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| AVII > SEC Filings for AVII > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
This section should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2007 and the "Risk Factors" contained in such report.
Forward-Looking Information
The Financial Statements and Notes thereto should be read in conjunction with the following discussion. The discussion in this Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements are identified by such words as "believe," "expect," "anticipate" and words of similar import. All statements other than historical or current facts, including, without limitation, statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts, the success of raising funds in the current offering or future offerings under our current shelf registration, the results of pre-clinical and clinical testing, the effect of regulation by FDA and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, and other risks detailed in the Company's Securities and Exchange Commission filings, that could cause actual results to differ materially from the expected results reflected in such forward looking statements.
Overview
From our inception in 1980, we have devoted our resources primarily to fund our research and development efforts. We have been unprofitable since inception and, other than limited interest, license fees, grants and research contracts, we have had no material revenues from the sale of products or other sources, and we do not expect material revenues for the foreseeable future. We expect to continue to incur losses for the foreseeable future as we continue to expand our research and development efforts and enter into additional collaborative efforts. As of June 30, 2008, the Company's accumulated deficit was $243,122,653.
Results of Operations
Revenues, from license fees, grants and research contracts, increased to $4,982,963 in the second quarter of 2008 from $2,351,424 in the second quarter of 2007, primarily due to increases in research contract revenues of $2,636,349, partially offset by decreases in grant revenues of $4,811. Revenues, from license fees, grants and research contracts, increased to $10,607,580 for the six months ended June 30, 2008 from $2,887,466 for the comparable period in 2007, due to increases in research contract revenues of $7,737,224, partially offset by decreases in grant revenues of $24,311.
Operating expenses decreased to $9,861,494 in the second quarter of 2008 from $11,191,612 in the second quarter of 2007, primarily due to decreases in research and development, which decreased to $8,164,698 in the second quarter of 2008 from $9,160,816 in the second quarter of 2007. Operating expenses increased to $29,233,255 for the six months ended June 30, 2008 from $21,813,138 for the comparable period of 2007, due primarily to $9,916,271 of acquired in-process research and development associated with the acquisition of Ercole Biotechnology, Inc ("Ercole") and to increases in research and development, which increased to $15,637,509 in the first half of 2008 from $15,478,457 in the first half of 2007. This research and development decrease in the second quarter of 2008 was due primarily to decreases in government research contract expenses of approximately $1,750,000, decreases for contracting costs for the production of GMP subunits, which are used by the Company to manufacture compounds for future clinical trials of approximately $330,000, and decreases in amortization of leaseholds of approximately $135,000. These research and development decreases in the second quarter of 2008 were partially offset by increases in professional consultant costs of approximately $300,000, increases in the purchases of equipment for government research contracts of approximately $290,000, increases in net clinical expenses of approximately $230,000, severance payments to certain Ercole employees of approximately $216,000, and increases in employee costs of approximately $140,000. The research and development increase for the six months ended June 30, 2008 was due primarily to increases in compensation costs of approximately $770,000, severance payments to certain Ercole employees of approximately $617,000, increases in net clinical expenses of approximately $570,000, and increases in the purchases of equipment for government research contracts of approximately $65,000, partially offset by decreases in government research contract expenses of approximately $950,000, decreases for contracting costs for the production of GMP subunits, which are used by the Company to manufacture compounds for future clinical trials of approximately $300,000, decreases in amortization of leaseholds of approximately $270,000, decreases in chemical costs of approximately $250,000, and decreases in professional consultant costs of approximately $125,000.
The remaining decrease in operating expenses was due to general and administrative costs decreasing to $1,696,796 in the second quarter of 2008 from $2,030,796 in the second quarter of 2007 and to $3,679,475 in the first half of 2008 from $6,334,681 in the first half of 2007. This general and administrative decrease in the second quarter of 2008 was due primarily to decreases legal expenses of approximately $215,000, employee costs of approximately $52,000, and public and investor relations costs of approximately $51,000. This general and administrative decrease for the six months ended June 30, 2008 was due primarily to decreases in employee costs of approximately $2,210,000, of which approximately
$1,620,000 (including $562,500 in cash compensation and $1,057,372 in SFAS 123R expenses) was related to the Separation and Release Agreement with the Company's former Chief Executive Officer during the first quarter of 2007, as well as, decreases in SFAS 123R expenses of approximately $600,000. General and administrative expenses also includes decreases in legal expenses of approximately $360,000 and public and investor relations costs of approximately $76,000.
Net interest income decreased to $80,450 in the second quarter of 2008 from $303,568 in the second quarter of 2007 and to $247,802 for the six months ended June 30, 2008 from $666,077 for the comparable period in 2007 due to decreases in average cash, cash equivalents and short-term securities and by decreases in average interest rates of the Company's interest earning investments. Gain on warrant liability increased to $3,047,459 in the second quarter of 2008 from $755,317 in the second quarter of 2007. Gain on warrant liability decreased to $1,612,775 for the six months ended June 30, 2008 from $2,254,008 for the comparable period in 2007. The gain (loss) on warrant liability is primarily a function of the Company's stock price and fluctuates as the market price of the Company's stock fluctuates.
Liquidity and Capital Resources
The Company does not expect any material revenues in 2008 or 2009 from its business activities, other than from potential government grants and research contracts. The Company expects that its cash requirements through 2008 will be satisfied by existing cash resources. To fund its operations beyond the first quarter of 2009, the Company will need to secure additional funds. Such funds could come from technology license fees, government grants and research contracts, and the capital markets.
In December 2006, the Company announced the execution of a two-year $28 million research contract with the Defense Threat Reduction Agency (DTRA), an agency of the United States Department of Defense (DoD). In February 2008, the contract was extended into the first five months of 2009. The contract is directed toward funding the Company's development of antisense therapeutics to treat the effects of Ebola, Marburg and Junin hemorrhagic viruses, which are seen by DoD as potential biological warfare and bioterrorism agents. Funding under this contract is expected over three years, with approximately $24.5 million committed through the end of 2008 (including amounts received in 2007), and the remainder anticipated in the first five months of 2009. The Company recognized $4,685,758 and $8,630,830 in research contract revenues from this contract in the second quarter and first six months of 2008, respectively.
In January 2006, the Company announced that the final version of the 2006 defense appropriations act had been approved, which included an allocation of $11.0 million to fund the Company's ongoing defense-related programs. Net of government administrative costs, it is anticipated that the Company will receive up to $9.8 million under this allocation. The Company's NEUGENEŽtechnology is expected to be used to continue developing therapeutic agents against Ebola, Marburg and dengue viruses, as well as to continue developing countermeasures for anthrax exposure and antidotes for ricin toxin. The Company has received signed contracts for all four of these projects. The Company expects that funding under these signed contracts will be received over the next 12 months. In the quarter and six-month period ended June 30, 2008, the Company recognized $275,955 and $1,906,715, respectively, in
research contract revenues from this contract. As of June 30, 2008, approximately $5.2 million in additional funding remains available under these contracts.
The Company's cash, cash equivalents and short-term securities were $18,786,092 at June 30, 2008, compared with $25,074,413 at December 31, 2007. The decrease of $6,288,321 was due primarily to $5,637,058 used in operations and $602,717 used for purchases of property and equipment and patent related costs. This decrease also included approximately $900,000 paid to Ercole for its use in retiring certain of its debts prior to closing of the Ercole asset purchase.
The Company's short-term securities may include certificates of deposit, commercial paper and other highly liquid investments with original maturities in excess of 90 days at the time of purchase and less than one year from the balance sheet date. The Company classifies its investment securities as available-for-sale and, accordingly, such investment securities are stated on the balance sheet at their fair market value with unrealized gains (losses) recorded as a separate component of shareholders' equity and comprehensive income (loss).
The Company's future expenditures and capital requirements depend on numerous factors, most of which are difficult to project beyond the short term, including, without limitation, the progress of its research and development programs, the progress of its pre-clinical and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, its ability to establish collaborative arrangements and the terms of any such arrangements, and the costs associated with commercialization of its products. The Company's cash requirements are expected to continue to increase each year as the Company expands its activities and operations. There can be no assurance, however, that the Company will ever be able to generate product revenues or achieve or sustain profitability.
The Company expects to continue to incur losses as it continues its research and development activities and related regulatory work and collaborative efforts. For 2008, the Company expects expenditures for operations, net of government funding, including collaborative efforts, and GMP facilities to be approximately $14 to $16 million. Expenditures for 2008 could increase if the Company undertakes additional collaborative efforts. If necessary, however, the Company's management has the ability to significantly curtail certain expenditures because a significant amount of the Company's costs are variable.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company's critical accounting policies and estimates are consistent with the disclosure in the Company's Form 10-K, with the exception of FIN 48 (see Note 9).
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