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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 2000 Commission File No. 0-18734
AVANIR PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No).
9393 TOWNE CENTRE DRIVE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive office) (Zip Code)
(858) 558-0364
(Registrant's telephone number, including area code)
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods 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 [ ]
The number of shares of Common Stock of the Registrant issued and outstanding as
of May 10, 2000:
<TABLE>
<S> <C>
Class A Common stock, no par value 55,081,086
Class B Common stock, no par value 65,000
</TABLE>
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AVANIR PHARMACEUTICALS
FORM 10-Q
For the quarter ended March 31, 2000
Index
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 2000 and September 30, 1999 .............. 3
Statements of Operations for the three and six month periods
ended March 31, 2000 and 1999 and for the period from
August 31, 1988 (Inception) to March 31, 2000 ........................ 4
Statements of Cash Flows for the six month periods ended
March 31, 2000 and 1999 and for the period from
August 31, 1988 (Inception) to March 31, 2000 ........................ 5
Notes to Financial Statements ........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders .................. 23
Item 6. Exhibits and Reports on Form 8-K ..................................... 23
SIGNATURES ...................................................................... 25
</TABLE>
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,723,272 $ 122,674
Receivable - Insurance (net of allowance for
non-payment of $189,011) 76,499
Receivables - license fee 500,000
Inventory 111,901 111,901
Prepaid 206,195 263,004
Restricted cash 57,158
Other 4,978 1,692
------------ ------------
Total current assets 12,546,346 632,928
PROPERTY - at cost (less accumulated depreciation of
$518,069 and $496,726) 159,641 219,361
PATENT COSTS (less accumulated amortization of
$101,064 and $101,473) 597,175 617,741
DEFERRED COSTS 40,846 100,000
LONG-TERM INVENTORY 111,901 111,901
OTHER ASSETS 52,050 83,284
------------ ------------
TOTAL $ 13,507,959 $ 1,765,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 705,279 $ 1,173,068
Accrued expenses and other liabilities 124,236 221,207
Accrued compensation and payroll taxes 292,518 123,068
Note payable 69,497 183,676
------------ ------------
Total current liabilities 1,191,530 1,701,019
COMMITMENTS (Notes 7 and 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series D - no par value, 500 shares 898,586
authorized; 100 shares issued
and outstanding
SHAREHOLDERS' EQUITY
Preferred Stock - 10,000,000 shares authorized;
and outstanding no shares issued
Common stock - no par value:
Class A - 99,288,000 shares authorized;
54,446,686 and 45,017,063 issued and outstanding 80,061,469 62,195,950
Class B - 712,000 shares authorized; 440,000
shares issued and outstanding (convertible 38,270 38,270
into Class A common stock)
Deficit accumulated during development stage (68,681,896) (62,170,024)
------------ ------------
Total shareholders' equity 11,417,843 64,196
------------ ------------
TOTAL $ 13,507,959 $ 1,765,215
============ ============
</TABLE>
See notes to the financial statements.
3
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31,
THREE MONTHS ENDED SIX MONTHS ENDED 1988
MARCH 31, MARCH 31, (INCEPTION)
------------------------------- ------------------------------- TO MARCH 31,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/contract
services $ 1,000,000 $ 1,000,000 $ 5,507,625
Federal research grants 940,646
Interest and other 42,978 $ 37,547 51,015 $ 109,389 4,888,829
------------ ------------ ------------ ------------ ------------
Total revenues 1,042,978 37,547 1,051,015 109,389 11,337,100
------------ ------------ ------------ ------------ ------------
EXPENSES:
Research and development 489,733 985,794 942,735 1,580,464 39,429,590
General and
administrative 921,440 1,211,579 1,925,805 1,780,217 27,038,027
Sales and marketing 168,807 75,632 251,498 986,692 2,518,504
Litigation settlement 3,900,000 4,097,504 4,881,403
Interest 237,744 1,508 345,345 4,124 5,618,200
Cost of contract services 533,270
------------ ------------ ------------ ------------ ------------
Total expenses 5,717,724 2,274,513 7,562,887 4,351,497 80,018,996
------------ ------------ ------------ ------------ ------------
NET LOSS $ (4,674,746) $ (2,236,966) $ (6,511,872) $ (4,242,108) $(68,681,896)
============ ============ ============ ============ ============
NET LOSS
ATTRIBUTABLE TO
COMMON
SHAREHOLDERS (4,679,332) (2,236,966) (6,516,458) (4,242,108) (68,711,042)
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.09) $ (0.05) $ (0.14) $ (0.10)
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF
COMMON SHARES
OUTSTANDING 50,438,776 40,991,359 48,047,954 40,882,698
============ ============ ============ ============
</TABLE>
See notes to the financial statements.
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31, 1988
MARCH 31, (INCEPTION) TO
------------------------------ MARCH 31,
2000 1999 2000
------------ ----------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,511,872) $(4,242,108) $(68,681,896)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 71,086 69,247 1,155,204
Non-cash interest expense 402,990 17,620 4,697,297
Technology license fee 3,545,713
Compensation paid with common stock and stock options 388,855 27,226 1,262,041
Gain/loss on sales of assets 5,224 5,224
Compensation forgiven by stockholder 66,923
Imputed interest on technology license fee 82,613
Changes in assets and liabilities
Accounts receivables (423,501) 67,673 (500,000)
Stock subscription receivable (200,000)
Inventory (111,901) (111,901)
Prepaid and other 187,339 (56,824) (329,700)
Organizational costs (20,242)
Deferred costs 59,154 (253,830) (40,846)
Accounts payable (467,789) 300,018 705,279
Litigation settlements paid with common stock 4,097,504 4,097,504
Accrued expenses and other liabilities (107,073) 76,226 297,811
Accrued compensation and payroll taxes 169,450 19,446 292,518
------------ ----------- ------------
Net cash used for operating activities: (2,128,633) (4,287,207) (53,476,459)
INVESTING ACTIVITIES:
Patent and licensing costs (32,904) (64,619) (752,118)
Capital expenditures/divestitures 1,556 (44,855) (827,910)
------------ ----------- ------------
Net cash used for investing activities (31,348) (109,474) (1,580,028)
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 14,029,773 2,055,518 55,342,256
Proceeds from issuance of convertible notes payable 1,500,000 21,000,000
Debt issue costs (155,015) (1,222,425)
Repayment of convertible notes payable (1,500,000) (4,173,217)
Stock issue costs (111,128) (3,147,625)
Advances for purchase of common stock 125,000
Collection of notes receivable for common stock 14,525
Proceeds from stockholders loans 322,788
Repayment of stockholder loans (322,788)
Proceeds from issuance of subordinated notes payable 16,277 555,027
Repayment of subordinated notes payable (130,456) (755,456)
Payment on technology license fee (958,326)
------------ ----------- ------------
Net cash provided by financing activities 13,760,579 1,944,390 66,779,759
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,600,598 (2,452,291) 11,723,272
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 122,674 6,508,341
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,723,272 $ 4,056,050 $ 11,723,272
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 345,345 $ 4,124 $ 1,460,593
============ =========== ============
</TABLE>
See notes to the financial statements
5
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited financial statements presented in this quarterly report
have been prepared in accordance with the instructions to Form 10-Q under
Section 13 or 15(d) of the Securities Exchange Act of 1934. These statements
should be read with the audited financial statements and the accompanying notes
included in AVANIR Pharmaceuticals' Annual Report on Form 10-K for the fiscal
year ended September 30, 1999. In management's opinion, the financial statements
include all adjustments, consisting only of normal recurring accruals that are
necessary to summarize fairly the company's financial position as of March 31,
2000, and the results of operations for the three and six months ended March 31,
2000 and from August 31, 1988 (Inception) to March 31, 2000. The results of
operations for the three and six months ended March 31, 2000, may not be
indicative of the results that may be expected for the fiscal year ending
September 30, 2000.
2. GOING CONCERN
We have prepared the accompanying financial statements on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We have incurred net losses since
our inception and have not yet received approval of our new drug application for
docosanol 10% cream from the U.S. Food and Drug Administration. As a result, we
have not generated any significant revenues from our licensed products. The
report from our auditors for the fiscal year ended September 30, 1999 contains
an explanatory paragraph referring to the status of our ability to continue as a
going concern. During the first two quarters of fiscal year 2000, we received
over $13 million from equity financing activities, including the sale of $6
million in Class A common stock and $7 million from the exercise of stock
purchase warrants and stock options. All of the funds received from the equity
financing activities and exercises of stock options and warrants will be used
for working capital purposes to support operations in the event of any delay in
a decision from the FDA regarding our new drug application.
3. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that we make estimates and assumptions
that affect the reported amounts of our assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to current period presentation.
5. INVENTORY
In November 1998, we purchased the active ingredient in docosanol 10%
cream at a cost of $223,800. We estimate that 50% of the raw materials purchased
are current assets because we expect that at least one-half of the raw materials
will be sold within the next year. We have classified the remaining 50% of the
raw materials inventory on our balance sheet as part of other assets. We record
the value our inventories at the lower of cost (first-in, first-out) or market
price.
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6. DEFERRED COSTS
Deferred costs at March 31, 2000 and March 31, 1999 of $40,846 and
$100,000, respectively, relate to an equity line investment agreement dated
January 22, 1999. Our policy is to record the costs associated with establishing
the equity line as deferred assets so long as there is a reasonable likelihood
of the equity line being drawn down and to expense these costs immediately when
the equity line will not be drawn down. Because we still could draw on some or
all of this equity line, we have recorded the costs as deferred costs and are
amortizing the costs over the 24-month term of the equity line.
7. REDEMPTION OF 11% CONVERTIBLE DEBENTURES
Loan Agreement - On November 23, 1999, we entered into a loan agreement
for $1.5 million in financing from two international financial lenders. On
November 24, 1999 and November 29, 1999, respectively, we issued to each lender
an 18-month convertible debenture, with an interest rate of 11% payable
quarterly in arrears. Under the loan agreement, we had the option to pay back
the outstanding principal and accrued interest on each convertible debenture
within the first 100 days from its issuance date before the lender was entitled
to convert the convertible debenture into shares of Class A common stock. On
February 4, 2000, we redeemed the $1.5 million in outstanding convertible
debentures plus $28,151 in accrued and unpaid interest. We paid a 5% redemption
premium in connection with the redemption of these debentures.
Stock Purchase Warrant - In connection with redeeming the convertible
debentures, one-third of the aggregate 584,112 shares of Class A common stock
underlying the Class M stock purchase warrants issued to the lenders were
cancelled on February 4, 2000. The remaining two-thirds of the Class A common
stock underlying the Class M stock purchase warrants, or 389,408 shares issuable
upon exercise of the warrants were fully vested on November 24, 1999. Because we
redeemed the convertible debentures within the first 100 days from their
respective issuance dates, each lender may only exercise 194,704 shares
underlying its Class M stock purchase warrant at an exercise price of $1.284 per
share. Additionally, because we have redeemed each of the convertible debentures
in full, the placement agents may only exercise an aggregate of 77,881 shares
underlying their Class M stock purchase warrants at an exercise price of $1.284
per share.
8. DEBT ISSUE COSTS
We incurred $155,015 in debt issue costs related to the issuance of the
convertible debentures on November 23, 1999. (See Note 7.) The debt issue costs
were fully amortized between November 23, 1999 and February 4, 2000. Between
November 23, 1999 and December 31, 1999 we amortized $57,356 in debt issue
costs. Between January 1, 2000 and February 4, 2000, we amortized the balance of
$97,659 in debt issue costs.
9. SHAREHOLDERS' EQUITY
Preferred Stock - Preferred stock consists of Series C Junior
Participating Preferred Stock and Redeemable Series D Convertible Preferred
Stock. On March 31, 2000, 100 shares of Redeemable Convertible Series D
Preferred Stock were outstanding.
Redeemable Series D Convertible Preferred Stock and Class J Stock
Purchase Warrants - On February 18, 2000, we received $1 million in exchange for
issuing 100 shares of Redeemable Convertible Series D Preferred Stock and Class
J Stock Purchase Warrants to purchase 50,000 shares of Class A common stock. We
issued these Series D shares pursuant to the terms of a securities purchase
agreement that we entered into with several accredited investors on March 22,
1999 to obtain up to $5 million in financing through the sale of Series D shares
and Class J Stock Purchase
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Warrants. The investors' purchase of an additional $1 million in Series D shares
and Class J Stock Purchase Warrants on February 18, 2000 was pursuant to the
investors' exercise of an option to purchase these additional securities under
similar terms as the March 1999 financing. At the initial closing on March 31,
1999, we had received $2 million in exchange for issuing to the investors 200
Series D shares and related Class J Stock Purchase Warrants to purchase an
aggregate of 100,000 shares of Class A common stock. By September 30, 1999, the
investors had converted all of the 200 Series D shares issued at the initial
closing into 4,075,771 shares of Class A common stock.
The Series D holders may convert any or all of the shares of Redeemable
Series D Convertible Preferred Stock that they acquire into shares of Class A
common stock at a conversion rate equal to $10,000 divided by a conversion price
equal to the lesser of:
- the Fixed Conversion Price - an amount equal to $2.715 per share of
Class A common stock; or
- the Variable Conversion Price - an amount equal to 86% of the market
price of our Class A common stock, defined as the lower of:
- the average of the five lowest trading prices per share of Class A
common stock on The American Stock Exchange during the 25 trading
days immediately preceding a given date of determination, where
trading price is determined as the average of the high and low
trading prices of our Class A common stock on a particular trading
day; or
- the average of the high and low trading price per share of Class A
common stock on The American Stock Exchange on the date of
determination.
On the date of issuance, the exercise price of the Class J Stock
Purchase Warrants issued in connection with the $1.0 million in financing was
set at 120% of the market price for Class A common stock (as defined in the
Certificate of Determination that the company filed with the California
Secretary of State on March 26, 1999) or $2.715 per share for the February 18,
2000 issuance. We estimated the value of the warrants to be $106,000, which we
credited (added) to Class A common stock and reported the same as a discount to
the Redeemable Series D Convertible Preferred Stock, which will be accreted over
the three-year life of the Redeemable Series D Convertible Preferred Stock or
sooner if converted to Class A common stock. We estimated the value of the
beneficial conversion feature of the Redeemable Series D Convertible Preferred
Stock at the time of issuance to be $138,222. We will record the effect of the
beneficial conversion feature on May 3, 2000, which is 75 days after issuance
and the date which the variable conversion price changes from 100% to 86% of
market price.
Class A Common Stock - Between January 1, 2000 and March 31, 2000, we
issued an aggregate of 2,991,703 shares of Class A common stock in connection
with the exercise of $4,113,592 in stock purchase warrants and 225,503 shares of
Class A common stock in connection with the exercise of $375,699 in employee
stock options. Details of the transactions are shown in the table below.
<TABLE>
<CAPTION>
WARRANTS AMOUNT AVERAGE PRICE
EXERCISED DATES SHARES RECEIVED PER SHARE
- ---------------- ----------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Class D warrants 01/01/00-03/31/00 112,970 $ 155,334 $1.3750
Class G warrants 01/01/00-03/31/00 2,878,733 $3,958,258 $1.3750
--------- ---------- -------
Total 2,991,703 $4,113,592 $1.3750
</TABLE>
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<TABLE>
<CAPTION>
STOCK OPTIONS AMOUNT AVERAGE PRICE
EXERCISED DATES SHARES RECEIVED PER SHARE
- --------------- ----------------- ------- -------- -------------
<S> <C> <C> <C> <C>
Employees 01/01/00-03/31/00 225,503 $375,699 $1.666
</TABLE>
$6 Million Private Placement - On January 31, 2000, we closed a $6
million private placement financing with three accredited financial
institutions, in which we issued 2,630,137 shares of Class A common stock and
warrants to purchase an additional aggregate of 263,014 shares of Class A common
stock at an exercise price of $2.44 per share. We paid financial advisory and
finders' fees of $480,000 in connection with this financing arrangement and
$47,049 in legal and other costs, leaving net proceeds of $5,472,951 from the
financing transaction.
Class D Warrants. The Class D warrant holders exercised warrants to
purchase a total of 112,970 shares of Class A common stock at an exercise price
of $1.375 per share for aggregate proceeds of $155,334. We previously recognized
a portion of the exercises of Class D warrants to purchase 46,060 shares of
Class A common stock that were processed after December 31, 1999 as
subscriptions receivable, which amounted to $63,333 at December 31, 1999.
Class G Warrants. As of December 31, 1999, 3,635,783 Class G warrants
were outstanding. In March 2000, the Class G warrant holders exercised their
rights to purchase a total of 2,878,733 shares of Class A common stock at an
aggregate purchase price of $3,958,258. As of March 31, 2000, Class G warrants
to purchase 757,050 shares of Class A common stock remained outstanding.
Class I Warrants. As of December 31, 1999, Class I warrants to purchase
500,000 shares of Class A common stock were outstanding. Between January 1, 2000
and March 31, 2000, the holders exercised 250,000 warrants to purchase 176,711
shares of Class A common stock using a "cashless" exercise option. The exercise
price for the Class I warrants was $0.78125 per share of Class A common stock.
The market prices on the date of exercise of the Class I warrants ranged from
$2.00 per share to $3.8125 per share, with an average of $2.66715 per share of
Class A common stock. The average gain in value per warrant was $1.8859 per
share. Therefore, the holder delivered to us 73,229 Class I warrants valued at
$138,103 to pay for the purchase of 176,771 shares of Class A common stock at
$0.78125 per share.
Class J Warrants. As of December 31, 1999, Class J Stock Purchase
Warrants to purchase 50,000 shares of Class A common stock at an exercise price
of $0.9144 per share were outstanding. On February 23, 2000, as part of the
issuance of $1 million in Redeemable Convertible Series D Convertible Preferred
Stock, we issued Class J Stock Purchase Warrants to purchase an additional
50,000 shares of Class A common stock at an exercise price of $2.715 per share.
We estimated the value of the warrants issued on February 23, 2000 to be
$106,000, which we recorded as common stock in the accompanying financial
statements, with a corresponding discount to the Redeemable Convertible Series D
Convertible Preferred Stock. As of March 31, 2000, the above Class J Stock
Purchase Warrants to purchase 50,000 shares of Class A common stock at $0.9144
per share and 50,000 shares of Class A common stock at $2.715 per share were
outstanding.
Class M Warrants. As of January 1, 2000, Class M warrants to purchase an
aggregate of 700,934 shares of Class A common stock were outstanding at an
exercise price of $1.284 per share. Two-thirds of the warrants to purchase
467,289 shares of Class A common stock were fully vested on January 1, 2000.
These warrants were issued to certain lenders and investment bankers in
connection with the $1.5 million in 11% convertible debentures that we issued in
November 1999. At the time of issuance, we valued the warrants at $81,308, which
was fully amortized at March 31, 2000. On February 18, 2000, we repaid the $1.5
million in 11% convertible debentures and the remaining one-third of the
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warrants to purchase an aggregate of 233,645 shares of Class A common stock were
cancelled. Vesting of the warrants stopped because we repaid the debentures
within the first 100 days of issuance (See Note 7.)
Class N Warrants. At March 31, 2000, Class N warrants to purchase
263,014 shares of Class A common stock were outstanding at an exercise price of
$2.44 per share. We issued these warrants to the investors who purchased Class A
common stock as part of the $6 million private placement on January 31, 2000. We
valued the Class N warrants at $472,478 and the sale of the Class A common stock
at $5,527,522 and included both allocated values in the financial statements in
common stock.
Amortization of Discount on Convertible Debentures. At March 31, 2000,
we had fully amortized the discount of $166,667 on the 11% convertible
debentures, which had been recorded as equity related to the beneficial
conversion feature on the convertible debentures issued in November 1999. (See
Note 7.)
Stock Options to Officers. On March 10, 2000, we issued stock options to
the officers of the company for the purchase of 375,000 shares of Class A common
stock at an exercise price of $2.4701 per share. We considered the options to be
nonqualified stock options under our stock option plan because they were issued
at a 15% discount to the market price on the date of grant. The closing sales
price for our Class A common stock on March 10, 2000 was $2.906 per share. In
connection with such issuance of these stock options at a discount, we will
record as compensation expense over the three-year vesting period the amount of
$163,463, representing the difference in the market price on the date of
issuance and the discounted price of the stock options on the date granted.
Stock Options to Non-employee Directors. In lieu of paying cash to
non-employee directors for services between January 1, 2000 and June 30, 2000,
we issued stock options on December 2, 1999 for the purchase of an aggregate of
120,000 shares of Class A common stock at an exercise price of $1.55 per share.
We issued these options at a 15% discount to the market price on the date of
grant, and classified the issuances as nonqualified stock options according to
our stock option plan. The closing sales price for our Class A common stock on
December 2, 1999 was $1.8125 per share. In connection with such issuance of
stock options at a discount for services, we are recording the cost as
compensation expense over a six-month period of the directors' services in the
total amount of $123,540.
10. NET LOSS PER SHARE
Net Loss Per Share - In the accompanying statements of operations for
the three and six months ended March 31, 2000 and March 31, 1999, we have
presented our net loss per share under SFAS No. 128. Net loss per share is
computed using the Basic EPS method, as the inclusion of common stock
equivalents in the diluted EPS calculation would be anti-dilutive. Based on the
our continuing net losses, implementing SFAS No. 128 has not had a material
impact on net loss per share.
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11. FDA REVIEW OF DOCOSANOL 10% CREAM
In November 1999, the U.S. Food and Drug Administration (FDA) informed
us that our clinical data for docosanol 10% cream would be sufficient for
approval as an over-the-counter (OTC) product, provided that the FDA finds no
serious discrepancies from a site audit conducted at a clinical trial site in
The Netherlands and that agreement can be reached with the Agency on labeling of
the product for the OTC market. The clinical study in The Netherlands was
conducted in 1992-1993 by our European partner, Yamanouchi Europe, under our
investigational new drug application. We have submitted final responses to all
FDA questions about our new drug application along with proposed consumer
product labeling. We are unaware of any other matter at this time that the FDA
must still evaluate in order to make a decision on our new drug application. We
believe the FDA's internal review guidelines may allow the Agency until Monday,
June 5, 2000 to make a decision on our new drug application. If our new drug
application is approved by the FDA, then docosanol 10% cream will be the first
OTC product for cold sore treatment that will have an FDA-approved new drug
application to support claims made about the product's performance.
12. LICENSE AGREEMENT WITH SMITHKLINE BEECHAM
On March 31, 2000, we signed an exclusive license agreement with
SmithKline Beecham (NYSE: SBH) for rights to manufacture and market docosanol
10% cream as an OTC product in the United States and Canada as a treatment for
recurrent oral-facial herpes.
Under the terms of the license agreement, SmithKline Beecham Consumer
Healthcare will be responsible for all sales and marketing activities and the
manufacturing and distribution of docosanol 10% cream in the exclusive markets.
The terms of the license agreement provide for our company to receive license
fees and milestone payments up to $25 million. The majority of the milestone
payments are structured around obtaining FDA approval of our new drug
application and product launch. A final portion of the payments is structured
around achieving a sales performance milestone within 12 months of product
launch. In addition, we expect to receive royalties for sales of docosanol 10%
cream in the licensed market territory. A small portion of the $25 million was
due upon signing the license agreement and has been paid and is nonrefundable.
However, we will not receive the balance of milestone payments or the royalties
if the FDA does not approve the use of docosanol 10% cream for sale as an OTC
treatment for cold sores.
At this time, we can provide no assurance that we will:
- Obtain a successful site audit, as required by the FDA (see Note 11); or
- Agree with the FDA in a timely manner on labeling of the product.
Furthermore, we can give no assurance that the proceeds from a marketing
partnership will be sufficient to continue our other drug discovery and
development programs currently underway.
13. SUBSEQUENT EVENTS
See Part II, Item 6 - "Exhibits and Reports on Form 8-K."
14. RELATED PARTY
IriSys Research and Development, LLC - On February 5, 1999, we entered
into a letter of intent, subject to approval of a definitive agreement, with
IriSys Research and Development, LLC ("IriSys") to license the worldwide rights
to a new drug product to treat several central nervous system conditions. These
include treatments of:
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(1) a condition associated neurodegenerative diseases such as
Amyotrophic Lateral Sclerosis (ALS), multiple sclerosis,
Alzheimer's Disease and stroke;
(2) neuropathic pain, as occurs in diabetic neuropathy, and
(3) intractable cough.
The terms of the agreement, if approved, would require AVANIR to make milestone
payments in cash or stock to IriSys only for successful filings of a new drug
application and subsequent marketing approvals by the FDA and to pay a royalty
on sales. We are in the process of negotiating the final terms of this agreement
with IriSys.
Dr. Gerald Yakatan, the president and chief executive officer of AVANIR,
is the founder of IriSys and is its current chairman and a majority shareholder
of IriSys. Based in San Diego, IriSys is a privately held company founded by Dr.
Yakatan in 1996 that engages in contract formulation development.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains forward-looking statements concerning future events
or performance of AVANIR. You should not rely excessively on these
forward-looking statements, because they are only predictions based on our
current expectations and assumptions. Forward-looking statements often contain
such words like "estimate," "anticipate," "believe," "plan" or "expect". Many
known and unknown risks and uncertainties could cause our actual results to
differ materially from those indicated in these forward-looking statements. You
should review carefully the risks and uncertainties identified in this report,
including those explained below and in our other filings with the Securities and
Exchange Commission. We have no obligation to update or announce revisions to
any forward-looking statements to reflect actual events or developments.
OVERVIEW
AVANIR Pharmaceuticals is a development stage company organized to
market novel therapeutic products to treat human diseases. Since inception in
August 1988, AVANIR has operated in one business segment - pharmaceutical
product development. For the period from inception to March 31, 2000, AVANIR has
incurred a cumulative net loss of $68.7 million.
Docosanol 10% Cream: Docosanol 10% cream, a topical treatment for
oral-facial herpes, which is more commonly known as cold sores or fever
blisters, is our lead therapeutic product that we have been developing for over
eight years. Docosanol 10% cream is currently under review by the U. S. Food and
Drug Administration ("FDA") and, if approved, will be the first over the counter
product in the cold sore treatment category with FDA approval. In November 1999,
the FDA informed us that our clinical data for docosanol 10% cream would be
sufficient for approval as an over the counter product, provided that the FDA
finds no serious discrepancies from a site audit conducted at a clinical study
site in The Netherlands and that agreement can be reached with the Agency on
labeling of the product for the over the counter market. The clinical study in
The Netherlands was conducted in 1992-1993 by our European partner Yamanouchi
Europe under our investigational new drug application. We have submitted final
responses to all FDA questions about our new drug application along with
proposed consumer product labeling. We are unaware of any other matter at this
time that the FDA must still evaluate in order to make a decision on our new
drug application. We believe that the FDA's internal review guidelines may allow
the Agency until Monday, June 5, 2000 to make a decision on our new drug
application.
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License Agreement with SmithKline Beecham. On March 31, 2000, we signed
an exclusive license agreement with SmithKline Beecham, to allow SmithKline
Beecham to market docosanol 10% cream as an over the counter treatment for cold
sores in the United States and Canada. Under the terms of the license agreement,
SmithKline Beecham Consumer Healthcare will be responsible for all sales and
marketing activities and the manufacturing and distribution of docosanol 10%
cream for the licensed markets.
The license agreement provides for our company to receive license fees
and milestone payments up to $25 million. The majority of the milestone payments
are structured around obtaining FDA approval of our new drug application and
product launch. A final portion of the payments is structured around achieving a
sales performance milestone within 12 months of product launch. In addition, we
will receive royalties for sales of docosanol 10% cream. A small portion of the
$25 million was due upon signing the license agreement and has been paid and is
nonrefundable.
SmithKline Beecham has the right to terminate this license agreement
with us in its entirety if any governmental agency directly prevents or is
likely to prevent launch of docosanol 10% cream for use as an over the counter
product. Failure to receive FDA marketing approval could affect materially and
adversely our business operations and financial condition. Furthermore, we can
give no assurance that the proceeds from this marketing partnership will be
sufficient to continue our other drug discovery and development programs
currently underway.
Other Proposed Products: We also are engaged in much earlier stages of
investigation, research and/or development of several other potential
therapeutic products, including potential new drugs for the treatment of
allergies, asthma and inflammatory diseases and a treatment for central nervous
system disorders. These additional products will not be available for sale to
the market for several years, if at all.
RESULTS OF OPERATIONS--
THREE MONTHS ENDED MARCH 31, 2000
NET LOSSES
Net losses for the second fiscal quarter ended March 31, 2000 were $4.7
million or $0.09 per share compared to $2.2 million or $0.05 per share for the
same period in 1999. Litigation settlement costs during the second fiscal
quarter ended March 31, 2000 were $3.9 million. Excluding litigation settlement
costs, net losses for the three months ended March 31, 2000 were $775,000 or
$0.02 per share, compared to $2.2 million or $0.05 per share, for the same
period in 1999.
REVENUES
Revenues increased to $1.0 million in the second quarter of fiscal year
2000 from $38,000 in the same period in 1999. The increase in revenues during
the second quarter of fiscal year 2000 was primarily due to earning $1.0 million
in license fees in the second quarter of fiscal year 2000 for docosanol 10%
cream.
EXPENSES
Operating Expenses - Total operating expenses increased to $5.7 million
in the second quarter of fiscal year 2000 compared to $2.3 million in the same
period in 1999. Operating expenses for the second quarter of fiscal year 2000
included $3.9 million in litigation settlement costs. Excluding litigation
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settlement costs, operating expenses for the second quarter of fiscal year 2000
were $1.8 million, representing a decrease of $457,000 from the comparable
period in the prior fiscal year. A comparison of operating expenses for fiscal
year 2000 compared with the prior year is described below in the discussions of
research and development, general and administrative, sales and marketing and
interest expenses.
Research and Development Expenses - During the second quarter of fiscal
year 2000, research and development expenses decreased to $490,000 compared to
$986,000 in the same period in 1999. The decreased expenses in the second
quarter of fiscal year 2000 related to continued maintenance of a smaller staff
size beginning on July 1, 1999, and reduced spending on outside contract
research. Research efforts declined in fiscal year 2000, as less analytical
support was necessary to respond to FDA questions in the current year.
Additionally, we maintained lower spending rates for other research and
development projects to conserve cash while awaiting a decision by the FDA on
our new drug application for docosanol 10% cream.
General and Administrative Expenses - During the second quarter of
fiscal year 2000, general and administrative expenses decreased to $921,000
compared to $1.2 million in the same period in 1999. The decrease in general and
administrative expenses during the second quarter is related primarily to
reduced staff size compared with a year ago and lower legal fees in 2000.
Sales and Marketing Expenses - During the second quarter of fiscal year
2000, sales, marketing and business development expenses were $169,000 compared
with $76,000 in the comparable period a year earlier. Higher expenses were
incurred in the current fiscal year primarily due to the cost of development of
a license agreement for docosanol 10% cream and in evaluating other license
agreements for potential inlicensing of late-stage development drug candidates.
Litigation Settlement Expense - Litigation settlement expense for the
second quarter of fiscal year 2000 was $3.9 million, which amount was satisfied
through the issuance of 975,000 shares of Class A common stock (see Part II,
Item 1 "Legal Proceedings").
Interest Expense - Interest expense increased to $238,000 in the second
quarter of fiscal year 2000 compared to $1,500 for the same period in 1999. The
increase in interest expense in fiscal year 2000 was due to the issuance of $1.5
million in 11% convertible debentures in the current fiscal year.
RESULTS OF OPERATIONS--
SIX MONTHS ENDED MARCH 31, 2000
NET LOSSES
Net losses for the six months ended March 31, 2000 increased to $6.5
million or $0.14 per share, compared to $4.2 million or $0.10 per share, for the
same period in 1999. Excluding litigation settlement costs, net losses for the
six months ended March 31, 2000 were $2.4 million or $0.05 per share, compared
to $4.2 million or $0.10 per share, for the same period in 1999.
REVENUES
Revenues for the six months ended March 31, 2000 increased to $1.0 million from
$109,000 in the same period in 1999. License fees for docosanol 10% cream
accounted for most of the difference in revenues between the two periods.
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EXPENSES
Operating Expenses - For the six months ended March 31, 2000, total
operating expenses increased to $7.6 million compared to $4.4 million in the
same period in 1999. Operating expenses for the first six months of fiscal year
2000 included $4.1 million in litigation settlement costs. Excluding litigation
settlement costs, operating expenses for the first six months of fiscal year
2000 were $3.5 million, representing a decrease of $886,000 from the comparable
period in the prior year. A comparison of operating expenses for the first six
months of fiscal year 2000 compared with the same period a year ago is described
below in the discussions of research and development, general and
administrative, sales and marketing and interest expenses.
Research and Development - During the first six months of fiscal year
2000, research and development expenses decreased to $943,000, compared with
$1.6 million in the same period in 1999. The decrease in expenses for the first
six months of fiscal year 2000 compared with the prior year represents the
six-month effect of smaller staff size in fiscal year 2000 and reduced spending
on outside contract research while awaiting a decision by the FDA on our new
drug application for docosanol 10% cream.
General and Administrative Expenses - For the six months ended March 31,
2000, general and administrative expenses increased to $1.9 million compared to
$1.8 million in the same period of 1999. The increased expenses for the six
months ended March 31, 2000 reflect the higher level of legal expenses incurred
in the first three months of fiscal year 2000 compared to levels in the same
period in fiscal year 1999.
Sales and Marketing Expenses - During the first six months of fiscal
year 2000, sales and marketing expenses were $251,000 compared with $987,000 in
the comparable period a year earlier. Sales, marketing and business development
expenses for fiscal year 2000 have decreased because AVANIR decided to
outlicense docosanol 10% cream. Higher expenses in six months ended March 31,
1999 represent primarily our efforts to form a sales and marketing staff and to
prepare for the launch of docosanol 10% cream as a prescription product when we
were pursuing FDA approval of our new drug application as a prescription drug.
Litigation Settlement Expense - Litigation settlement expense for the
first six months of fiscal year 2000 was $4.1 million and was paid for by the
issuance of 160,000 shares of Class A common stock in the first quarter of
fiscal year 2000 and 975,000 shares of Class A common stock during the second
quarter of fiscal year 2000 (see Part II, Item 1 "Legal Proceedings").
Interest Expense - Interest expense increased to $345,000 in the first
six months of fiscal year 2000 compared to $4,000 for the same period in 1999.
The increase in interest expense in fiscal year 2000 was due to the issuance of
$1.5 million in 11% convertible debentures in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, AVANIR has financed operations primarily through the
sale of common stock, convertible debt securities, shareholder loans and
issuances of common stock or stock options for services or employee compensation
instead of cash. Net cash provided by financing activities from inception
through March 31, 2000 was $66.8 million.
Cash Balances and Working Capital - At March 31, 2000, AVANIR had
available cash, cash equivalents and short-term investments of $11.7 million and
working capital of $11.4 million, compared to cash and cash equivalents of
$123,000 and a negative working capital balance of $1.1 million at
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September 30, 1999. The increases in cash, cash equivalents and short-term
investments and working capital at March 31, 2000 were due to net cash received
from financing activities totaling $13.8 million during the first six months of
the current fiscal year, partially offset by $2.2 million in cash used for
operations and investing activities, as discussed below and in "Results of
Operations." Included in cash, cash equivalents and short-term investments, and
working capital balances at March 31, 2000, is $1.0 million received from the
sale of 100 shares of Redeemable Convertible Series D Convertible Preferred
Stock and Class J Stock Purchase Warrants to purchase 50,000 shares of Class A
common stock. See Note 9 to the Financial Statements.
Operating Activities - Net cash used to fund operating activities during
the six months ended March 31, 2000 were $2.1 million, which was approximately
one-half the cash used to fund operating activities during the same period in
1999. The decrease in cash used for operations is related primarily to lower net
losses in the 2000 period after excluding litigation settlement costs of $4.1
million, which were paid with common stock. (see Part II, Item 1, "Legal
Proceedings" for $3.9 million settlement).
Investing Activities - We made no major purchases of capital equipment
in the first six months of fiscal year 2000 and instead received a refund on
other previously purchased equipment during the first six months of fiscal year
2000. Expenditures for patents were about half the levels from the comparable
period in fiscal year 1999.
Financing Activities - Net cash received from financing activities
during the first six months of fiscal year 2000 totaled $13.8 million,
including:
- $6.9 million from exercises of stock purchase warrants;
- approximately $5.5 million, net of fees and costs, from a $6.0
million private placement with three accredited investors;
- $1.0 million from the sale of Redeemable Series D Convertible
Preferred Stock,
- $607,000 from exercises of employee stock options; and
- less repayments on smaller notes and other debt issue costs.
In the second quarter of fiscal year 2000 we repaid a $1.5 million convertible
debenture that we issued in the prior quarter.
Since inception, AVANIR has experienced negative cash flows from
operations. Cash flows from operations for the next two years will depend almost
solely upon whether or not the FDA approves our new drug application and
SmithKline Beecham is able to launch docosanol 10% cream on a timely basis.
Whether or not AVANIR receives marketing approval of docosanol 10% cream from
the FDA, we expect our cash requirements will be substantial for the fiscal year
ending September 30, 2000 and the following year. AVANIR's cash, cash
equivalents and short-term investments of $11.7 million at March 31, 2000, while
improved over levels at September 30, 1999 and December 31, 1999, may not be
sufficient to implement all our programs on a timely basis, if at all. Funds
will be necessary in the next several years to inlicense drugs for development,
to conduct internal research and development programs, and for development of
the company's proprietary monoclonal antibodies platform.
Even with FDA approval of our new drug application, AVANIR's plans for
the next 3-5 years to develop a pipeline of potential products will still likely
depend on AVANIR's receipt of additional financing from time-to-time until we
begin to generate sustainable positive cash flows from operations. There can be
no assurance that we will be able to enter into other financing agreements with
investors on attractive terms, if at all, or that the conditions of obtaining
any financing will be satisfied. See "Risk Factors." Such financing activities
could result in significant dilution to shareholders. We may also have to enter
into collaborative arrangements with one or more other pharmaceutical or
biotechnology companies to commercialize our other products. There can be no
assurance that we can successfully obtain such additional capital or enter into
the collaborative arrangements necessary to fully develop or
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commercialize any of our drugs on acceptable terms. Failure to raise additional
capital or enter into such arrangements in a timely manner could materially and
adversely affect our business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard will become effective for AVANIR for the year ending September 30,
2000. Interim reporting of this standard will be required. We have not yet
assessed the effect of this standard on our current reporting and disclosures.
RISK FACTORS
We are a development stage company with a history of continuing losses and a
limited amount of capital reserves.
In the Independent Auditors' Report on our financial statements for the
fiscal year ended September 30, 1999, our auditors indicated that we would need
to raise additional capital to continue as a going concern. From our inception
through September 30, 1999, we have generated only limited revenues and have
incurred net losses totaling approximately $62.1 million. Further, we expect to
continue to incur operating losses related to research and development and
marketing activities, unless we obtain approval from the FDA of our new drug
application for docosanol 10% cream. Docosanol 10% cream still requires
regulatory approval before it can be sold in the marketplace. Even if the FDA
approves our new drug application for docosanol 10% cream, we cannot assure you
that the approval or product launch will occur in a timely manner. If we incur
any significant delays, then we would have to defer our development programs or
raise additional financing earlier than we currently contemplate. We also will
likely need to raise additional financing to support research and development
efforts that we believe are necessary to develop other new drugs.
If our amended new drug application for docosanol 10% cream does not receive FDA
approval, then our business will be materially and adversely affected.
We cannot assure you that the FDA will approve docosanol 10% cream as an
over the counter ("OTC") product or that the FDA will approve our proposed OTC
labeling. SmithKline Beecham has the right to terminate this license agreement
with us in its entirety if any governmental agency directly prevents or is
likely to prevent launch of docosanol 10% cream as an OTC product. Failure to
receive FDA marketing approval could affect materially and adversely our
business operations and financial condition.
On October 29, 1999, the Center for Drug Evaluation and Research
informed us that the clinical data on the effectiveness of docosanol 10% cream
in treating recurrent oral-facial herpes would be sufficient for approval as an
OTC product, pending an acceptable audit of the data in one of the clinical
studies presented in our new drug application. The FDA asked that we submit
proposed product labeling for docosanol 10% cream as an OTC product, which we
have completed. We are currently awaiting FDA assessment of the site audit and
evaluation of our proposed product labeling.
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Neither we nor our licensees may successfully sell docosanol 10% cream as an OTC
product.
If we and/or our licensees pursue commercialization of docosanol 10%
cream as an OTC product for cold sores/fever blisters, then we will face the
following risks in our efforts to market this product:
- potential delays in achieving timely compliance with FDA regulations
for marketing an OTC product;
- development in a timely manner of a professional marketing staff and
sales communications program to launch the product;
- difficulty in building product awareness of a new OTC product among
customers or retail store decision makers;
- lack of consumer perception that docosanol 10% cream is superior to
existing and potentially new OTC products for oral herpes; and
- lack of widespread acceptance of docosanol 10% cream in the OTC
consumer market.
Docosanol 10% cream, if ultimately marketed, will face intense competition from
a number of existing and well-established products.
If approved by the FDA and successfully launched, docosanol 10% cream
will compete with several other products for oral-facial herpes currently on the
market in the U.S., as well as other products or potential products that are or
may be under development or undergoing the FDA regulatory approval process. Most
of our competitors, including Blistex, Inc., Bayer Corp. and Schering Plough,
have greater financial resources, research and development facilities and
manufacturing and marketing experience than we do. Docosanol 10% cream may not
achieve commercial success in this intense competitive environment, which would
severely impact our revenues.
Foreign sales of docosanol 10% cream and other potential products are subject to
various foreign trade risks.
We are exposed to various foreign trade risks relating to the continued
development of docosanol 10% cream by foreign licensees. We also may arrange for
contracts in the future for the manufacture, marketing and distribution of
docosanol 10% cream overseas by foreign licensees, which will be substantially
out of our control. Our license agreement with SmithKline Beecham initially is
for the United States and Canada only, and we may not finalize any licensing or
distributorship arrangements for territories not covered by existing agreements
on favorable terms, if at all. Specific risks that could impact significantly
our ability to deliver products abroad include:
- changes in the regulatory and competitive environments in foreign
countries;
- changes in a specific country's or region's political or economic
conditions;
- difficulty in negotiating a license agreement with SmithKline
Beecham for foreign markets or in finding other foreign partners
with sufficient capital to effectively launch the product;
- shipping delays;
- difficulties in managing operations across disparate geographic
areas;
- fluctuations in foreign currency exchange rates;
- difficulties associated with enforcing agreements through foreign
legal systems; and
- trade protection measures, including customs duties and export
quotas.
Our failure to comply with government regulations regarding the development,
production, testing, manufacturing and marketing of docosanol 10% cream and our
other products may affect adversely our operations.
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Governmental authorities in the U.S., including the FDA, and other
countries regulate significantly the development, production, testing,
manufacturing and marketing of pharmaceutical products. The clinical testing and
regulatory approval process can take a number of years and require the
expenditure of substantial resources. Although we have completed the development
of docosanol 10% cream and are waiting for the FDA's approval, we may not obtain
regulatory approval for it or any of our other proposed products.
Failure to obtain, or delays in obtaining, these approvals will affect
adversely our business operations, including our ability to commence marketing
of any proposed products. We could use a significant portion of our financial
resources for research and development and the clinical trials necessary to
obtain these approvals for our proposed products. We will continue to incur
costs of development without any assurance that we will ever obtain regulatory
approvals. In addition, we cannot predict the extent to which adverse
governmental regulation might arise from future U.S. or foreign legislative or
administrative action. Moreover, we cannot predict with accuracy the effect of
unspecified, but possible, future changes in the regulatory approval process and
in the domestic health care system for which we develop our products. Future
changes could affect adversely the time frame required for regulatory review,
our financial resources, and the sale prices of our proposed products, if
approved for sale.
Unsuccessful research and development programs for proposed new products could
affect negatively our business.
We face substantial risks of failing to complete the development of our
early-stage research and development programs in allergy and asthma and other
areas. The effectiveness of our preclinical allergy and asthma research
performed in vitro or in animal models may not be relevant to the development
of, or indicate the efficacy of, a proposed product for human use. Unsuccessful
clinical trial results for our proposed products could affect materially and
adversely our business operations and financial condition. The development
process for medical products is lengthy and capital intensive. Our drug
development programs are exposed to all of the risks inherent in product
development based on innovative technologies, including unanticipated
development problems and the possible lack of funding that could result in the
abandonment or substantial change in the development of a specific product.
Difficulties in acquiring in-licensed technologies that we believe are necessary
to fill our product development pipeline may negatively affect our stock price
and restrict our growth.
We will face intense competition for these in-licensed products and
technologies. In addition, we might not locate suitable products and
technologies to fit our strengths or obtain them on acceptable terms, or have
the financial resources to develop products from the in-licensed technology. Our
inability to add these technologies and products to our product development
pipeline will hinder our growth and may affect negatively our business.
Our business strategy is to in-license products and/or technologies at
various stages in the drug development pipeline. To achieve this objective, we
must have the financial resources to acquire and/or in-license new products and
technologies and develop and market the products, once approved. For example, we
signed a letter of intent with IriSys Research and Development, LLC in February
1999 to license world-wide rights to a product intended for use in a condition
associated with neurodegenerative diseases and pain. However, due to limited
financial resources in fiscal year 1999, we deferred negotiations of a final
agreement with IriSys to in-license the product. We can provide no assurance
that we will in-license this or any other product or technology.
Our failure to retain key management and scientific personnel could affect
negatively our business.
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Our success depends on the performance of a small core staff of key
management and scientific employees with biotech experience. Given our early
stage of development, we depend substantially on our ability to hire, train,
retain and motivate high quality personnel, especially our scientists and
management team in this field. If we were to lose one or more of our key
scientists, then we would lose the history and knowledge that they have which
could substantially delay one or more of our development programs until adequate
replacement personnel could be hired and trained.
Our future success also depends on our continuing ability to identify,
hire, train and retain highly qualified, technical, sales, marketing and
customer service personnel. The employment and employee retention agreements
with several of our key employees are limited in scope and provide no real
assurance that any of these people will continue their employment with our
company. We do not have "key person" life insurance policies. The industry in
which we compete has a high level of employee mobility and aggressive recruiting
of skilled personnel, which creates intense competition for qualified personnel,
particularly in product research, development, sales and marketing.
Our patents may be challenged and our pending patents may be denied, which would
seriously jeopardize our ability to compete in the intended markets for our
proposed products.
We rely substantially on the protection of our intellectual property,
with 19 worldwide docosanol patents and 24 additional docosanol-related patent
applications pending. We also have ten patents issued or pending on other
products and technologies. Because of the competitive nature of the
bio-pharmaceutical industry, we cannot assure you that:
- the claims in the pending patent applications will be allowed or
that we will even be issued patents;
- present and future competitors will not develop similar or superior
technologies independently, duplicate our technologies or design
around the patented aspects of our technologies;
- our proposed technologies will not infringe other patents or rights
owned by others, including licenses which may not be available to
us;
- any issued patents will provide us with significant competitive
advantages; or
- challenges will not be instituted against the validity or
enforceability of any patent that we own or, if instituted, that
these challenges will not be successful.
Our inability to obtain or maintain patent protections for our products in
foreign markets may affect negatively our financial condition.
The process for the approval of patent applications in foreign countries
may differ significantly from the process in the U.S., which may delay our plans
to market and sell docosanol 10% cream in the international market place.
Approval in one country does not necessarily indicate that approval can be
obtained in other countries. The patent authorities in each country administer
that country's laws and regulations relating to patents independently of the
laws and regulations of any other country and we must seek and obtain the
patents separately. Our inability to obtain or maintain patent protections for
docosanol 10% cream in foreign markets would hamper severely our ability to
generate international sales from our first proposed product.
If we do not protect our technical innovations, then our business may be
negatively affected.
We rely substantially on confidentiality agreements to protect our innovations.
We cannot assure you that secrecy obligations will be honored, or that others
will not develop independently similar or superior technology. In addition, if
our consultants, key employees or other third parties apply technological
information independently developed by them or by others to our projects, then
disputes
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may arise as to the proprietary rights to this information in which we may not
receive a favorable resolution.
Developing new pharmaceutical products for human use involves product liability
risks, for which we currently have limited insurance coverage.
The testing, marketing and sale of pharmaceutical products involve the
risk of product liability claims by consumers and other third parties. We have
maintained product liability insurance coverage for our clinical trials in the
amount of $2 million per incident and in the aggregate. However, product
liability claims can be high in the pharmaceutical industry and our insurance
may not cover sufficiently all possible liabilities. If a suit against our
business or proposed products is successful, then the lack or insufficiency of
insurance coverage could affect materially and adversely our business and
financial condition. Furthermore, various distributors of pharmaceutical
products require minimum product liability insurance coverage before their
purchase or acceptance of products for distribution. Failure to satisfy these
insurance requirements could impede our ability to achieve broad distribution of
our proposed products.
Our Class A common stock trades on The American Stock Exchange and could be
delisted if it fails to comply with the AMEX listing requirements.
We cannot assure you that our Class A common stock will continue to
comply with the listing requirements of The American Stock Exchange. For
example, our Class A common stock was delisted from trading on the Nasdaq
National Market System on September 17, 1999, and traded on the OTC Bulletin
Board from September 20, 1999 to April 5, 2000. Our Class A common stock started
trading on The American Stock Exchange on April 6, 2000. Delisting from The
American Stock Exchange could have a material adverse effect on our ability to
raise additional capital on favorable terms, if at all, as well as on
stockholder liquidity.
We may issue additional shares of our Class A common stock that may dilute the
value of our Class A common stock to current shareholders and may affect
adversely the market price of our Class A common stock.
If we raise additional capital by issuing equity securities at a price
or a value per share less than the then current price per share of Class A
common stock, then the value of the shares of Class A common stock then
outstanding will be diluted or reduced. For example, we potentially may issue
and register up to 8,137,388 shares of our Class A common stock under a
two-year, $13 million equity line agreement with Promethean Investment Group,
L.L.C. that could result in dilution in your ownership position in the company.
Depending on the price per share of our Class A common stock during the next two
years, we may need to register additional shares for resale to access the full
amount of financing available.
In addition, there will be a dilutive effect on the shares of our Class A common
stock currently issued and outstanding from the conversion or exercise of stock
purchase warrants and stock options currently outstanding. As of May 5, 2000,
the following securities were exercisable or convertible into shares of Class A
common stock:
- stock options to purchase an aggregate of 6,074,015 shares of Class
A common stock at exercise prices ranging from $0.30 to $6.44 per
share;
- Class G stock purchase warrant exercisable into 757,050 shares of
Class A common stock at an exercise price of $1.375 per share;
- Class H stock purchase warrant exercisable into 100,000 shares of
Class A common stock at an exercise price of $2.40 per share;
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<PAGE> 22
- Class I stock purchase warrant exercisable into 11,442 shares of
Class A common stock at an exercise price of $0.78125 per share;
- Class J Stock Purchase Warrants exercisable into 50,000 shares of
Class A common stock at exercise price of $0.9144 per share and
50,000 shares of Class A common stock at an exercise price of $2.715
per share;
- Class K stock purchase warrant exercisable into 375,000 shares of
Class A common stock at an exercise price of $1.125 per share;
- Class L stock purchase warrant exercisable into 55,000 shares of
Class A common stock at an exercise price of $1.1875 per share;
- Class M stock purchase warrants exercisable into 467,290 shares of
Class A common stock at an exercise price of $1.284 per share;
- Class N stock purchase warrants exercisable into 263,014 shares of
Class A common stock at an exercise price of $2.44 per share;
- 65,000 shares of Class B common stock each convertible into one
share of Class A common stock; and
- 100 shares of Redeemable Series D Convertible Preferred Stock.
Sales in the public market of shares of Class A common stock that
underlie stock options and warrants may affect adversely the prevailing market
prices for shares of Class A common stock. Negative price movements in the
shares of Class A common stock likely would affect adversely our ability to
obtain additional equity capital on favorable terms, if at all.
We will not declare or pay cash dividends in the foreseeable future.
We do not intend to declare or pay cash dividends in the foreseeable
future. We expect to retain any earnings, if and when achieved, to finance our
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AVANIR's market risk exposures are related to its cash and cash
equivalents. We invest our excess cash in highly liquid short-term investments
with maturities of less than one-year, which we do not believe is a significant
market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AVANIR Pharmaceuticals, previously LIDAK Pharmaceuticals, David H. Katz,
M.D., (the company's founder, former CEO, and a former director) and Mrs. Lee R.
Katz (the wife of Dr. Katz) jointly announced a comprehensive settlement of all
disputes, claims and litigation that they have asserted against each other.
In the aftermath of a lengthy jury trial between AVANIR and the Katzes
in September and October 1999, both the company and Dr. and Mrs. Katz expressly
regret the expense and tribulation each have experienced as a result of actions
by the other. The company specifically regrets that any of its public
statements, including statements regarding cause for termination of Dr. Katz'
employment, may have reflected adversely on him or provoked criticism of him by
third parties. Dr. Katz regrets that any of his public statements regarding
AVANIR, its directors or its officers may have reflected adversely on them or
provoked criticism of AVANIR's management team by third parties. AVANIR
recognizes the significant intellectual, scientific and financial contributions
Dr. and Mrs. Katz have made to the
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<PAGE> 23
development, growth and success of the company. AVANIR and the Katzes each
extend best wishes to the other for their future endeavors.
Under the settlement terms, AVANIR has conveyed to Dr. Katz shares of
Class A Common Stock valued at $3.9 million, and an additional cash payment in
the amount of $175,000 has been made to Dr. Katz. A portion of the settlement
has been funded by the company's insurer. Dr. Katz, his wife and two daughters
have, in return, assigned voting control of their stock in AVANIR, whether
directly or beneficially owned, to company management for a period of 7 years,
and all of Dr. Katz' outstanding stock options, exercisable into 1,827,000
shares, have been cancelled. In addition, Dr. Katz and his wife have assigned
the company any and all their rights to certain technology and related patent
applications pertaining to research on allergy and asthma treatments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held March 23, 2000, AVANIR's
shareholders approved the following proposals:
1) To elect two directors to hold offices until the 2003 Annual Meeting of
Shareholders. The following directors were elected to the Board of
Directors until the 2003 Annual Meeting of Shareholders: Dennis J.
Carlo, Ph.D. and Edward L. Hennessy, Jr. Votes cast in favor of each
nominee totaled in excess of 46,080,000 votes.
2) To approve the 2000 Stock Option Plan pursuant to which an aggregate
2,300,000 shares of Class A Common Stock will be reserved for issuance.
Votes cast in favor of this proposal totaled 36,306,269, votes cast
against this proposal totaled 11,322,256, and votes abstaining totaled
426,853.
3) To ratify the selection of Deloitte & Touche LLP as AVANIR's independent
auditors for the fiscal year ending September 30, 2000. Votes cast in
favor of this proposal totaled 46,670,348, votes cast against this
proposal totaled 1,074,402, and votes abstaining totaled 310,628.
Management withdrew a proposal to amend our articles of incorporation to
conform the articles of incorporation with our bylaws regarding the definition
of a quorum for a meeting of the shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Current Reports on Form 8-K
On February 4, 2000, we filed a current report on Form 8-K, reporting
that AVANIR Pharmaceuticals had completed a $6 million private placement
financing with three accredited investors.
On February 23, 2000, we filed a current report on Form 8-K, reporting
that we had received $1 million from several accredited investors in
exchange for sale of 100 shares of Redeemable Series D Convertible
Preferred Stock and Class J Stock Purchase Warrants to purchase 50,000
shares of Class A common stock.
On April 19, 2000, we filed a current report on Form 8-K, incorporating
by reference a press release dated March 24, 2000.
On May 4, 2000, we filed a current report on Form 8-K, reporting that we
had signed an exclusive license agreement with SmithKline Beecham to
allow SmithKline Beecham to market
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<PAGE> 24
our docosanol 10% cream as an over the counter treatment for cold sores
in the United States and Canada.
(b) Exhibits
<TABLE>
<S> <C>
4.1 Registration Rights Agreement, dated as of January 25, 2000, by
and among (i) AVANIR Pharmaceuticals, a California corporation,
and (ii) Bayview LLC, a Cayman Islands LLC, The Endeavour
Capital Fund, S.A., a British Virgin Islands corporation, and
Roseworth Group Ltd., a British Virgin Islands corporation
(collectively, the "Bayview Investors").(1)
4.2 Form of Stock Purchase Warrant.(1)
4.3 Certificate of Determination, dated March 26, 1999.(2)
4.4 Form of Redeemable Series D Convertible Preferred Stock
certificate.(2)
4.5 Form of Class J Stock Purchase Warrant.(2)
4.6 Registration Rights Agreement, dated as of March 22, 1999, by
and among AVANIR Pharmaceuticals and HFTP Investment L.L.C., AG
Super Fund International Partners, L.P., GAM Arbitrage
Investments, Inc., Leonardo, L.P., Raphael, L.P. and Ramius
Fund, Ltd. (collectively, the "HFTP Investors")(2)
10.1 Common Stock Purchase Agreement, dated as of January 25, 2000,
by and among AVANIR Pharmaceuticals and the Bayview
Investors.(1)
10.2 Securities Purchase Agreement dated as of March 23, 1999, by and
among AVANIR Pharmaceuticals and the HFTP Investors.(2)
10.3 License agreement, dated as of March 31, 2000, by and between
AVANIR Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico
Corporation(3)
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to the similarly described exhibits included
with the Registrant's current report on Form 8-K, filed February 4,
2000.
(2) Incorporated by reference to the similarly described exhibits included
with the Registrant's current report on Form 8-K, filed April 1, 1999.
(3) Incorporated by reference to the similarly described exhibit filed in
connection with Registrant's current report on Form 8-K, filed May 4,
2000.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ GERALD J. YAKATAN President and Chief May 15, 2000
- --------------------------- Executive Officer
Gerald J. Yakatan (Principal Executive Officer)
/s/ GREGORY P. HANSON Vice President, Finance and Chief May 15, 2000
- --------------------------- Financial Officer
Gregory P. Hanson (Principal Financial and Accounting Officer)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 11,723,272
<SECURITIES> 0
<RECEIVABLES> 500,000
<ALLOWANCES> 0
<INVENTORY> 111,901
<CURRENT-ASSETS> 12,546,346
<PP&E> 677,710
<DEPRECIATION> 518,069
<TOTAL-ASSETS> 13,507,959
<CURRENT-LIABILITIES> 1,191,530
<BONDS> 0
898,586
0
<COMMON> 80,061,469
<OTHER-SE> (68,681,896)
<TOTAL-LIABILITY-AND-EQUITY> 13,507,959
<SALES> 0
<TOTAL-REVENUES> 1,042,970
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,479,980<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237,744
<INCOME-PRETAX> (4,674,746)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,674,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,674,746)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
<FN>
<F1>INCLUDES LITIGATION SETTLEMENT COSTS OF $3.9 MILLION, PAID WITH SHARES OF
COMMON STOCK.
</FN>
</TABLE>
