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| AVRX > SEC Filings for AVRX > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
Financial Operations Overview
Revenue
We have not generated any revenue from sales of commercial products and do
not expect to generate any product revenue for the foreseeable future. To date,
our revenue has consisted of collaboration revenue.
Collaboration Revenue. Since inception, we have generated revenue solely in
connection with our collaboration and pilot study agreements. Our collaborations
with Merck, AstraZeneca and Novartis include upfront payments, research funding,
and/or payments for the achievement of certain discovery and development related
milestones. During the first nine months of 2008, we recognized revenue from
work performed under our collaboration with Novartis and recognized no revenue
from our other collaborations.
Research and Development Expense
Research and development expense consists of expenses incurred in connection
with developing and advancing our drug discovery technology and identifying and
developing our drug candidates and supporting our collaborative relationships.
These expenses consist primarily of salaries and related expenses, the purchase
of laboratory supplies, access to data sources, facility costs, costs for
preclinical development and expenses related to our in-license and clinical
trials of AVN944. Other than for advance payments for research and development
costs, subject to the provisions of EITF 07-03, we charge all research and
development expenses to operations as incurred.
We expect our research and development costs to be substantial as we advance
our drug candidates into preclinical testing and clinical trials. Based on the
results of our preclinical studies, we expect to selectively advance some drug
candidates into clinical trials. We anticipate that we will select drug
candidates and research projects for further development on an ongoing basis in
response to their preclinical and clinical success and commercial potential. We
are currently conducting Phase I clinical trials for AVN944 in patients with
hematological cancer and Phase IIa clinical trials for patients with pancreatic
cancer. In August 2008, we announced that we had reached a likely maximum
tolerated dose of AVN944 in both the ongoing Phase I clinical trial and in the
Phase IIa trial. Management is currently assessing strategies for further
development of AVN944.
General and Administrative
General and administrative expense consists primarily of salaries and related
expenses for personnel in administrative, finance, business development and
human resource functions. Other costs include legal costs of pursuing patent
protection of our intellectual property and other fees for legal services.
Critical Accounting Policies and Significant Judgments and Estimates
Stock-Based Compensation
We account for share-based payments in accordance with the provisions of FASB
Statement No. 123(R), Share-Based Payment. For the nine months ended
September 30, 2008, we recorded approximately $230,000 of stock-based
compensation expenses, of which $87,000 was included in research and development
expense and $143,000 was included in general and administrative expense. Since
we continue to operate in a net loss, stock-based compensation expense had no
impact for tax-related effects on cash flow from operations and cash flow from
financing activities for the nine months ended September 30, 2008. As of
September 30, 2008, unamortized stock-based compensation expenses of
approximately $521,000 remains to be recognized over a weighted-average period
of approximately 2.3 years. We amortize stock-based compensation expenses on an
accelerated basis over the vesting period.
We estimated the fair value of stock options granted during the three months
ended September 30, 2008 using the Black-Scholes option pricing model. The
assumptions used under this model are as follows: (i) expected term of 7 years
based upon management's consideration of the historical life of options, the
vesting period of the option granted and the contractual period of the option
granted; (ii) expected volatility of 65.5% based on historical and peer
volatility data; (iii) weighted average risk-free interest rate of 3.45% based
on the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected term of the option; and (iv) expected dividend
yield of zero percent. In addition, under SFAS 123(R), the fair value of stock
options granted is recognized as expense over the service period, net of
estimated forfeitures. Based on historical data, we calculated a 4.20% annual
forfeiture rate, which we believe is a reasonable assumption. However, the
estimation of forfeitures requires judgment, and to the extent actual results or
updated estimates differ from our current estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are revised.
The Black-Scholes option pricing model requires the input of highly
subjective assumptions. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models may not provide a reliable single
measure of the fair value of our employee stock. In addition, management will
continue to assess the assumptions and methodologies used to calculate estimated
fair value of share-based compensation. Circumstances may change and additional
data may become available over time, which result in changes to these
assumptions and methodologies, and which could materially impact our fair value
determination.
Results of Operations
Three Months Ended September 30, 2008 and 2007
Revenue. Total revenues for the three months ended September 30, 2008 were
$124,000, compared with no revenues in the same period of the prior year. The
reported revenues were attributable to our collaboration agreement with
Novartis.
Research and Development. Research and development expenses increased by
$463,000, or 13%, to $4.0 million for the three months ended September 30, 2008
from $3.5 million for the same period in 2007. The increase in research and
development expenses was primarily attributable to increases in clinical trial
and product costs related to our AVN944 drug candidate and our pre-clinical drug
candidate AVN316.
Research and development expenses consist of direct costs which include
salaries and related costs of research and development personnel, and the costs
of consultants, materials and supplies associated with research and development
projects. Indirect research and development costs include facilities,
depreciation, patents and other indirect overhead costs.
General and Administrative. General and administrative expenses decreased by
$44,000 or 2% when comparing the three months ended September 30, 2008 with the
three months ended September 30, 2007. Lower stock compensation expense as well
as lower costs for personnel and consultants were largely offset by a $928,000
restructuring charge. The restructuring charge included severance and related
costs for the 19 employees who left Avalon when we restructured our operations
in August of 2008.
Interest Income. Interest income decreased by $372,000 or 79%, to $98,000 for
the three months ended September 30, 2008, compared to $470,000 for the three
months ended September 30, 2007. The decrease in interest income is due to lower
balances of cash and investments and lower average interest rates.
Interest Expense. Interest expense decreased by $58,000, or 37%, to $97,000
for the three months ended September 30, 2008, compared to $155,000 for the
three months ended September 30, 2007. The decrease in interest expense was
related to lower debt balances and lower average interest rates on debt.
Other Income. Other income was $63,000 for the three months ended
September 30, 2008, compared to $8,000 for the three months ended September 30,
2007. The increase in other income was primarily related to income from
subletting part of our facility and the provision of shared services to
subtenants.
Nine Months Ended September 30, 2008 and 2007
Revenue. Total revenues for the nine months ended September 30, 2008 were
$311,000, a decrease of $498,000 from the same period in the prior year. All
2007 and 2008 revenues were attributable to our collaboration agreement with
Novartis.
Research and Development. Research and development expenses increased by
$1.2 million, or 10%, to $12.9 million for the nine months ended September 30,
2008 from $11.7 million for the same period in 2007. The increase in research
and development expenses was primarily attributable to increases in clinical
trial and product costs related to our AVN944 drug candidate and our
pre-clinical drug candidate AVN316.
General and Administrative. General and administrative expenses decreased by
$901,000 or 14%, to $5.6 million for the nine months ended September 30, 2008,
compared to $6.5 million for the nine months ended September 30, 2007. Lower
costs for stock compensation, personnel and consultants were partially offset by
a restructuring charge of $928,000 recorded in the third quarter of 2008.
Interest Income. Interest income decreased by $628,000 or 53%, to $559,000
for the nine months ended September 30, 2008, compared to $1.2 million for the
nine months ended September 30, 2007. The decrease in interest income is
primarily due to lower balances of cash and investments and lower average
interest rates.
Interest Expense. Interest expense decreased by $181,000, or 37%, to $305,000
for the nine months ended September 30, 2008, compared to $486,000 for the nine
months ended September 30, 2007. The decrease in interest expense was primarily
related to lower debt balances and lower average interest rates on debt.
Other Income. Other income was $79,000 for the nine months ended
September 30, 2008, compared to $107,000 for the nine months ended September 30,
2007. The decrease in other income was primarily related to lower income from
subletting part of our facility and the provision of shared services to
subtenants in the 2008 period.
Liquidity and Capital Resources
Our primary cash requirements are to:
• fund our research and development and clinical programs;
• obtain regulatory approvals;
• prosecute, defend and enforce any patent claims and other intellectual property rights;
• fund general corporate overhead; and
• support our debt service requirements and contractual obligations.
Our cash requirements could change materially as a result of the progress of
our research and development and clinical programs, licensing activities,
acquisitions, divestitures or other corporate developments.
We have incurred operating losses since our inception and historically have
financed our operations principally through public stock offerings, debt
financings, private placements of equity securities, strategic collaborative
agreements that include research and development funding and development
milestones, and investment income.
In evaluating alternative sources of financing we consider, among other
things, the dilutive impact, if any, on our stockholders, the ability to
leverage stockholder returns through debt financing, the particular terms and
conditions of each alternative financing arrangement and our ability to service
our obligations under such financing arrangements.
As of September 30, 2008, we had cash, cash equivalents and marketable
securities of approximately $11.4 million. Of this amount, $4.4 million was held
in a restricted account to serve as collateral for our long-term debt. In
connection with entering into the merger agreement with Clinical Data, on
October 27, 2008, we borrowed $3 million from Clinical Data under a secured loan
to fund our short term on-going operations, entered into a license agreement
with Clinical Data under which Clinical Data received an exclusive license
(subject to certain exceptions) to AvalonRx® in exchange for a one time license
fee of $1 million, and engaged in a private placement with Clinical Data of our
common stock and warrants for a cash payment of $237,338 from Clinical Data. As
a result of entering into the merger agreement and receiving the $3 million
secured loan from Clinical Data, we were required under the terms of our letter
of credit from M&T Bank to pay off all amounts due under the letter of credit.
On October 30, 2008 we paid off all amounts due M&T Bank under the letter of
credit and as a result, we have no further obligations under the letter of
credit or our financing arrangement with MIDFA.
As a result of our borrowing $3 million from Clinical Data and the receipt of
other payments from Clinical Data in connection with the private placement and
exclusive license grant of AvalonRx® to Clinical Data described above, we
currently estimate that our existing capital resources will be sufficient to
fund our current operations through the end of the first quarter of 2009, by
which time our pending merger with a subsidiary of Clinical Data is expected to
close. If our proposed merger does not close by the end of the first quarter of
2009, we would need to raise additional funds to continue operations and to
repay our secured loan from Clinical Data. In light of the proposed merger, we
do not expect to seek to raise additional capital. Should the merger not close
or if the closing is delayed beyond the end of the first quarter of 2009, there
is no assurance that we would be able to raise capital sufficient to enable us
to continue our operations significantly beyond the end of the first quarter of
2009. In the event we were unable to successfully raise additional capital in
such circumstances, we will not have sufficient cash flows and liquidity to
finance our business operations as currently contemplated. Accordingly, in such
circumstances we would be compelled to reduce general and administrative
expenses and delay research and development projects and the purchase of
scientific equipment and supplies until we were able to obtain sufficient
financing.
Sources and Uses of Cash
Operating Activities. Net cash used in operating activities for the nine
months ended September 30, 2008 was $15.6 million, compared to $14.0 million for
the same period in fiscal 2007. During the first nine months of fiscal year
2008, our net loss of $17.8 million was reduced by non-cash charges of
$1.5 million, primarily for stock compensation, depreciation and amortization,
while changes in our net operating assets and liabilities provided and
additional $0.6 million in cash.
Investing Activities. Net cash provided by investing activities for the nine
months ended September 30, 2008 was $13.4 million, compared to net cash used in
investing activities of $9.4 million for the same period in 2007. Proceeds from
the sale and maturity of marketable securities were the primary source of cash
from investing activities, providing $22.9 million in the first nine months of
2008 and $26.3 million in the comparable period of 2007. Cash used in investing
activities principally represents the amount used to purchase marketable
securities, net of proceeds from the sale and maturity of marketable securities.
Financing Activities. Net cash used by financing activities for the nine
months ended September 30, 2008 was $1.4 million, compared to $26.8 million of
net cash provided by financing activities for the same period in 2007. Aggregate
proceeds of $28.4 million from the issuance of common stock in two private
placements was the principal source of net cash provided by financing activities
during the first nine months of 2007.
Credit Arrangements
In April 2003, we entered into a series of agreements with MIDFA and M&T Bank
in order to finance improvements to our corporate office and research facility
located in Germantown, Maryland. MIDFA sold development bonds in the amount of
$12.0 million. The proceeds of the bond sale were put in trust to reimburse us
for the costs we incurred for improvements to our facility. We are required to
repay the trust $1.2 million annually, on the first day of April, for these
borrowings. The borrowing bears interest at a variable rate and matures on
April 8, 2013. The weighted-average interest rate during the nine months ended
September 30, 2008 and 2007 was 3.02% and 5.42% respectively
In connection with the development bond financing, we entered into an
agreement with M&T Bank to issue the trustee an irrevocable letter of credit to
provide payment of the principal and interest of the bonds. The amount of the
letter of credit changes annually, as principal payments are made. As of
September 30, 2008, that amount is $6,098,630, consisting of $6.0 million of
principal and $98,630 in interest, computed at 50 days at an assumed maximum
rate of interest of 12% per annum. The letter of credit expires the earlier of
April 8, 2013, or the date the bonds have been paid in full. In consideration of
the letter of credit, we have granted M&T Bank a security interest in certain
facility improvements, equipment and cash collateral held as restricted cash.
On October 30, 2008 we paid off all amounts due M&T Bank under the letter of
credit and as a result, we have no further obligations under the letter of
credit or our financing arrangement with MIDFA. See "Recent Developments" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable pursuant to the rules of the Securities and Exchange
Commission relating to the disclosure requirements for a "smaller reporting
company."
Item 4T. Controls and Procedures
Disclosure Controls and Procedures: Under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, we have evaluated the effectiveness of our disclosure
controls and procedures, as of September 30, 2008 (the "Evaluation Date"). Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective.
Changes in Internal Control over Financial Reporting: There have been no
changes in our internal control over financial reporting during the quarter
ended on the Evaluation Date that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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