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| AVRX > SEC Filings for AVRX > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
delay research and development projects and the purchase of scientific equipment
and supplies until we were able to obtain sufficient financing.
On August 13, 2008, we restructured our operations to focus on the
pre-clinical and clinical development of our beta-catenin inhibitor program and
on our existing collaborations, such as with Merck. We curtailed our other
development programs and are evaluating the clinical data from our AVN944
development program to assess strategies for further development of AVN944. In
connection with the restructuring of our operations, we reduced our workforce by
approximately one third, or 19 employees. We recorded restructuring charges
related to these actions of $928,000 in the third quarter of 2008.
Pending Acquisition by Clinical Data
On October 27, 2008, we entered into a merger agreement with Clinical Data
and API, an indirect wholly-owned subsidiary of Clinical Data. The merger
agreement provides that, upon the terms and subject to the conditions set forth
in the merger agreement, API will be merged with and into Avalon, with Avalon
continuing as the surviving corporation and a subsidiary of Clinical Data. In
connection with entering into the merger agreement with Clinical Data, we
borrowed $3 million from Clinical Data under a secured loan maturing on
April 30, 2009 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 Avalon 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 notified by
Manufacturers and Traders Trust Company (M&T Bank) on October 29, 2008, that we
were in default under the terms of our letter of credit with M&T Bank to the
Maryland Industrial Development Financing Authority (MIDFA). 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 the
financing arrangement with MIDFA. See also Item 1 of this Annual Report on Form
10-K under the heading "Business - Pending Acquisition by Clinical Data".
Pending Nasdaq Delisting
We are currently subject to delisting from the Nasdaq Global Market because
we are not in compliance with the minimum stockholders' equity requirement of
$10 million for continued listing on the Nasdaq Global Market as set forth in
Nasdaq Marketplace Rule 4450(a)(3). See Item 1 of this Annual Report on Form
10-K under the heading "Business-Pending Nasdaq Delisting" for a description of
this matter.
Recent Developments
On March 30, 2009, in order to fund our continuing operations through the
closing of the merger, we borrowed an additional $1 million from Clinical Data
under the terms of our note purchase agreement with Clinical Data. In addition,
on March 30, 2009, Clinical Data extended the maturity of its prior $3 million
secured loan to us from April 30, 2009 to May 31, 2009.
As with our original $3 million loan from Clinical Data, the additional
$1 million loan from Clinical Data is evidenced by a term note that bears
interest at a fixed rate of seven percent per annum and matures on May 31, 2009,
unless accelerated pursuant to its terms. We have the right to prepay the term
note, together with any accrued interest, at any time without penalty. The
maturity of the term note accelerates if there is a default under the terms of
the note purchase agreement or related documents, including any default, breach
or termination of our license agreement with Clinical Data or of the merger
agreement (other than a termination of the merger agreement as a result of a
failure to obtain the approval by our stockholders of the merger). The
additional $1 million loan is secured by collateral consisting of certain of our
intellectual property rights.
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 2008, we recognized revenue from work performed and expenses
incurred on our collaboration agreement with Novartis and recognized no revenue
from our other collaboration agreements.
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 payments made in advance for goods or services
received for use in future research and development activities, we charge all
research and development expenses to operations as incurred.
Our total research and development expenses for the years ended December 31,
2008, 2007 and 2006 were $15.5 million, $15.3 million, and $13.3 million,
respectively. During the year ended December 31, 2008, we incurred expenses of
approximately $4.6 million related to the development of AVN944. Other than for
our clinical candidate AVN944, we do not currently track our internal research
and development costs or our personnel and related costs on an individual drug
candidate basis. We use our research and development resources, including
employees and our drug discovery technology, across multiple drug development
programs. As a result, we cannot state precisely the costs incurred for each of
our research and development programs or our clinical and preclinical drug
candidates. During 2008, we estimate that 20% and 10% of research and
development expenses were attributable to research related to our beta-catenin
and Aurora/Centrosome pathway programs, respectively. We estimate that 22% of
research and development expenses were attributable to collaborations with
AstraZeneca, Merck, ChemDiv, Medarex and Novartis. The remaining expenses
included all personnel and related expenses and other research and development
expenses not attributable to any specified discovery and development program. We
begin to track development costs for a program after an individual molecule has
been selected for formal pre-clinical development. Research and development
expenses as a percentage of total operating expenses for the years ended
December 31, 2008, 2007 and 2006 were 69%, 65% and 63%, respectively.
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 on-going 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 on-going Phase I clinical trial and in the
Phase IIa trial. We are currently assessing various alternatives regarding the
internal or external development of AVN944.
General and Administrative
Our general and administrative expense consists primarily of salaries and
related expenses for personnel in administrative, finance, business development
and human resource functions. Other general and administrative costs include
legal costs of pursuing patent protection of our intellectual property and other
fees for legal services.
Quarterly Results May Fluctuate
We anticipate that our quarterly results of operations will fluctuate for
several reasons, including:
• the timing and extent of our development activities and clinical trials for
AVN944 and any other biopharmaceutical drug candidates that we may develop
in the future;
• the timing and outcome of our applications for regulatory approval for our drug candidates;
• the timing and extent of our adding new employees and infrastructure; and
• the timing of any milestone payments, license fees, or royalty payments that we may be required to make or that we may receive from collaborations.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and the disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenue and expenses during the reporting
periods. We evaluate our estimates and judgments on an on-going basis. We base
our estimates on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 5 to our
audited financial statements included under Item 8 of this Annual Report on Form
10-K. We believe that the following critical accounting policies reflect our
more significant estimates and assumptions used in the preparation of our
financial statements.
Revenue Recognition
Revenue is recognized when there is persuasive evidence that an agreement
exists, delivery has occurred, the price is fixed and determinable, and
collection is reasonably assured. Payments received in advance of work performed
are recorded as deferred revenue and recognized ratably over the performance
period. Milestone payments are recognized as revenue when milestones, as defined
in the contract, are achieved.
Accrued Expenses
As part of the process of preparing financial statements, we are required to
estimate accrued expenses. This process involves identifying services which have
been performed on our behalf, and estimating the level of service performed and
the associated cost incurred for such service as of each balance sheet date.
Examples of expenses for which we accrue estimated liabilities include services
provided by contract research organizations in connection with our preclinical
testing, and legal and other professional services. In connection with such
service fees, our estimates are most affected by our understanding of the status
and timing of services provided relative to the actual levels of services
incurred by such service providers. The majority of our service providers
invoice us in arrears for services performed. In the event that we do not
identify certain costs, which have begun to be incurred, or if we under- or
over-estimate the level of services performed or the costs of such services, our
reported expenses for such period would be too low or too high. The date on
which services commence, the level of services performed on or before a given
date and the cost of such services are often determined based on subjective
judgments. We make these judgments based upon the facts and circumstances known
to us in accordance with generally accepted accounting principles.
Stock-Based Compensation
We account for stock-based compensation expense using the fair value
recognition provisions of FASB Statement No. 123(R), "Share-Based Payment"
("Statement 123(R)"). The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing fair value model and
recognized as compensation expense over the vesting period of the award using
the accelerated attribution method.
For the year ended December 31, 2008, we recorded $310,000 of stock-based
compensation expense, of which $109,000 was included in research and development
expense and $201,000 was included in general and administrative expense. Since
we continue to operate in a net loss, our stock-based compensation expense had
no tax-related effects or an impact on cash flow from operations and cash flow
from financing activities for the year ended December 31, 2008. As of
December 31, 2008, our unrecognized stock-based compensation expense of
approximately $293,000 remains to be recognized over a weighted-average period
of approximately 2.35 years.
We estimate the fair value of stock options granted during the year ended
December 31, 2008 using the Black-Scholes option-pricing model. The assumptions
used under this model for the year ended December 31, 2008 are as follows:
(i) expected term of 6.9 years based on the simplified method for estimating the
expected term of stock options; (ii) expected volatility of 66.46% based on
historical and peer volatility data; (iii) weighted average risk-free interest
rate of 3.48% 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.
The fair value of stock options granted is recognized as expense over the
service period, net of estimated forfeitures. Prior to 2008, we calculated a
4.20% annual forfeiture rate. The estimation of forfeitures requires judgment,
and to the extent actual results or updated estimates differ from our current
estimates, such amounts are recorded as a cumulative adjustment in the same
period estimates are revised. In 2008, we adjusted our forfeiture rate to 9.0%
to reflect actual cumulative forfeitures to date. 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
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue. Total revenues for the twelve months ended December 31, 2008 were
$0.3 million, a decrease of $0.5 million from the prior year. All revenue in
2008 and 2007 was attributable to our collaboration agreement with Novartis and
no revenue was recognized under our other collaboration agreements.
Research and Development. Research and development expenses increased by $0.2
million, or 1%, to $15.5 million for the twelve months ended December 31, 2008
from $15.3 million for the same period in 2007. The increase in research and
development expenses was primarily attributable to increases in clinical trial
costs related to our AVN944 drug candidate and AVN316 preclinical drug
candidate, somewhat offset by decreases in salaries and benefits as a result of
the August 2008 reduction in force and a decrease in stock compensation costs.
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
$2.9 million, or 36%, to $5.3 million for the twelve months ended December 31,
2008 from $8.2 million for the same period in 2007. This decrease is primarily
attributable to a decrease in salaries and benefits as a result of the
August 2008 reduction-in-force and a decrease in stock compensation costs.
Restructuring and merger-related costs. Restructuring and merger-related
costs were $1.6 million in 2008 and represented severance and related costs
associated with our August 2008 reduction-in-force as well as legal and other
professional fees incurred in connection with our proposed merger with Clinical
Data.
Interest Income. Interest income decreased by $1.0 million, or 64%, to $0.6
million for the twelve months ended December 31, 2008, compared to $1.6 million
for the same period in 2007. The decrease in interest income is a result of
interest earned on lower average cash balances at lower average interest rates.
Interest Expense. Interest expense decreased by $65,000, or 10%, to $568,000
for the twelve months ended December 31, 2008, compared to $633,000 for the same
period in 2007. The decrease in interest expense was primarily related to lower
interest rates and lower average debt balances. Interest expense in 2008
included $174,000 of deferred financing costs charged to interest expense upon
the early retirement of our letter of credit with M&T Bank and our financing
arrangement with MIDFA.
Other Income. Other income increased by $37,000, or 34%, to $147,000 for the
twelve months ended December 31, 2008, compared to $110,000 for the same period
in 2007. The increase in other income was primarily related to the income from
subletting part of our facility and the provision of shared services to
subtenants.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenue. Total revenues for the twelve months ended December 31, 2007 were
$0.8 million, a decrease of $1.9 million from the prior year. All 2007 revenue
was attributable to our collaboration agreement with Novartis and no revenue was
recognized under our other collaboration agreements. During 2006, we recognized
revenue from our collaboration agreements with AstraZeneca, Novartis and the
University of Louisville.
Research and Development. Research and development expenses increased by $2.0
million, or 15%, to $15.3 million for the twelve months ended December 31, 2007
from $13.3 million for the same period in 2006. The increase in research and
development expenses was primarily attributable to increases in clinical trial
costs related to our AVN944 drug candidate, increases in laboratory supplies
expense, and an increase in salaries and benefits expense related to new hires.
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 increased by
$0.5 million, or 8%, to $8.2 million for the twelve months ended December 31,
2007 from $7.7 million for the same period in 2006. This increase is primarily
attributable to an increase in consulting costs and an increase in compensation
expense related to stock options.
Interest Income. Interest income increased by $0.3 million, or 23%, to $1.6
million for the twelve months ended December 31, 2007, compared to $1.3 million
for the same period in 2006. The increase in interest income is a result of
interest earned on higher average cash balances at higher average interest
rates.
Interest Expense. Interest expense decreased by $176,000, or 22%, to $633,000
for the twelve months ended December 31, 2007, compared to $808,000 for the same
period in 2006. The decrease in interest expense was primarily related to lower
balances on our long term debt. This decrease was offset, in part, by higher
average interest rates on our development bond financing.
Other Income. Other income decreased by $514,000, or 82%, to $110,000 for the
twelve months ended December 31, 2007, compared to $624,000 for the same period
in 2006. The decrease in other income was primarily related to the
discontinuation, during the first half of 2007, of income from subletting part
of our facility and the provision of shared services to subtenants.
Liquidity and Capital Resources
Overview
Our primary cash requirements are to:
• fund our research, 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 December 31, 2008, we had cash, cash equivalents and marketable
securities of approximately $5.8 million, which is a decrease of $22.7 million
from December 31, 2007. Our funds were invested in investment grade and United
States government securities. 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 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 with M&T Bank to MIDFA 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.
Sources and Uses of Cash
Operating Activities. Net cash used in operating activities was
$18.4 million, $18.9 million and $11.9 million in 2008, 2007 and 2006,
respectively. In 2008, our net loss of $21.8 million was reduced by non-cash
charges of $2.2 million, primarily for depreciation and amortization and stock
compensation. In addition, changes in net operating assets and liabilities in
2008 provided $1.2 million in cash from operating activities.
Investing Activities. Net cash provided by investing activities was
$21.2 million in 2008, net cash used in investing activities was $4.6 million in
2007, and net cash provided by investing activities was $0.4 million in 2006.
Proceeds from the sale and maturity of marketable securities were the primary
source of cash from investing activities, providing $28.6 million,
$39.2 million, and $20.7 million in 2008, 2007 and 2006, respectively. Cash used
in investing activities principally represents the amount used to purchase
property and equipment and marketable securities, net of proceeds from the sale
and maturity of marketable securities.
Financing Activities. Net cash used in financing activities was $4.1 million
in 2008, while net cash provided by financing activities was $26.7 million and
. . .
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