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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ________ to _________
Commission file number 0-22613
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AVI BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0797222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One SW Columbia Street, Suite 1105, Portland, Oregon 97258
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 503-227-0554
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Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock without par value 13,338,644
(Class) (Outstanding at november 9, 1998)
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Transitional Small Business Disclosure Format (check one): Yes___ No X_
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AVI BIOPHARMA, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets - September 30, 1998 and December 31, 1997 2
Statements of Operations - Three and Nine Months Ended
September 30, 1998 and 1997 and from July 22, 1980
(Inception) to September 30, 1998 3
Statements of Cash Flows - Nine Months Ended September 30,
1998 and 1997 and from July 22, 1980 (Inception) to 4
September 30, 1998
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
1
AVI BIOPHARMA, INC.
(A Development Stage Company)
BALANCE SHEETS
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,928,671 $ 17,638,936
Other current assets 525,147 19,042
-------------- --------------
Total Current Assets 11,453,818 17,657,978
Property and Equipment, net of accumulated
depreciation and amortization of $2,354,830
and $2,262,755 390,498 438,820
Patent Costs, net of accumulated amortization of
$271,273 and $218,773 702,103 553,063
Deferred Acquisition Costs - 102,506
Other Assets 29,847 29,847
-------------- --------------
Total Assets $ 12,576,266 $ 18,782,214
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 916,333 $ 219,083
Accrued liabilities 252,527 245,369
-------------- --------------
Total Current Liabilities 1,168,860 464,452
Shareholders' Equity:
Preferred Stock, $.0001 par value, 2,000,000
shares authorized; none issued and outstanding - -
Common stock, $.0001 par value, 50,000,000
shares authorized; 13,338,644 and 11,125,617
issued and outstanding 1,334 1,113
Additional paid-in capital 51,789,824 34,358,122
Deficit accumulated during the development stage (40,383,752) (16,041,473)
-------------- --------------
Total Shareholders' Equity 11,407,406 18,317,762
-------------- --------------
Total Liabilities and Shareholders' Equity $ 12,576,266 $ 18,782,214
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these balance sheets.
2
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
July 22, 1980
Three months ended September 30, Nine months ended September 30, (Inception) to
1998 1997 1998 1997 September 30, 1998
------------ ------------ ------------ ------------ ------------------
Revenues, from grants and research contracts $ 4,977 $ 5,345 $ 16,780 $ 9,100 $ 720,622
Operating expenses:
Research and development 1,549,133 748,550 4,147,572 2,122,203 15,896,318
General and administrative 366,637 294,418 1,178,587 874,558 7,010,383
Acquired in-process research and
development 19,476,091 - 19,476,091 - 19,476,091
------------ ------------ ------------ ------------ ------------------
21,391,861 1,042,968 24,802,250 2,996,761 42,382,792
Other Income:
Interest income, net 128,927 92,988 443,191 184,936 1,181,668
Realized gain on sale of short-term
investments - - - - 96,750
------------ ------------ ------------ ------------ ------------------
128,927 92,988 443,191 184,936 1,278,418
------------ ------------ ------------ ------------ ------------------
Net loss $(21,257,957) $ (944,635) $(24,342,279) $ (2,802,725) $ (40,383,752)
------------ ------------ ------------ ------------ ------------------
------------ ------------ ------------ ------------ ------------------
Net loss per share - basic and diluted $ (1.84) $ (0.09) $ (2.16) $ (0.29)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding for computing basic and diluted
loss per share 11,539,885 11,012,743 11,286,190 9,735,018
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
3
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Period
Nine months ended September 30, July 22, 1980
------------------------------- (Inception) to
1998 1997 September 30, 1998
------------- ------------- ------------------
Cash flows from operating activities:
Net loss $ (24,342,279) $ (2,802,725) $ (40,383,752)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 157,140 348,808 2,674,247
Realized gain on sale of short-term investments -
available for sale - - (96,750)
Compensation expense on issuance of common
stock and partnership units - - 182,392
Compensation expense on issuance of options and
warrants to purchase common stock or partnership units - 98,802 562,353
Conversion of interest accrued to common stock - - 7,860
Acquired in-process research and development 19,476,091 - 19,476,091
(Increase) decrease in:
Other current assets (506,105) (8,754) (525,147)
Other assets - - (29,847)
Net increase in accounts payable and
accrued liabilities 704,408 489,715 1,168,860
------------- ------------- ------------------
Net cash used in operating activities (4,510,745) (1,874,154) (16,963,693)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term investments - 30,000 247,750
Purchase of property and equipment (56,318) (138,872) (2,793,472)
Patent costs (201,540) (112,491) (973,376)
Acquisition costs (2,126,535) - (2,229,041)
------------- ------------- ------------------
Net cash used in investing activities (2,384,393) (221,363) (5,748,139)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise of
options 184,873 17,831,373 34,025,940
Buyback of common stock pursuant to rescission offering - (288,795) (288,795)
Withdrawal of partnership net assets - - (176,642)
Issuance of convertible debt - - 80,000
------------- ------------- ------------------
Net cash provided by financing activities 184,873 17,542,578 33,640,503
Increase (decrease) in cash and cash equivalents (6,710,265) 15,447,061 10,928,671
Cash and cash equivalents:
Beginning of period 17,638,936 3,011,229 -
------------- ------------- ------------------
End of period $ 10,928,671 $ 18,458,290 $ 10,928,671
------------- ------------- ------------------
------------- ------------- ------------------
The accompanying notes are an integral part of these statements.
4
AVI BIOPHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three and nine-month periods
ended September 30, 1998 and 1997 and the financial information as of September
30, 1998 is unaudited; however, such information reflects all adjustments
consisting only of normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods. The financial information
as of December 31, 1997 is derived from AVI BioPharma, Inc.'s (the Company's)
Form 10-KSB. The interim financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Company's Form
10-KSB. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. EARNINGS PER SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS are
computed using the methods prescribed by Statement of Financial Accounting
Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior period amounts have been
restated to conform with the presentation requirements of SFAS 128. Given that
the Company is in a loss position, there is no difference between basic EPS and
diluted EPS since the common stock equivalents would be antidilutive. This
restatement to conform with the presentation requirements of SFAS 128 resulted
in no change to previously reported numbers.
The Company's net loss for the 1998 third quarter and nine month period include
a one-time charge of $19,476,091, or $1.69 per share, for acquired in-process
research and development, reflecting the recently completed acquisition of
ImmunoTherapy Corporation (Note 3).
Three Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Net loss $(21,257,957) $ (944,635)
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 11,539,885 11,012,743
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 11,539,885 11,012,743
------------ ------------
------------ ------------
Net loss per share - basic and diluted $ (1.84) $ (0.09)
------------ ------------
------------ ------------
5
Nine Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Net loss $(24,342,279) $(2,802,725)
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 11,286,190 9,735,018
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 11,286,190 9,735,018
------------ ------------
------------ ------------
Net loss per share - basic and diluted $ (2.16) $ (0.29)
------------ ------------
------------ ------------
* The following common stock equivalents are excluded from earnings per share
calculation as their effect would have been antidilutive:
Three Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Warrants and stock options 7,024,233 4,420,226
Nine Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Warrants and stock options 7,024,233 4,420,226
NOTE 3. ACQUISITION
On September 15, 1998, the Company acquired all of the equity of ImmunoTherapy
Corporation (ITC), a privately held biotechnology company based in Seattle,
Washington. ITC was in the process of developing a therapeutic vaccine
targeting cancer. The preliminary purchase consideration consisted of 2,142,470
shares of AVI BioPharma common stock and 2,126,683 warrants to purchase AVI
BioPharma common stock. The transaction was accounted for as a purchase. In
connection with the purchase price allocation, the Company estimated that
substantially all of the intangible assets consist of research and development
projects in process. At that time, the development of these projects had not
reached technology feasibility and the technology was believed to have no
alternative future use. In accordance with generally accepted accounting
principles, a one-time charge for acquired in-process research and development
of $19,476,091, or $1.69 per share, has been reflected in the accompanying
financial statements.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate.
Remaining development efforts for the acquired R&D projects include various
stages of clinical testing and development work to manufacture the product in
accordance with functional and commercial specifications. If none of these
products is successfully developed,
6
the sales and profitability of the combined company may be adversely affected in
future periods.
Unaudited pro forma combined statements of operations assume the ITC acquisition
occurred at beginning of each period and exclude acquired in-process research
and development are as follows:
Three Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Revenues $ 4,977 $ 5,345
Net loss (2,061,316) (1,275,758)
Net loss per share - basic and diluted $ (0.15) $ (0.10)
Nine Months Ended September 30, 1998 1997
- --------------------------------------------- ------------ ------------
Revenues $ 16,780 $ 9,100
Net loss (5,816,317) (3,796,095)
Net loss per share - basic and diluted $ (0.44) $ (0.32)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING INFORMATION
The Financial Statements and Notes thereto should be read in conjunction with
the following discussion. The discussion in this Form 10-QSB contains certain
forward-looking statements that involve risks and uncertainties, including, but
not limited to, the results of research and development efforts, the results of
pre-clinical and clinical testing, the effect of regulation by FDA and other
agencies, the impact of competitive products, product development,
commercialization and technological difficulties, and other risks detailed in
the Company's Securities and Exchange Commission filings.
OVERVIEW
From its inception in July 1980, the Company has devoted its resources primarily
to fund its research and development efforts. The Company has been unprofitable
since inception and, other than limited interest and grant revenue, has had no
material revenues from the sale of products or other sources, and does not
expect material revenues for at least the next 12 months. The Company expects
to continue to incur losses for the foreseeable future as it expands its
research and development efforts. As of September 30, 1998, the Company's
accumulated deficit was $40,383,752.
7
RESULTS OF OPERATIONS
Operating expenses increased to $21,391,861 in the third quarter of 1998 from
$1,042,968 in the third quarter of 1997 and to $24,802,250 for the nine months
ended September 30, 1998 from $2,996,761 for the comparable period of 1997
principally due in each case to a one-time charge of $19,476,091 for acquired
in-process research and development reflecting the recently completed
acquisition of ITC and increases in research and development staffing and
increased expenses associated with outside collaborations and pre-clinical
testing of the Company's technologies. In connection with the purchase price
allocation for ITC, the Company estimated the fair value of the intangible
assets which indicated that the majority of all of the acquired intangible
assets consisted of research and development projects in process. At that time,
the development of these projects had not reached technological feasibility and
the technology was believed to have no alternative future use. In accordance
with generally accepted accounting principles, the acquired in-process research
and development has been reflected in the accompanying financial statements.
The Company currently believes that the research and development efforts may
result in commercially feasible products after at least 36 months and at an
additional estimated cost of at least $10 million. Additionally, increased
general and administrative costs were incurred to support the research
expansion, and to broaden the Company's investor and public relations efforts
due to its change in status to a public company in mid-1997. Net interest
income increased to $128,927 in the third quarter of 1998 from $92,988 in the
third quarter of 1997 and to $443,191 for the nine months ended September 30,
1998 from $184,936 for the comparable period in 1997 due to earnings on
increased cash balances, which consisted of proceeds from the initial public
offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $10,928,671 at September 30, 1998,
compared with $17,638,936 at December 31, 1997. The decrease of $6,710,265 was
primarily due to payment of liabilities incurred by, and as part of the
acquisition of ITC, increases in research and development staffing and increased
expenses associated with outside collaborations and pre-clinical testing of the
Company's technologies. Additionally, increased general and administrative
costs were incurred to support the research expansion, to broaden the Company's
investor and public relations efforts due to its change in status to a public
company in mid-1997, and to advance funding to ImmunoTherapy Corporation as part
of the Company's acquisition thereof.
The Company's future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of its research and
development programs, the progress of its pre-clinical and clinical trials, the
time and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, the ability of
the Company to establish collaborative arrangements and the terms of any such
arrangements, and the costs associated with commercialization of its products.
The Company's cash requirements are expected to continue to increase
significantly each year as it expands its activities and operations. There can
be no assurance, however, that the Company will ever be able to generate product
revenues or achieve or sustain profitability.
8
The Company expects that its cash requirements over the next twelve months will
be satisfied by existing cash resources.
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly when
the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
The Company has evaluated its technology and data, including imbedded
non-informational technology, used in the creation and development of its
products and services and in its internal operations and has identified no
significant Year 2000 issues. The core business systems are compliant, or a
migration path to a compliant version will be in place by the year 2000. The
Company has not incurred material costs and believes that future costs
associated with addressing the Year 2000 issue will have an immaterial effect on
the Company's financial results.
Although the Company has inquired of certain of its significant vendors as to
the status of their Year 2000 compliance initiatives, no binding assurances have
been received. The Company believes that parts and services used in normal
operations can be obtained from multiple sources and therefore is not overly
reliant on any single vendor. Failure of telephone service providers or other
monopolistic utilities could have a significant detrimental effect on the
Company's operations. There can be no assurances that such third parties will
successfully address their own Year 2000 issues over which the Company has no
control.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 31, 1998, at the Annual Meeting of the Company's Shareholders, the
shareholders approved each of the proposals set forth in the Company's Proxy
Statement dated August 7, 1998, briefly described below:
(i) The shareholders were asked to approve the issuance of shares of Common
Stock and Warrants in connection with an Agreement and Plan of Reorganization
relating to the merger of ImmunoTherapy Corporation with and into a subsidiary
of the Company. The proposal was approved by the shareholders, as 6,298,337
votes were cast for the proposal, 193,578 votes were cast against, and 22,564
abstained.
9
(ii) The shareholders were requested to elect the following individuals to the
Board of Directors:
NOMINEE FOR WITHHELD
------- --- --------
James P. Hicks, Ph.D. 6,271,777 242,702
Joseph Rubinfeld, Ph.D. 6,333,638 180,841
Alan P. Timmins 6,259,596 254,883
Dwight D. Weller, Ph.D. 6,333,315 181,164
The foregoing directors were approved.
(iii) The shareholders were asked to approve an amendment to the Company's 1992
Stock Incentive Plan to increase the shares reserved therefor. The proposal was
approved by the shareholders, as 5,991,651 votes were cast for the proposal,
462,959 votes were cast against, and 59,869 abstained.
(iv) The shareholders were asked to approve the assumption of the
ImmunoTherapy Corporation 1997 Stock Option Plan by the Company. The proposal
was approved by the shareholders, as 6,232,919 votes were cast for the proposal,
228,664 votes were cast against, and 52,896 votes abstained.
(v) The shareholders were asked to approve an amendment to the Third Amended
and Restated Articles of Incorporation of the Company, changing the name of the
Company to AVI BioPharma, Inc. The proposal was approved by the shareholders,
as 6,266,030 votes were cast for the proposal, 230,884 votes were cast against,
and 18,065 votes abstained.
(vi) The shareholders were asked to approve the selection of Arthur
Andersen LLP as the Company's independent auditors. The proposal was approved
by the shareholders, as 6,375,751 votes were cast for the proposal, 108,916
votes were against, and 29,812 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as a part of this report is listed below and this list
constitutes the exhibit index.
Exhibit No.
- -----------
27 Financial Data Schedule
10
(b) Reports on Form 8-K
On September 30, 1998, the Company filed the following current report on Form
8-K under Item 2. Acquisition or Disposition of Assets, Item 5. Other Events and
Item 7. Financial Statements of Business Acquired:
Date of Report Topic
-------------- -----
September 30, 1998 Merger of ImmunoTherapy Corporation into a
subsidiary of the Company and Change of Name
to AVI BioPharma, Inc.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 1998 AVI BIOPHARMA, INC.
By: /s/ DENIS R. BURGER, Ph.D.
---------------------------------
Denis R. Burger, Ph.D.
President, Chief Executive Officer
and Chairman (of the Board of Directors)
(Principal Executive Officer)
By: /s/ ALAN P. TIMMINS
---------------------------------
Alan P. Timmins
Chief Operating Officer,
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
12
5
0000873303
AVI BIOPHARMA, INC.
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
10,928,671
0
0
0
0
11,453,818
2,745,328
2,354,830
12,576,266
1,168,860
0
0
0
1,334
11,406,072
12,576,266
0
16,780
0
0
24,802,250
0
0
(24,342,279)
0
(24,342,279)
0
0
0
(24,342,279)
(2.16)
(2.16)
