
and we have only limited experience in preparing and filing the applications
necessary to gain regulatory approvals, although we do now have three open INDs
in the United States for AVI-4658, AVI-6002 and AVI-6003. Further, the FDA and
other foreign regulatory agencies have substantial discretion in the approval
process, and determining when or whether regulatory approval will be obtained
for any product candidate we develop. In this regard, even if we believe the
data collected from clinical trials of our product candidates are promising,
such data may not be sufficient to support approval by the FDA or any other
foreign regulatory authority. In addition, the FDA or their advisors may
disagree with our interpretations of data from preclinical studies and clinical
trials. Regulatory agencies also may approve a product candidate for fewer
conditions than requested or may grant approval subject to the performance of
post-approval studies for a product candidate. Similarly, regulatory agencies
may not approve the labeling claims that are necessary or desirable for the
successful commercialization of our product candidates.
In addition, changes in regulatory
requirements and guidance may occur and we may need to amend clinical trial
protocols to reflect these changes. Amendments may require us to resubmit our
clinical trial protocols to institutional review boards, or IRBs, for
reexamination, which may impact the costs, timing or successful completion of a
clinical trial. Due to these and other factors, our current product candidates
or any of our other future product candidates could take a significantly longer
time to gain regulatory approval than we expect or may never gain regulatory
approval, which could delay or eliminate any potential product revenue by
delaying or terminating the potential commercialization of our product
candidates.
If we receive regulatory approval
for our product candidates, we will also be subject to ongoing FDA obligations
and oversight, including adverse event reporting requirements, marketing
restrictions and potential other post-marketing obligations, all of which may
result in significant expense and limit our ability to commercialize such
products. The FDAs policies may also change and additional government
regulations may be enacted that could prevent or delay regulatory approval of
our product candidates or further restrict or regulate post-approval activities.
We cannot predict the likelihood, nature or extent of adverse government
regulation that may arise from future legislation or administrative action,
either in the United States, or abroad. If we are not able to maintain
regulatory compliance, we may be subject to civil and criminal penalties, we
may not be permitted to market our products and our business could suffer. Any
delay in or failure to receive or maintain regulatory approval for any of our
product candidates could harm our business and prevent us from ever generating
meaningful revenues or achieving profitability. We will need to obtain
regulatory approval from authorities in foreign countries to market our product
candidates in those countries. We have not filed for regulatory approval to
market our product candidates in any foreign jurisdiction. Approval by one
regulatory authority does not ensure approval by regulatory authorities in
other jurisdictions. If we fail to obtain approvals from foreign jurisdictions,
the geographic market for our product candidates would be limited.
Our clinical trials may
fail to demonstrate acceptable levels of safety and efficacy of our product
candidates, which could prevent or significantly delay their regulatory
approval
.
To obtain the requisite regulatory
approvals to market and sell any of our product candidates, we must
demonstrate, through extensive preclinical and clinical studies, that the
product candidate is safe and effective in humans. Ongoing and future clinical
trials of our product candidates may not show sufficient safety or efficacy to
obtain requisite regulatory approvals. We expect to develop the therapeutic
product candidates to treat Ebola and Marburg viruses 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 is currently
under evaluation by the FDA generally which may present challenges for gaining
final regulatory approval for these product candidates.
Phase 1 clinical trials generally
are not designed to test the efficacy of a product candidate but rather are
designed to test safety, to study pharmacokinetics and pharmacodynamics and to
understand the product candidates side effects at various doses and dosing
schedules. Delays in establishing the
appropriate dosage levels can lead to delays in the overall clinical
development of a product candidate. At
this point in time we do not believe that we have identified a consistently
effective dose in DMD patients for AVI-4658, although final results of the
recently completed study 28 in the United Kingdom are still awaited. This may prevent us from proceeding with an
extension study in the United Kingdom to our Phase 1b/2 trial this year. We are expeditiously moving to start a U.S.-based
clinical trial for AVI-4658 to further explore and identify a dose that may be
more consistently effective and thus more appropriate for future clinical
trials and that can serve as a basis for approval by governmental regulatory
authorities; however, we can not assure you that these efforts will be
successful.
Furthermore, success in preclinical
and early clinical trials does not ensure that later large-scale trials will be
successful nor does it predict final results. Acceptable results in early
trials may not be repeated in later trials.
For example, pivotal trials for AVI-4658 and AVI-7100 will likely
involve a larger number of patients to achieve statistical significance, will
be expensive and will take a substantial amount of time to complete. As a
result, we may conduct lengthy and expensive clinical trials of our product
candidates, only to learn that the product candidate is not an effective
treatment or is not superior to existing approved therapies, or has an
unacceptable safety profile, which could prevent or significantly delay
regulatory approval for such product candidate.
23
Table of Contents
Clinical trials for our
product candidates are expensive and time consuming, may take longer than we
expect or may not be completed at all, and their outcome is uncertain
.
We recently completed a Phase1b/2
clinical trial for AVI-4658 in the UK and are currently completing the
collection and analysis of data from this study. We expect to commence
additional trials of AVI-4658 and other product candidates in the future. Each
of our clinical trials requires the investment of substantial expense and time
and the timing of the commencement, continuation and completion of these
clinical trials may be subject to significant delays relating to various
causes, including scheduling conflicts with participating clinicians and
clinical institutions, difficulties in identifying and enrolling patients who
meet trial eligibility criteria, failure of patients to complete the clinical
trial, delay or failure to obtain independent review board, or IRB, approval to
conduct a clinical trial at a prospective site, unexpected adverse events and
shortages of available drug supply. Patient enrollment is a function of many
factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the trial, the
existence of competing clinical trials and the availability of alternative or
new treatments. We depend on medical
institutions and clinical research organizations, or CROs, to conduct our
clinical trials in compliance with Good Clinical Practice, or GCP, and to the
extent they fail to enroll patients for our clinical trials, fail to conduct
the study to GCP standards or are delayed for a significant time in achieving
full enrollment, we may be affected by increased costs, program delays or both,
which may harm our business. In addition, we conduct clinical trials in foreign
countries which may subject us to further delays and expenses as a result of
increased drug shipment costs, additional regulatory requirements and the
engagement of foreign CROs, as well as expose us to risks associated with less
experienced clinical investigators who are unknown to the FDA, different
standards of medical care, and foreign currency transactions insofar as changes
in the relative value of the U.S. dollar to the foreign currency where the
trial is being conducted may impact our actual costs. In addition, for most of
our programs (in DMD, Ebola and Marburg infections) there are currently no
approved drugs to compare against and agreement about how to measure efficacy
has yet to be reached with the FDA and then demonstrated.
Clinical trials must be conducted
in accordance with FDA or other applicable foreign government guidelines and
are subject to oversight by the FDA, other foreign governmental agencies and
IRBs at the medical institutions where the clinical trials are conducted. In
addition, clinical trials must be conducted with supplies of our product
candidates produced under GMP and other requirements in foreign countries, and
may require large numbers of test patients. We, the FDA or other foreign
governmental agencies could delay, suspend or halt our clinical trials of a
product candidate for numerous reasons, including:
·
deficiencies in the conduct of the clinical trial,
including failure to conduct the clinical trial in accordance with regulatory
requirements or clinical protocols;
·
deficiencies in the clinical trial operations or trial
sites resulting in the imposition of a clinical hold;
·
the product candidate may have unforeseen adverse side
effects, including fatalities, or a determination may be made that a clinical
trial presents unacceptable health risks;
·
the time required to determine whether the product
candidate is effective may be longer than expected;
·
fatalities or other adverse events arising during a
clinical trial that may not be related to clinical trial treatments;
·
the product candidate may not appear to be more effective
than current therapies;
·
the quality or stability of the product candidate may fall
below acceptable standards;
·
our inability to produce or obtain sufficient quantities of
the product candidate to complete the trials;
·
our inability to reach agreement on acceptable terms with
prospective CROs and trial sites, the terms of which can be subject to
extensive negotiation and may vary significantly among different CROs and trial
sites;
·
our inability to obtain IRB approval to conduct a clinical
trial at a prospective site;
·
lack of adequate funding to continue the clinical trial,
including the occurrence of unforeseen costs due to enrollment delays,
requirements to conduct additional trials and studies and increased expenses
associated with the services of our CROs and other third parties;
·
our inability to recruit and enroll patients to participate
in clinical trials for reasons including competition from other clinical trial
programs for the same or similar indications; or
·
our inability to retain patients who have initiated a
clinical trial but may be prone to withdraw due to side effects from the
therapy, lack of efficacy or personal issues, or who are lost to further
follow-up.
In addition, we may experience
significant setbacks in advanced clinical trials, even after promising results in
earlier trials, such as unexpected adverse events that occur when our product
candidates are combined with other therapies, which often occur in later-stage
clinical trials. In addition, clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Negative or inconclusive results or adverse medical events, including patient
fatalities that may be attributable to our product candidates, during a
clinical trial may necessitate it to be redesigned, repeated or terminated.
Further, some of our clinical
24
Table of Contents
trials may be overseen by an
independent data safety monitoring board, (DSMB), and the DSMB may determine to
delay or suspend one or more of these trials due to safety or futility findings
based on events occurring during a clinical trial.
We have incurred net
losses since our inception and we may not achieve or sustain profitability.
We incurred a net loss of $17.2
million for the six months ended June 30, 2010 and $25.2 million for the
year ended December 31, 2009. As of
June 30, 2010, our accumulated deficit was $292.7 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, partner one or more programs, complete development of our products,
obtain regulatory approvals and market our products. It is uncertain when, if
ever, we will become profitable.
We will need additional
funds to conduct our planned research and development efforts. If we fail to
continue to attract significant capital or enter into strategic relationships,
we may be unable to continue to successfully develop our products.
We expect that we will require
additional capital from time to time in the future in order to continue the
development of products in our pipeline and to expand our product portfolio.
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,
competitive and technological developments in the market. An unforeseen change
in these factors, or others, might increase our need for additional capital. We
may need funds sooner than currently anticipated.
We would expect to seek additional
financing from the sale and issuance of equity or debt securities or the entry
into strategic relationships, and we cannot predict that financing will be
available when and as we need financing or that, if available, the financing
terms will be commercially reasonable. If we are unable to obtain additional
financing when and if we require, or on commercially reasonable terms, it would
have a material adverse effect on our business and results of operations. To
the extent we issue additional equity securities, our existing shareholders
could experience substantial dilution.
Further, we plan to enter into
relationships with pharmaceutical or biotechnology companies to conduct
clinical trials and to market our products.
We currently do not have a strategic relationship with a third party to
assist us in funding the continued development and commercialization of
AVI-4658. If we are unable to enter into
partnerships or strategic relationships with respect to AVI-4658 or our other
product candidates on favorable terms it may impede our ability to develop and
commercialize our product candidates.
We currently rely
on third-party manufacturers and other third parties for production of our drug
products and our dependence on these manufacturers may impair the development
of our product candidates.
We do not currently have the internal ability to
manufacture the drug products that we need to conduct our clinical trials and
we rely upon a limited number of manufacturers to supply our drug products. In
addition, we rely on other third parties to perform additional steps in the
manufacturing process, including filling and labeling of vials and storage of
our product candidates. For the foreseeable future, we expect to continue to
rely on contract manufacturers and other third parties to produce, fill vials
and store sufficient quantities of our product candidates for use in our
clinical trials. If our contract manufacturers or other third parties fail to
deliver our product candidates for clinical use on a timely basis, with
sufficient quality, and at commercially reasonable prices, and we fail to find
replacement manufacturers or to develop our own manufacturing capabilities, we
may be required to delay or suspend clinical trials or otherwise discontinue
development and production of our product candidates. In addition, we depend on
outside vendors for the supply of raw materials used to produce our product
candidates. If the third-party suppliers were to cease production or otherwise
fail to supply us with quality raw materials and we are unable to contract on
acceptable terms for these raw materials with alternative suppliers, our
ability to have our product candidates manufactured and to conduct preclinical
testing and clinical trials of our product candidates would be adversely
affected.
We do not yet have all of the agreements necessary for
the supply of our product candidates in quantities sufficient for commercial
sale and we may not be able to establish or maintain sufficient commercial
manufacturing arrangements on commercially reasonable terms. Securing
commercial quantities of our product candidates from contract manufacturers
will require us to commit significant capital and resources. We may also be
required to enter into long-term manufacturing agreements that contain
exclusivity provisions and/or substantial termination penalties. In addition,
contract manufacturers have a limited number of facilities in which our product
candidates can be produced and any interruption of the operation of those
facilities due to events such as equipment malfunction or failure or damage to
the facility by natural disasters could result in the cancellation of
shipments, loss of product in the manufacturing process or a shortfall in
available product candidates.
Our contract manufacturers are required to produce our
clinical product candidates under current Good Manufacturing Practice, or cGMP,
conditions in order to meet acceptable standards for our clinical trials. If
such standards change, the ability of contract manufacturers to produce our
product candidates on the schedule we require for our clinical trials may be
affected. In addition, contract manufacturers may not perform their obligations
under their agreements with us or may discontinue their business before the
time required by us to successfully produce and market our product candidates.
We and our contract manufacturers are subject to
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periodic unannounced inspection by the FDA and
corresponding state and foreign authorities to ensure strict compliance with
GMP and other applicable government regulations and corresponding foreign
standards. We do not have control over a third-party manufacturers compliance
with these regulations and standards. Any difficulties or delays in our
contractors manufacturing and supply of product candidates or any failure of
our contractors to maintain compliance with the applicable regulations and
standards could increase our costs, cause us to lose revenue, make us postpone
or cancel clinical trials, prevent or delay regulatory approval by the FDA and
corresponding state and foreign authorities, prevent the import and/or export
of our product candidates, or cause our products to be recalled or withdrawn.
We rely on third
parties to provide services in connection with our preclinical and clinical
development programs. The inadequate performance by or loss of any of these
service providers could affect our product candidate development.
Several third
parties provide services in connection with our preclinical and clinical
development programs, including
in vitro
and
in vivo
studies, assay and
reagent development, immunohistochemistry, toxicology, pharmacokinetics,
clinical assessments, data monitoring and management and statistical analysis
and other outsourced activities. If these service providers do not adequately
perform the services for which we have contracted or cease to continue
operations and we are not able to quickly find a replacement provider or we
lose information or items associated with our product candidates, our
development programs may be delayed.
Our RNA-based, or
antisense, technology has not been incorporated into a commercial product and
is still at a relatively early stage of development.
Our RNA-based platform, utilizing proprietary
antisense technology, has not been incorporated into a commercial product and
is still at a relatively early stage of development. This antisense technology is used in all of
our therapeutic candidates, including AVI-4658. We are conducting toxicology,
pharmacology, pharmacokinetics and other preclinical studies and, although we
have initiated clinical trials for AVI-4658, additional studies may be required
before other similar product candidates enter human clinical trials. For
example, we noted unexpected toxicology findings in the kidney as part of our
series of preclinical studies for AVI-5038, our lead preclinical PPMO drug
candidate for DMD that is based on a different chemistry, derived from the PMO
chemistry used in AVI-4658. Based on
those findings, we are conducting additional preclinical work to help clarify
the therapeutic index of AVI-5038, which will guide decision making on
continued development of this candidate.
In addition, preclinical models to study patient toxicity and activity
of compounds are not necessarily predictive of toxicity or efficacy of these
compounds in the treatment of human disease and there may be substantially
different results in clinical trials from the results obtained in preclinical studies.
Any failures or setbacks utilizing our antisense technology, including adverse
effects resulting from the use of this technology in humans, could have a
detrimental impact on our internal product candidate pipeline and our ability
to maintain and/or enter into new corporate collaborations regarding these
technologies, which would negatively affect our business and financial
position.
We rely on U.S. government
contracts to support several important research and development programs and
substantially all of our revenue. If the U.S. government fails to fund such
programs on a timely basis or at all, or such contracts are terminated, the
results of our operations would be materially and adversely affected.
We rely on U.S. government
contracts and awards to fund several of our development programs, including
those for the Ebola, Marburg, Junín and H1N1 viruses and for all of our current
revenue.
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. If 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 completed to that point. A termination
arising out of our default could expose us to liability and have a negative
impact on our ability to obtain future contracts.
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 revenue lost as a result of termination of any of our
contracts.
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Our
U.S. government contracts may be terminated and we may be liable for penalties
under a variety of procurement rules and regulations and changes in
government regulations or practices could adversely affect our profitability,
cash balances or growth prospects.
We must comply with laws and
regulations relating to the formation, administration and performance of U.S.
government contracts, which affect how we do business with our customers. Such
laws and regulations may potentially impose added costs on our business and our
failure to comply with them may lead to penalties and the termination of our
U.S. government contracts. Some significant regulations that affect us include:
·
the Federal Acquisition Regulation and supplements, which
regulate the formation, administration and performance of U.S. Government
contracts;
·
the Truth in Negotiations Act, which requires certification
and disclosure of cost and pricing data in connection with contract negotiations;
and
·
the Cost Accounting Standards, which impose accounting
requirements that govern our right to reimbursement under certain cost-based
government contracts.
Our
contracts with the U.S. government are subject to periodic review and
investigation. If such a review or investigation identifies improper or illegal
activities, we may be subject to civil or criminal penalties or administrative
sanctions, including the termination of contracts, forfeiture of profits, the
triggering of price reduction clauses, suspension of payments, fines and
suspension or debarment from doing business with U.S. government agencies. We
could also suffer harm to our reputation if allegations of impropriety were
made against us, which would impair our ability to win awards of contracts in
the future or receive renewals of existing contracts.
In addition, U.S. government
agencies routinely audit and review their contractors performance on
contracts, cost structure, pricing practices and compliance with applicable
laws, regulations and standards. They also review the adequacy of, and a
contractors compliance with, its internal control systems and policies,
including the contractors purchasing, property, estimating, compensation and
management information systems. Such audits may result in adjustments to our
contract costs, and any costs found to be improperly allocated will not be
reimbursed. We have recorded contract revenues for the periods presented in
this report based upon costs we expect to realize upon final audit; however, we
do not know the outcome of any future audits and adjustments and, if future
audit adjustments exceed our estimates, our results of operations could be
adversely affected.
We intend to increase the size of our
workforce and if we fail to manage our growth effectively, our growth prospects
and operating results could be adversely affected.
Our
ability to perform our U.S. government contracts, growth prospects and
operating results depend on highly-skilled personnel to conduct product
development and we intend to recruit, hire and retain significant numbers of
additional personnel in the near term.
Competition for qualified personnel in our industry, particularly those
with experience with the infectious diseases we are target, is intense. In addition,
we expect to meet some of our short-term personnel needs by engaging
contractors who may be difficult to retain if they are offered permanent
positions with other companies that guarantee a wider range of employee
benefits not typically offered to contractors.
If we are unable to attract, assimilate or retain such personnel or
manage our growth effectively, our continued growth, expansion and ability to
perform our U.S. government contracts would be adversely affected.
We rely on highly skilled personnel, and if
we are unable to retain or motivate key personnel or hire qualified personnel,
our operations may be adversely affected.
Our operations and our ability to
execute our business strategy are highly dependent on the efforts of our
executive management team. In April 2010, our chief executive officer and
president resigned in connection with the settlement with a group of our
shareholders. Following his departure, our board of directors appointed J.
David Boyle II, our chief financial officer, to serve as interim chief
executive officer and president, and we have hired an executive to assist Mr. Boyle
with his responsibilities as chief financial officer. We are conducting a
nationwide search for a new chief executive officer, but the departure of our
chief executive officer and president and the circumstances surrounding his
departure could have a disruptive effect on our ability to attract and retain
qualified team members and execute our strategic plan. An extended period of
time without a permanent chief executive officer could materially and adversely
affect our business, financial condition or operating results. In the event we
are unable to effect a smooth transition from our interim chief executive
officer to a permanent chief executive officer, or if a new chief executive
officer should
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unexpectedly prove to be
unsuitable, the resulting disruption could negatively affect our operations and
impede our ability to execute our strategic plan. In addition, although the
members of our senior management team have employment agreements with us, these
agreements may not provide sufficient incentives for these officers to continue
employment with us. The loss of one or more of the members of our senior
management team could adversely affect our operations.
Recent changes in our
executive leadership and board of directors and any similar changes in the
future my serve as a significant distraction for our management
.
As previously disclosed on April 20,
2010, we entered into a settlement agreement with a shareholder group that had
sought a special meeting of our shareholders to replace certain members of our
board of directors. In connection with such settlement agreement, among other
things, we experienced the change in our executive leadership described above
and our board of directors underwent significant change. Such changes may
disrupt our operations as our company adjusts to the reallocation of
responsibilities and assimilate new leadership and, potentially, differing
perspectives on our strategic direction. The dispute with the shareholder group
required the expenditure of significant time and resources by us and if we are
involved in a similar dispute in the future, we may incur significant
additional expenditures and it may be a significant distraction for our
management and employees.
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, biotechnology
and academic environments are highly competitive and competing intellectual property
could limit our ability to protect our products.
Our success will depend in
significant part on our existing patents and licenses (205 patents (domestic
and foreign) issued or licensed to us and 184 (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.
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 that cover our products or
technology. We are aware of a patent that was issued to Prosensa in
Europe that may provide the basis for Prosensa to assert that our drug AVI-4658
infringes on such patent. We are currently opposing this patent in the
Opposition Division of the European Patent Office and believe that we may be
able to invalidate some or all of the claims covered by this patent and
non-U.S. foreign equivalents. Final resolution of this opposition
proceeding may take a number of years. In any case, we have freedom to operate
with respect to our ongoing clinical trials for this drug candidate.
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 on 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. If any patent related to
our products or technology issues, and if our activities are determined to be
covered by such a patent, we cannot assure you that we will be able to obtain
or maintain a license, which could have a material adverse effect on our
business, financial condition, operating results and ability to obtain and/or
maintain our strategic business relationships.
Others may challenge our patents
and, as a result, our patents could be narrowed or invalidated. The patent
position of pharmaceutical and biotechnology firms, as well as academia, is
generally highly uncertain, involves complex legal and factual questions, and
has recently been the subject of much litigation. No consistent policy has
emerged from the U.S. Patent and Trademark Office, or 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
pharmaceutical and biotechnology patent applications at the USPTO and the
approval or rejection of patents may take several years.
To help protect our proprietary
rights in unpatented trade secrets, we require our employees, consultants and
advisors to execute confidentiality agreements and invention assignment
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.
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Our research collaborators may
publish data and information to which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, then our ability to receive patent
protection or protect our proprietary information may be impaired.
We face intense competition and rapid technological change, which may
result in others discovering, developing or commercializing competing products
before or more successfully than we do.
The
biotechnology and pharmaceutical industries are highly competitive and subject
to significant and rapid technological change. We are aware of many pharmaceutical
and biotechnology companies that are actively engaged in research and
development in areas related to antisense technology or that are developing
alternative approaches to or therapeutics for the disease indications on which
we are focused. Some of these competitors are developing or testing product
candidates that do, or may in the future, compete directly with our product
candidates. For example, we believe that companies including Alnylam
Pharmaceuticals, Isis Pharmaceuticals, and Santaris share a focus on
RNA-based drug discovery and development.
Competitors with respect to our DMD program, or AVI-4658, include
Prosensa and GlaxoSmithKline, or GSK, and BioMarin Pharmaceuticals. A European
based clinical trial evaluating the systemic administration of the Prosensa/GSK
lead DMD drug candidate started several months before the start of our similar
clinical trial, although the results from this trial have yet to be made
publically available. The Prosensa/GSK drug candidate may, or may not, prove to
be safer or more efficacious than our product candidate and it could gain
marketing approval before our product candidate. We also face significant competition with
respect to our influenza program from many different companies, including large
biopharmaceutical companies, that have both marketed products like Tamiflu® and
other products in various stages of development,
Other
potential competitors include large, fully integrated pharmaceutical companies
and more established biotechnology companies that have significant resources
and expertise in research and development, manufacturing, testing, obtaining
regulatory approvals and marketing. Also, academic institutions, government
agencies and other public and private research organizations conduct research,
seek patent protection and establish collaborative arrangements for research,
development, manufacturing and marketing. It is possible that these competitors
will succeed in developing technologies that are more effective than our
product candidates or that would render our technology obsolete or
noncompetitive. Our competitors may, among other things:
·
develop safer or more effective products;
·
implement more effective approaches to sales and marketing;
·
develop less costly products;
·
obtain quicker regulatory approval;
·
have
access to more manufacturing capacity;
·
form
more advantageous strategic alliances; or
·
establish superior proprietary positions.
We may be subject to
clinical trial claims and our insurance may not be adequate to cover damages.
We currently have no products that
have been approved for commercial sale; however, the current and future use of
our product candidates by us and our corporate collaborators in clinical
trials, and the sale of any approved products in the future, may expose us to
liability claims. These claims might be made directly by consumers or
healthcare providers or indirectly by pharmaceutical companies, our corporate
collaborators or others selling such products. We may experience financial
losses in the future due to product liability claims. We have obtained limited
general commercial liability insurance coverage for our clinical trials. We
intend to expand our insurance coverage to include the sale of commercial
products if we obtain marketing approval for any of our product candidates.
However, we may not be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against all losses. If a successful
product liability claim or series of claims is brought against us for uninsured
liabilities or in excess of insured liabilities, our assets may not be
sufficient to cover such claims and our business operations could be impaired.
Our
operations involve the use of hazardous materials, and we must comply with
environmental laws, which can be expensive, and may affect our business and
operating results.
Our research and development
activities involve the use of hazardous materials, including organic and
inorganic solvents and reagents. Accordingly, we are subject to federal,
state, and local laws and regulations governing the use, storage, handling,
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manufacturing, exposure to, and
disposal of these hazardous materials. In addition, we are subject to
environmental, health and workplace safety laws and regulations, including
those governing laboratory procedures, exposure to blood-borne pathogens, and the
handling of biohazardous materials. Although we believe that our activities
conform in all material respects with such environmental laws, there can be no
assurance that violations of these laws will not occur in the future as a
result of human error, accident, equipment failure, or other causes.
Liability under environmental, health and safety laws can be joint and several
and without regard to fault or negligence. The failure to comply with past,
present, or future laws could result in the imposition of substantial fines and
penalties, remediation costs, property damage and personal injury claims, loss
of permits or a cessation of operations, and any of these events could harm our
business and financial conditions. We expect that our operations will be
affected by other new environmental and health and workplace safety laws on an
ongoing basis, and although we cannot predict the ultimate impact of any such
new laws, they may impose greater compliance costs or result in increased risks
or penalties, which could harm our business.
Risks Related to Our Common Stock
Provisions
of our articles of incorporation, bylaws and Oregon corporate law might deter
acquisition bids for us that might be considered favorable
and prevent or frustrate any attempt to
replace or remove the then current management and board of directors
.
Certain provisions of our articles
of incorporation and bylaws may make it more difficult for a third party to
acquire control of us or effect a change in our board of directors and
management. These provisions include:
·
classification of our board of directors
into two classes, with one class elected each year;
·
prohibit cumulative voting of shares in the
election of directors;
·
prohibit shareholder actions by less than
unanimous written consent;
·
provide that the board of directors is
expressly authorized to make, alter or repeal our bylaws;
·
establish advance notice requirements for nominations for
election to our board or for proposing matters that can be acted upon by
shareholders at shareholder meetings; and
·
the ability of our board of directors to authorize the
issuance of undesignated preferred stock, the terms and rights of which may be
established and shares of which may be issued without shareholder approval,
including rights superior to the rights of the holders of common stock.
In addition, 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 provisions could discourage, delay or prevent a
transaction involving a change of control, even if doing so would benefit our
shareholders. These provisions also could discourage proxy contests and make it
more difficult for shareholders to elect directors of their choosing or cause
us to take other corporate actions, such as replacing or removing management or
members of our board of directors.
Our stock price is
volatile and may fluctuate due to factors beyond our control.
The market prices for, and trading
volumes of, securities of biotechnology companies, including our securities,
have been historically volatile. The market has from time to time experienced
significant price and volume fluctuations unrelated to the operating
performance of particular companies. The market price of our common stock may
fluctuate significantly due to a variety of factors, including:
·
positive or negative results of testing and
clinical trials by ourselves, strategic partners, or competitors;
·
delays in entering into strategic relationships with
respect to development and/or commercialization of our product candidates;
·
technological innovations or commercial
product introductions by ourselves or competitors;
·
changes in government regulations;
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·
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;
·
comments by securities analysts;
·
the perception that shares of our common
stock may be delisted from The NASDAQ Stock Market; or
·
general market conditions in our industry
or in the economy as a whole.
In addition, the stock market has
recently experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of individual
companies. Broad market and industry factors may seriously affect the market
price of companies stock, including ours, regardless of actual operating
performance. In addition, in the past, following periods of volatility in the
overall market and the market price of a particular companys securities,
securities class action litigation has often been instigated against these
companies. This litigation, if instigated against us, could result in
substantial costs and a diversion of our managements attention and resources.
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. In the past our stock price has
traded near, and at times below, the $1.00 minimum bid price required for
continued listing on NASDAQ. For example, the trading price for our common
stock was $0.99 as recently as May 11, 2009. Although NASDAQ in the past
has provided relief from the $1.00 minimum bid price requirement as a result of
the recent weakness in the stock market, it may not do so in the future. If we
fail to maintain compliance with NASDAQs listing standards, and our common
stock becomes ineligible for listing on The NASDAQ Stock Market the liquidity
and price of our common stock would be adversely affected.
If our common stock was
delisted, the price of our stock and the ability of our shareholders to trade
in our stock would be adversely affected. In addition, we would be subject to a
number of restrictions regarding the registration of our stock under U.S.
federal securities laws, and we would not be able to allow our employees to
exercise their outstanding options, which could adversely affect our business
and results of operations. If we are delisted in the future from The NASDAQ
Global Market, there may be other negative implications, including the
potential loss of confidence by actual or potential collaboration partners,
suppliers and employees and the loss of institutional investor interest in our
company.
We expect that we will seek to raise
additional capital in the future; however, such capital may not be available to
us on reasonable terms, if at all, when or as we require additional funding. If
we issue additional shares of our common stock or other securities that may be
convertible into, or exercisable or exchangeable for, our common stock, our
existing shareholders would experience further dilution.
We
expect that we will seek to raise additional capital from time to time in the
future. For example, in connection with our December 2007, January 2009
and August 2009 financings, we sold an aggregate of 29.7 million shares of
our common stock and issued warrants to purchase an additional 29.7 million
shares of our common stock. Future financings may involve the issuance of debt,
equity and/or securities convertible into or exercisable or exchangeable for
our equity securities. These financings may not be available to us on
reasonable terms or at all when and as we require funding. If we are able to
consummate such financings, the trading price of our common stock could be
adversely affected and/or the terms of such financings may adversely affect the
interests of our existing shareholders. Any failure to obtain additional
working capital when required would have a material adverse effect on our
business and financial condition and would be expected to result in a decline
in our stock price. Any issuances of our common stock, preferred stock, or
securities such as warrants or notes that are convertible into, exercisable or
exchangeable for, our capital stock, would have a dilutive effect on the voting
and economic interest of our existing shareholders.
Because we do not expect
to pay dividends on our common stock, shareholders
will benefit from an
investment in our common stock only if it appreciates in value
.
We have never paid dividends on our
shares of common stock and do not intend to pay dividends in the foreseeable
future. We are not profitable and do not expect to earn any material revenues
for at least several years, if at all. As a result, we intend to use all
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available cash and liquid assets in
the development of our business. Any future determination about the payment of
dividends will be made at the discretion of our board of directors and will
depend upon our earnings, if any, capital requirements, operating and financial
conditions and on such other factors as our board of directors deems relevant.
Therefore, you should only invest in our common stock with the expectation of
realizing a return through capital appreciation on your investment. There is no
guarantee that our common stock will appreciate in value or even maintain the
price at which shareholders have purchased their shares. You should not invest
in our common stock if you are seeking dividend income.
We expect our quarterly operating results
to fluctuate in future periods, which may cause our stock price to fluctuate or
decline.
Our
quarterly operating results have fluctuated in the past, and we believe they
will continue to do so in the future. Some of these fluctuations may be more
pronounced than they were in the past as a result of the issuance of warrants
to purchase 29.7 million shares of our common stock by us in December 2007
and January and August 2009. These warrants are classified as a
derivative liability. Accordingly, the fair value of the warrants is recorded
on our consolidated balance sheet as a liability, and such fair value is
adjusted at each financial reporting date with the adjustment to fair value
reflected in our consolidated statement of operations. The fair value of the
warrants is determined using the Black-Scholes option valuation model.
Fluctuations in the assumptions and factors used in the Black-Scholes model can
result in adjustments to the fair value of the warrants reflected on our
balance sheet and, therefore, our statement of operations. Due to the
classification of such warrants and other factors, quarterly results of
operations are difficult to forecast, and period-to-period comparisons of our
operating results may not be predictive of future performance. In one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our
common stock could decline. In addition, the market price of our common stock
may fluctuate or decline regardless of our operating performance.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
|
|
|
|
Incorporated by Reference to Filings Indicated
|
Exhibit No
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
3.2
|
|
First
Restated Bylaws of AVI BioPharma, Inc., as amended
|
|
|
|
|
|
|
|
|
|
X
|
10.82
|
|
Settlement
Agreement dated April 20, 2010 among the Company and the Shareholder
Group
|
|
8-K
|
|
1-14895
|
|
10.1
|
|
4/22/10
|
|
|
10.83
|
|
Separation
Agreement dated April 20, 2010 between Leslie Hudson and the Company
|
|
8-K
|
|
1-14895
|
|
10.2
|
|
4/22/10
|
|
|
10.84*
|
|
Contract
Number HDTRA1-10-C-0079 between Defense Threat Reduction Agency and the
Company dated June 4, 2010
|
|
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Certification
of the Companys Interim President and Chief Executive Officer and Chief
Financial Officer, J. David Boyle II, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of the Companys Controller and Chief Accounting Officer, Melinda K. Miles,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certification
of the Companys Interim President and Chief Executive Officer, and Senior
Vice President and Chief Financial Officer, J. David Boyle II, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
*
A Confidential Treatment Request for certain information in this document has
been filed with the Securities and Exchange Commission. The information for
which treatment has been sought has been deleted from such exhibit and the
deleted text replaced by an asterisk (*).
32
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:
August 9, 2010
|
AVI
BIOPHARMA, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
J. DAVID BOYLE II
|
|
|
J.
David Boyle II
|
|
|
Interim
President and Chief Executive Officer, and Senior Vice President and Chief
Financial Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/
MELINDA K. MILES
|
|
|
Melinda
K. Miles
|
|
|
Chief
Accounting Officer
|
|
|
|
|
|
(Principal
Accounting Officer)
|
33
Table of
Contents
EXHIBIT INDEX
|
|
|
|
Incorporated by Reference to Filings Indicated
|
Exhibit No
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
3.2
|
|
First
Restated Bylaws of AVI BioPharma, Inc., as amended
|
|
|
|
|
|
|
|
|
|
X
|
10.82
|
|
Settlement
Agreement dated April 20, 2010 among the Company and the Shareholder
Group
|
|
8-K
|
|
1-14895
|
|
10.1
|
|
4/22/10
|
|
|
10.83
|
|
Separation
Agreement dated April 20, 2010 between Leslie Hudson and the Company
|
|
8-K
|
|
1-14895
|
|
10.2
|
|
4/22/10
|
|
|
10.84*
|
|
Contract
Number HDTRA1-10-C-0079 between Defense Threat Reduction Agency and the
Company dated June 4, 2010
|
|
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Certification
of the Companys Interim President and Chief Executive Officer and Chief
Financial Officer, J. David Boyle II, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of the Companys Controller and Chief Accounting Officer, Melinda K. Miles,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certification
of the Companys Interim President and Chief Executive Officer, and Senior
Vice President and Chief Financial Officer, J. David Boyle II, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
34
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