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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 0-22613
AVI BIOPHARMA, INC.
(Name of small business issuer in its charter)
OREGON 93-0797222
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE SW COLUMBIA STREET, SUITE 1105, PORTLAND, OREGON 97258
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 503-227-0554
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $120,351. The
aggregate market value of voting stock held by non-affiliates of the
registrant was $40,888,068 as of March 20, 1999, based upon the last sales
price as reported on the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of March
20, 1999 was 13,351,206 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference,
portions of its Proxy Statement for its 1999 annual meeting.
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AVI BIOPHARMA, INC.
FORM 10-KSB INDEX
PART I
Page
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Item 1. Description of Business 2
Item 2. Description of Property 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 21
Item 6. Management's Discussion and Analysis or Plan of Operation 21
Item 7. Financial Statements 23
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 24
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management 24
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 25
Signatures 27
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
AVI BioPharma is an emerging biopharmaceutical company and a pioneer in the
development of therapeutic products based upon three platform technologies:
- therapeutic cancer vaccines,
- gene-targeted drugs (antisense), and,
- drug delivery technologies.
The Company focuses its three platform technologies on two important clinical
areas, cancer and cardiovascular disease. The Company is in late-stage
development with Avicine, its cancer vaccine, which the Company believes may
be applicable to many cancer types. The Company also has developed
Neu-Genes(R), a patented class of antisense compounds, which may prove to be
useful in the treatment of a wide range of human diseases. The Company has
developed a new intracellular drug delivery technology, CytoPorter(TM), which
may be useful with many FDA-approved drugs as well as with drugs in
development. The Company has 35 issued patents and numerous patent
applications supporting its technologies. The Company is focused on
developing products utilizing these technologies in large potential markets.
The Company's therapeutic cancer vaccine, Avicine, has completed five
clinical trials. The Company plans three additional clinical trials,
including Phase II trials in pancreatic cancer and prostate cancer, and a
Phase III licensing trial in colorectal cancer. The Phase II pancreatic
cancer trial will be a two-arm trial combining Avicine with gemcitabine,
Lilly's state-of-the-art pancreatic cancer drug. The Phase II prostate cancer
trial will test the impact of Avicine on the important prostate cancer marker
PSA, prostate specific antigen. The Phase III colorectal cancer licensing
trial will test Avicine versus Camptosar, the current recommended treatment
for advanced colorectal cancer. All these clinical trials are expected to
start in 1999.
The first application of the Company's antisense technology is designed to
treat diseases involving cellular proliferation such as cancer, the
cardiovascular disease called restenosis, and other proliferative disorders.
The Company is currently in pre-clinical development with this multi-use
compound and expects to file an Investigational New Drug Application ("IND")
to begin clinical trials in 1999. The Company plans to move into preclinical
development with its novel CYTOPORTER delivery engine in 1999.
The Company's long-term product development program uses its Avicine,
NEU-GENE and CYTOPORTER technologies to develop drugs to treat a broad range
of human diseases and combines these technologies to produce combination
drugs with additional potential clinical applications. The Company has 35
issued patents and has filed patent applications covering the basic
compositions of matter, methods of synthesis and therapeutic uses of its
Avicine, NEU-GENE and CYTOPORTER technologies in the United States, Canada,
Europe, Australia and Japan.
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DRUG DESIGN AND DEVELOPMENT
VACCINES. Avicine targets human chorionic gonadotropin (hCG), the hormone
associated with fertility and fetal development. The presence of this hormone
indicates pregnancy, and is responsible for stimulating fetal development.
The hCG hormone is also a widely expressed tumor marker which is associated
with all major histologic types including lung, colon, breast, pancreas and
prostate cancers. Importantly, the expression of the hCG hormone correlates
directly with the aggressiveness of the tumor; i.e. the more aggressive the
tumor, the higher the hCG expression.
It is believed that the role of the hCG hormone in cancer and pregnancy is
analogous. In both pregnancy and cancer, the hormone serves as a growth
factor encouraging rapid cell division. Further, in both cases the hormone is
required for implantation/invasion and for fostering angiogenesis, the
formulation of blood vessels. Additionally, the hormone facilitates
immunosuppression. The effectiveness of a vaccine to block the functions of
this hormone has been demonstrated by the World Health Organization, which
has tested an anti-hCG vaccine as a contraceptive method and found it to be
efficacious.
Avicine has completed five clinical studies in cancer, including Phase II
trials in pancreatic and colorectal cancer, in which a total of 172 patients
received treatment. From these studies, the Company concluded that the
vaccine is a safe and essentially non-toxic therapy, which is capable of
eliciting specific immune response to the targeted hormone in most patients.
Further, the patients who could mount an immune response demonstrated
survival benefits, and in some cases objective anti-tumor response.
Importantly, the Company believes that there were also significant quality of
life benefits for recipients of the vaccine.
ANTISENSE. Most conventional drugs are designed to induce or inhibit the
function of a target protein molecule with as few side effects as possible.
Conventional drugs are not available for many diseases due to their low level
of selectivity for the specific disease target or because they are difficult
to deliver to their targets. These two issues, lack of selectivity and poor
delivery, contribute to poor efficacy, unwanted side effects or high toxicity
at clinical dosages. Moreover, the development of conventional drugs is
usually time consuming and expensive, since thousands of compounds must be
produced and analyzed to find one with an acceptable balance between efficacy
and toxicity. Safe and effective therapeutics for viral and host diseases
such as cancer and cardiovascular diseases have been particularly difficult
to develop because these diseases use the patient's own cellular machinery
and therefore provide few disease targets for therapeutic intervention that
will not prove toxic to the patient.
Antisense technology has the potential to provide safe and effective
treatment for a wide range of diseases, including cancer, cardiovascular, and
infectious diseases. This new approach uses synthetic compounds, or polymers,
designed to block the function of genetic sequences involved in the disease
process. Targeting these genetic sequences provides the selectivity that is
not available in conventional drug development. The antisense approach
inhibits the disease mechanism at the genetic level. The Company has
completed preclinical studies with its novel antisense compounds and expects
to enter Phase I/II clinical trials in 1999 for two disease indications.
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INTRACELLULAR DRUG DELIVERY. Many drugs must cross tissue and cellular
barriers to reach their therapeutic targets inside cells. Drugs of this type
must move from the aqueous environment in blood across the lipid cell
membrane and into the interior of cells. Therefore, these drugs must achieve
solubility in both water and lipids. Since few compounds have these
solubility characteristics, many drug candidates are a compromise between
inherent solubility and effective delivery. This trade-off greatly reduces
efficacy and may significantly heighten toxicity of many drug candidates as
well as many FDA-approved drugs. The Company's CYTOPORTER technology
specifically addresses this drug delivery challenge.
Overall, the Company has three distinct technologies designed to address
these critical issues in drug development. The Company's Avicine therapeutic
cancer vaccine utilizes an active immunization approach to stimulate an
immune response to an existing cancer. The unique nature of the hCG vaccine
target distinguishes this vaccine approach from other cancer vaccines in
development. The Company's NEU-GENE antisense technology addresses the issue
of drug selectivity at the genetic level. The characteristics of the patented
structure of the Company's NEU-GENE compounds distinguish its antisense
technology from competing technologies. The Company's molecular engine,
CYTOPORTER, is designed to transport certain drugs with poor delivery
characteristics across the lipid barrier of cellular membranes into the
interior of cells to reach their site of action.
PRODUCTS
NEAR-TERM PRODUCT DEVELOPMENT SUMMARY
The Company has completed five clinical trials with Avicine, its therapeutic
cancer vaccine. As a result of these trials, the Company anticipates that it
will commence three additional trials in 1999; a Phase II trial in pancreatic
cancer, a Phase II trial in prostate cancer, and a Phase III licensing trial
in colorectal cancer. The first application of the Company's antisense
technology is designed to treat proliferation disorders; namely, cancer and
restenosis.
CLINICAL DEVELOPMENT PROGRAM
DRUG POTENTIAL USAGE DEVELOPMENT STATUS
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Avicine Colorectal cancer vaccine Phase III expected to commence in 1999
Avicine Pancreatic cancer vaccine Phase II expected to commence in 1999
Avicine Prostate cancer vaccine Phase II expected to commence in 1999
Resten-NG/R Restenosis IND filing expected in 1999 and
Phase I expected to commence in 1999
Resten-NG/C Cancer IND filing expected in 1999 and
Phase I expected to commence in 1999
VACCINES - AVICINE TECHNOLOGY
TECHNICAL OVERVIEW
Prominent among the newer strategies to treat cancer is the therapeutic
cancer vaccine approach. The rationale employed with this approach is that
active immunization against the tumor can stimulate an immune response that
can be effective in fighting a pre-existing cancer.
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Target sites on tumor cells, called tumor-associated antigens (TAA),
represent the key components in a cancer vaccine, and the therapeutic benefit
of the vaccine hinges on the selection of these target sites. AVI BioPharma's
therapeutic cancer vaccine, Avicine(TM), was designed to elicit an immune
response directed against a well-characterized TAA, hCG.
Normally, hCG is secreted only during pregnancy by cells of the placenta and
the fertilized egg. Cancer is the only significant exception to the normal
hCG secretion process. Given this selectivity, hCG is an ideal potential
target for a therapeutic cancer vaccine approach. Many different human
cancers produce hCG and it is considered a biochemical marker of malignancy.
Since hCG is a natural human protein, people do not mount an immune response
to hCG unless actively immunized.
The mechanisms by which the immune system recognizes and attacks the hCG
targets on cancer cells can be through both humoral and cellular arms of the
immune response. Moreover with this particular cancer target, an additional
mechanism of action can be through inhibition of the growth promoting and
immunosuppressive effects of hCG itself.
The advantages of hCG as a cancer vaccine target compared to other potential
targets are significant. This cancer marker is not usually found on normal
cells with the exception of pregnancy. It is widely expressed on all of the
major histological types of cancer, and expression correlates with tumor
aggressiveness. Antibodies to hCG are believed to block the hormonal
functions that hCG plays in both pregnancy and cancer, including growth
promotion, invasion, angiogenesis, and immunosuppression. Therefore an immune
response directed against hCG can be viewed as a two-pronged attack,
directing an immune attack against the tumor and neutralizing the hormonal
benefits provided by hCG.
The hCG component in Avicine is the synthetic c-terminal peptide of this
hormone. The peptide is conjugated to a foreign carrier, diphtheria toxoid to
enhance immunogenicity. Diphtheria toxoid was selected due to wide experience
with this vaccine component in man and since most of the population worldwide
are vaccinated against it. This provides for an existing immune response to
this carrier in patients being vaccinated and is believed to be important in
stimulating an immune response to the peptide.
CLINICAL TRIALS OF AVICINE IN CANCER
Three Phase I studies of Avicine in patients have been completed: a Phase I
safety study in 43 patients, a Phase I study in 21 patients with metastatic
cancer and Phase Ib study in 23 patients with metastatic cancer. Overall,
these studies suggested that Avicine was safe and essentially non-toxic.
Moreover, the vaccine was effective in stimulating an immune response to hCG
in that most patients make antibodies to hCG post vaccination. Apparent
survival benefits and some objective tumor responses were noted.
The Company has conducted a pilot Phase II study in 10 patients with advanced
pancreatic cancer. Patients with advanced pancreatic cancer are currently
treated with 5-FU or gemcitabine, (Gemzar(R) Lilly) and have a median
survival of approximately 18 weeks and 25 weeks respectively. In the 10
advanced pancreatic patients treated with Avicine, the median survival was
approximately 33 weeks. Although the Company believes these results to be
encouraging, the Company hesitates to draw conclusions from such a small
study other than to use these results to design additional trials.
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Two additional trials have been designed and are slated to be initiated in
1999. A Phase II study in patients with advanced pancreatic cancer in which
50 patients will be randomized to two treatment arms: Avicine alone or
Avicine with Gemzar. Our previous studies have shown that it takes at least
6-8 weeks to mount an immune response to hCG. During that period, patients
receiving Avicine alone continue to progress. Combination therapy may be of
additional benefit in that cytotoxic drug therapy may provide patients with
some benefit in arresting tumor progression before an immune response
develops to hCG. In this manner combination therapy of this type may provide
a synergistic effect that may exceed either modality alone.
An additional Phase II combination trial has also been planned in patients with
advanced pancreatic cancer. In this case, another drug, RFS-2000, currently
in phase III clinical development by SuperGen Inc., will be administered with
Avicine in 24 patients with advanced pancreatic cancer. RFS-2000 is a
less-toxic topo-isomerase I inhibitor with promising Phase II studies
reported to date.
MULTICENTER PHASE II STUDY IN PATIENTS WITH COLORECTAL CANCER
A Phase II study of Avicine in 77 patients with advanced colorectal cancer
has been completed. The primary objective of this trial was to determine
whether administrations of the vaccine at two dosage schedules would induce
immune responses in patients with metastatic colorectal cancer. The secondary
objective of the trial was to measure safety and efficacy in these patients.
Overall, 51 of the 77 patients responded to the vaccine by producing
antibodies to hCG. The patients that were antibody responders had a median
survival of 42 weeks. Patients that did not respond immunologically had a
median survival of just 17 weeks.
One may assume that in order to benefit from vaccine therapy for cancer, a
patient must survive long enough to receive the full course of vaccination.
In the group of 40 patients that fit this criterion, median survival was 46
weeks. Further analysis of these patients, showed a median survival of 58
weeks in patients on one arm of the protocol.
Overall these clinical data suggest that the patients that received Avicine
and responded immunologically had improved median survival compared to
patient populations treated with chemotherapeutic drugs. Avicine was found to
be safe and did not exhibit toxicity associated with cytotoxic drug regimes.
Based on these data, AVI BioPharma plans to initiate a Phase III licensing
trial in 300 patients with advanced colorectal cancer in 1999.
ANTISENSE - NEU-GENE TECHNOLOGY
TECHNICAL OVERVIEW
GENETIC STRUCTURE AND FUNCTION. All life forms contain genetic information in
molecules called DNA and RNA, which comprise the operating instructions for
life processes. The specific instructions are called genes, which are long
chains or strands of duplex DNA composed of the four genetic bases: adenine,
cytosine, guanine and thymine, represented by the letters, A, C, G, and T,
respectively. The molecular structures of these letters are complementary,
such that A can pair with T, and C can pair with G. Consequently, each
genetic strand has the unique ability to bind specifically to a complementary
strand and thereby form a duplex.
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The information encoded in the DNA by its sequence of genetic letters is used
to make proteins. To accomplish this, one strand (called the template strand)
of the duplex DNA is copied to make a new complementary strand, referred to
as messenger RNA. This messenger RNA is referred to as the sense strand
because it carries the information used to assemble a specific protein. An
antisense compound is a synthetic strand of bases in a sequence complementary
to a small portion of the messenger RNA. Antisense compounds pair with their
complementary messenger RNA sense strand to form a duplex, preventing the
decoding of message and resultant protein assembly.
GENE-TARGETED THERAPEUTICS. Most human diseases arise from the function or
dysfunction of genes within the body, either those of pathogens, such as
viruses, or of one's own genes. New techniques in molecular biology have led
to the identification of the genes associated with most of the major human
diseases and to the determination of the sequence of their genetic letters.
Using modern methods of chemical synthesis, an antisense compound can be
prepared that is complementary to a target sequence in a pathogen or
pathogenic process. When this complementary antisense compound binds tightly
to the disease-causing sequence, the synthesis of a selected protein is
inhibited, and thus the pathogen or pathogenic process is disabled.
Antisense compounds are composed of repeating structures or subunits that are
linked together forming a polymer, referred to as the antisense backbone.
Each subunit carries a genetic letter (A, C, G, or T) that pairs with its
corresponding letter in the genetic target. Although the genetic letters are
a feature common to all antisense compounds, the structure of the subunits
and the linkage groups that string them together may differ greatly. These
differences in the subunits and the linkages define the different types of
antisense backbones and their corresponding physical and biological
properties. The Company is distinguished from all other antisense companies
by the characteristics of its patented antisense backbone. The subunits,
which carry the genetic letters on the Company's backbone, are synthetic
products rather than modified natural materials. In addition, the linkages
used to string the subunits together in the Company's backbone carry no
charge. The Company believes these differences will provide pharmaceutical
advantages that are critical for antisense drug development to meet the
challenges of broad clinical utility.
FIRST-GENERATION COMPOUNDS. The first gene-inactivating compounds had
backbones composed of natural genetic materials and linkages. Development of
these compounds began in the late 1960s. As work continued in this new field,
it became increasingly clear that there were significant problems with these
structures. These natural compounds were degraded or broken down by enzymes
in the blood and within cells and had difficulty crossing cellular membranes
to enter the cells that contained their genetic target.
SECOND-GENERATION COMPOUNDS. To overcome these problems of degradation and
permeability, several research groups developed modified backbones in the
late 1970s, which were designed to resist degradation by enzymes and to enter
tissues and cells more efficiently. The most common of these types, the
phosphorothioate backbones used by ISIS Pharmaceuticals, Inex, Hybridon, and
others use natural DNA subunits linked together by a sulfur-containing,
charged linkage. The Company was also extensively involved in developing
second-generation backbones through the mid-1980s. After extensive
investigation, however, the Company concluded that even after optimization,
these second-generation compounds might lack the pharmaceutical properties
desirable for broad clinical utility. For this reason, the Company abandoned
development of second-generation backbones in the mid-1980s and started
development of third-generation backbones designed to address these
drawbacks. Today, in spite of extensive progress in the field, the Company
believes that there remain serious limitations to second-generation compounds
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due to problems with the stability, specificity, cost effectiveness, and
delivery of these compounds.
NEU-GENE THIRD-GENERATION TECHNOLOGY. By the mid-1980s, the limitations of
the second-generation compounds led the Company to pursue the development of
antisense technology with improved pharmaceutical properties, which could be
produced and purified in a cost-effective manner. This effort culminated in
the Company's development of a new class of compounds having a backbone of
synthetic subunits carrying each genetic letter, with each subunit linked
together by a patented uncharged linkage group. The synthetic subunits and
linkages are not found in nature, but rather were designed and synthesized to
meet specific pharmaceutical parameters. These patented third-generation
agents, known as NEU-GENE compounds, display advantageous pharmaceutical
properties (stability, neutral charge, high binding affinity and
specificity). Moreover, they are made from less expensive, more abundant
starting materials, and the Company believes that they will cost
significantly less to produce than second-generation compounds.
The Company and others have shown in cell culture, animal and pre-clinical
studies that NEU-GENE compounds inhibit targeted genetic sequences. With
these scientific benchmarks in place, the Company's objective is to develop
its third-generation antisense compounds into effective and affordable
therapeutics for life-threatening diseases.
PHARMACEUTICAL PROPERTIES OF ANTISENSE COMPOUNDS. The Company's core
technology differentiates it from others developing gene-inactivating
compounds. The Company believes its principal competitive advantage in the
antisense area is the chemical structure of the NEU-GENE backbone, which was
developed to address all of the above parameters.
STABILITY. Biological stability is principally determined by the degree of
resistance to enzymatic degradation. The Company has conducted studies
indicating that NEU-GENE agents are stable to a broad range of degradative
enzymes and are stable in biological tissues.
EFFICACY, POTENCY, AND SPECIFICITY. These parameters refer to the efficiency
with which the antisense compounds block selected protein production. In a
direct comparison with second-generation compounds, the Company's NEU-GENE
compounds exhibited substantially greater efficacy, potency, and specificity
in animal and preclinical studies than competing technologies.
COST EFFECTIVENESS. The Company believes that the total cost of production of
commercial quantities of NEU-GENES will be significantly less than that of
gene-inactivating compounds prepared from natural or modified subunits by
competitors.
DELIVERY. To reach their targets, antisense compounds must cross tissue and
cellular barriers, including cellular and nuclear membranes. Preliminary
research in animal and preclinical studies indicates that the Company's
antisense compounds are effective in reaching and inhibiting their targets
inside of cells.
NEAR-TERM ANTISENSE PRODUCT DEVELOPMENT B CANCER AND RESTENOSIS
The first application of the Company's antisense technology is designed to
treat proliferation disorders including cancer and restenosis, a
cardiovascular disease. The Company's NEU-GENE target for proliferative
diseases is a transcription factor, the oncogene named c-myc. The Company
believes that this target is applicable to a range of proliferative diseases
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including many types of cancer, certain cardiovascular and inflammatory
diseases, and some non-malignant proliferative disorders such as psoriasis.
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Cancer is the second leading cause of death in the United States with an
incidence of 1,500 deaths a day. There are approximately 8.5 million
Americans living with a history of cancer and 500,000 new cases diagnosed
annually. Cancer is a variety of different diseases with lung, prostate,
breast and colorectal cancer the four most common types which account for
over 50% of all newly diagnosed cancers. The market for drugs to treat each
of these cancer types is estimated to be in excess of $1 billion annually.
Osteogenic sarcoma, a form of bone cancer, has been selected for the
Company's initial clinical trial because it provides an ideal study setting
to determine clinical efficacy and because the Company believes that clinical
results in that setting would be applicable to the four major cancer types.
The Company has selected restenosis as its first cardiovascular antisense
opportunity. When a patient has a blocked coronary artery, a procedure called
balloon angioplasty is frequently used to remove the blockage. In this
procedure, a balloon catheter is inserted in the artery up to the blockage
and the balloon is inflated to expand the artery channel. During this
process, vascular cells, including smooth muscle cells, which underlie the
blockage, may be damaged. This process may result in rapid cell division
leading to closure of the artery a second time. Restenosis occurs in
approximately 30% - 40% of these procedures when stents are not placed and
cannot be predicted from patient to patient. Even when stents are placed, the
incidence of restenosis is significant. The precise mechanisms which cause
this reaction are not known. However, scientific evidence suggests that, if
the smooth muscle cells can be prevented from dividing for a period of time
until the integrity of the artery is reestablished, restenosis could be
prevented in a significant number of cases. Although there are a few new
clinical approaches that attempt to prevent restenosis, none is very
effective and all have significant risks associated with them. There are
approximately 500,000 balloon angioplasties done in the U.S. each year with a
market estimated at more than $1 billion annually.
The Company has finished preclinical development with Resten-NG and expects
to file an IND and initiate Phase I/II clinical trials in 1999.
LONG-TERM NEU-GENE DEVELOPMENT PROGRAM
The following table summarizes the Company's broader drug development
program. These programs utilize the Company's NEU-GENE antisense technology
and CYTOPORTER drug delivery technology. In addition, the Company anticipates
combining its NEU-GENE antisense technology with its CYTOPORTER drug delivery
technology to produce combination drugs. For each indication, NEU-GENES have
been designed to target the disease process at the genetic level. The Company
has designed CYTOPORTER to deliver drugs to their intracellular site of
action. Although NEU-GENES may display clinical efficacy on their own, the
Company believes that broad use of NEU-GENES and other antisense compounds
may require a drug delivery strategy.
All of the development programs listed below are in the research or lead
compound stage. Disease targets have been identified and NEU-GENE compounds
have been produced and tested in laboratory and/or animal models. In some
cases, lead compounds have been produced which are undergoing optimization
prior to pre-clinical development. The Company believes that several of these
compounds may move into pre-clinical development in the next two years.
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NEU-GENE Antisense Development Program
Antisense Target Clinical Indication
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C-myc cancer
cardiovascular restenosis
psoriasis
chronic graft rejection
Telomerase cancer
BCL2 cancer
Bcr/abl leukemia
NOS cancer
psoriasis
chronic graft rejection
TNF alpha rheumatoid arthritis
septic shock
asthma
psoriasis
NF kappa B Crohn's Disease
colitis
chronic inflammation
ICAM-1 arthritis
psoriasis
chronic graft rejection
inflammatory bowel disease
Hepatitis C virus hepatitis
liver cancer
Cytomegalovirus retinitis
restenosis
C-MYC. C-myc is an oncogene that is involved in the initiation of cell
division at the genetic level and is therefore referred to as a transcription
factor. Inhibition of this factor blocks transcription and prevents or
retards cell division. NEU-GENE antisense compounds directed against c-myc
have been shown to block cell division in model systems and preclinical
trials for cardiovascular restenosis and cancer. NEU-GENE compounds against
c-myc are potentially applicable for the treatment of other proliferation
disorders such as psoriasis and chronic graft rejection.
TELOMERASE. Telomerase is an enzyme found in cancer cells but rarely in
normal cells and the Company believes that inhibiting it may provide a broad
general approach to treat most cancers. There are approximately one million
new cases of cancer of all types reported in the United States annually. This
leads to about 500,000 deaths in the United States attributed to cancer each
year, making it the country's second leading cause of death. The Company has
developed NEU-GENE compounds that block telomerase activity in model systems
in the laboratory.
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BCL2. BCL2 is a proto-oncogene that acts as a major inhibitor of senescence
of cancer cells. The protein produced by this gene contributes to the
progression of cancer by conveying both a survival advantage to the malignant
cells over normal cells and a resistance to radiation and chemotherapy.
NEU-GENE the BCL-2 gene are designed to block production of this protein in
prostate, breast and a broad range of other cancers.
BCR/ABL. Certain types of leukemia (CML) are characterized by a genetic
abnormality in which two genes referred to as BCR and ABL become linked to
forma hybrid BCR/ABL gene. This gene is only found in certain cancer cells
and is involved in the malignant process. NEU-GENE therapy directed at the
BCR/ABL hybrid gene has the potential to provide a unique treatment for this
type of leukemia.
NITRIC OXIDE SYNTHETASE (NOS). The NOS enzymes are involved in the
transmission of signals across cellular membranes that results in cellular
proliferation. Initial studies with NEU-GENES designed to block the NOS
signaling pathway indicate this strategy may be useful in the prevention of
cellular proliferation in a wide variety of proliferative diseases.
TNF ALPHA. TNF alpha has been implicated as a significant factor in
psoriasis, arthritis, asthma, and other inflammatory disorders. Psoriasis is
a serious chronic, recurring skin disease that involves proliferation of
keratinocytes within the epidermal layer of the skin. Approximately six
million individuals in the United States are afflicted by psoriasis and
approximately 200,000 new cases are diagnosed annually. Current psoriasis
therapies are varied but offer limited results. The Company has demonstrated
that its NEU-GENE compounds are effective in inhibiting TNF alpha in
laboratory and animal models of inflammation.
NUCLEAR FACTOR KAPPA B (NF(kappa)B). NF(kappa)B is a protein complex involved
in the regulation of certain extracellular proteins at the genetic level.
These matrix proteins are an essential component in the cellular adhesion
process of cells that mediate immune and inflammatory responses. NEU-GENE
inhibition of NF(kappa)B is potentially useful in the management of certain
inflammatory diseases such as Crohn's disease, colitis, and chronic
inflammation.
ICAM-1. ICAM-1 facilitates the migration of immune cells involved in both
acute and chronic inflammation. Over-production of ICAM-1 is specifically
implicated in a wide variety of inflammatory disorders, such as rheumatoid
arthritis, asthma, psoriasis, organ transplant rejection, and inflammatory
bowel disease. The Company has targeted NEU-GENES against the adhesion
molecule ICAM-1 and is testing these compounds in models of inflammation.
HEPATITIS C VIRUS("HCV"). The Company has initiated a program to produce and
evaluate NEU-GENE compounds directed at HCV targets. HCV is a major health
problem in many parts of the world, including the United States where there
are approximately 150,000 new infections each year (about 40% of all acute
hepatitis cases). The mechanism of transmission may involve the exchange of
blood, although the route of transmission in many cases is obscure. There are
no FDA-approved vaccines or therapeutic drugs for the treatment of HCV.
CYTOMEGALOVIRUS ("CMV"). The Company is developing NEU-GENE compounds for the
treatment of CMV infections. CMV is a member of the herpes family of viruses
and is the most common cause of intrauterine and congenital infections in
newborns of infected mothers. CMV retinitis is a severe problem in transplant
patients and patients with immunosuppression (e.g., AIDS), often leading to
blindness and pneumonitis, one of the most lethal viral syndromes. Current
FDA-approved treatments for CMV retinitis suffer from
12
<PAGE>
dose-limiting side effects and have been associated with the emergence of
drug-resistant CMV strains.
DRUG DELIVERY - CYTOPORTER
Many FDA-approved drugs and drugs in do not readily make their way into
cells. The Company has been developing an intracellular delivery mechanism
that would allow drugs with delivery problems to be transported directly into
the interior of cells. The Company has developed and has filed a patent for a
molecular engine, called CYTOPORTER, to transport drugs into the interior of
cells.
TECHNICAL OVERVIEW
The body has protective barriers that shield it from penetration by foreign
agents. Two of these barriers, cell membranes and the outermost layer of the
skin, are composed of lipid layers (fat-like substances). The lipid
composition of these barriers prevents aqueous or water-soluble agents from
the environment or in the blood from penetrating into the interior of cells
and interfering with critical cellular functions. These lipid layers are the
principal barriers to effective drug delivery for many drugs that have an
intracellular site of action.
For optimal delivery, a drug should penetrate readily into both the aqueous
compartments of the body (body fluids and the interior of cells) and into the
lipid layers, which enclose those compartments. This is rarely achieved,
because when lipid solubility is increased, water solubility is decreased,
and vice versa. In the past, to achieve delivery, the structure of a selected
drug candidate was chemically adjusted to produce a compromise in the
solubility profile (e.g., less than ideal water solubility in order to
achieve some level of lipid solubility). This trade-off has been successful
with many drugs, but markedly less successful for many others. Currently, a
significant number of FDA-approved drugs have delivery problems, and many
others never make it into clinical development due to delivery problems.
CYTOPORTER DRUG DELIVERY SOLUTION. The Company believes it has developed an
effective drug delivery engine, called CYTOPORTER, to facilitate the
transport of polar and larger size drugs across the lipid barriers of the
skin, cell membranes and endosomes into the interior of cells at a rate that
is practical to achieve pharmaceutical results. Furthermore, the Company
believes that its CYTOPORTER delivery engine can be chemically adjusted to
accommodate a range of delivery challenges.
COLLABORATIVE AGREEMENTS
The Company believes that its vaccine, antisense, and drug delivery
technologies are broadly applicable for the potential development of
pharmaceutical products in many therapeutic areas. To exploit its core
technologies as fully as possible, the Company's strategy is to enter into
collaborative research agreements with major pharmaceutical companies for all
cancer applications with the vaccine, and agreements directed at specific
molecular targets for antisense and drug delivery. It is anticipated that
antisense collaborative research agreements may provide the Company with
funding for programs conducted by the Company aimed at discovering and
developing antisense compounds to inhibit the production of individual
molecular targets. Partners in antisense may be granted options to obtain
licenses to co-develop and to market drug candidates resulting from its
collaborative research programs. The Company intends to retain manufacturing
rights to its antisense products. There can be no assurance, however, it will
be able to enter into collaborative
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research agreements with large pharmaceutical companies on terms and
conditions satisfactory to the Company.
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<PAGE>
MANUFACTURING
For its vaccine, the Company has identified potential Good Manufacturing
Practices ("GMP") manufacturers who could meet large scale, low cost
manufacturing demands for future Phase III trials and market introduction.
The Company also believes that it has developed significant proprietary
manufacturing techniques, which will allow large-scale, low-cost synthesis
and purification of NEU-GENES. Because the Company's NEU-GENE compounds are
based upon a malleable backbone chemistry, the Company believes that NEU-GENE
synthesis will be more cost-effective than those of competing technologies.
The Company has established sufficient manufacturing capacity to meet
immediate research and development needs.
The Company currently intends to retain manufacturing rights to all products
incorporating its proprietary and patented antisense technology, whether such
products are sold directly by the Company or through collaborative agreements
with industry partners. The Company's current production capacity is
insufficient for the requirements of human clinical studies. The Company
contracted with a GMP facility to produce its near term antisense therapeutic
candidates for pre-clinical and clinical trial studies. There is no
assurance, however, that the Company's plans will not change as a result of
unforeseen contingencies.
In March 1993, the Company moved to its present laboratory facility. This
facility and the laboratory procedures followed by the Company have not been
formally inspected by the FDA and will have to be approved as products move
from the research phase through the clinical testing phase to
commercialization. The Company will be required to comply with FDA
requirements for GMP in connection with human clinical trials and commercial
production. See "Drug Approval Process and Other Government Regulations."
MARKETING STRATEGY
The Company plans to market the initial products for which it obtains
regulatory approval, through marketing arrangements or other licensing
arrangements with large pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any
products the Company develops and the Company's financial resources. The
Company does not expect to establish a direct sales capability for
therapeutic compounds for at least the next several years. To market products
that will serve a large, geographically diverse patient population, the
Company expects to enter into licensing, distribution, or partnering
agreements with pharmaceutical companies that have large, established sales
organizations. The timing of the Company's entry into marketing arrangements
or other licensing arrangements with large pharmaceutical companies will
depend on successful product development and regulatory approval within the
regulatory framework established by the Federal Food, Drug and Cosmetics Act,
as amended, and regulations promulgated thereunder. Although the
implementation of initial aspects of the Company's marketing strategy may be
undertaken before this process is completed, the development and approval
process typically is not completed in less than three to five years after the
filing of an IND application and the Company's marketing strategy therefore
may not be implemented for several years. See "Drug Approval Process and
Other Governmental Regulation."
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<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The proprietary nature of, and protection for, the Company's product
candidates, processes and know-how are important to its business. The Company
plans to prosecute and defend aggressively its patents and proprietary
technology. The Company's policy is to patent the technology, inventions, and
improvements that are considered important to the development of its
business. The Company also relies upon trade secrets, know-how, and
continuing technological innovation to develop and maintain its competitive
position.
The Company owns thirty-five patents covering various facets of its current
technology platforms and future developmental technologies. The Company has
additional pending applications in the area of its Avicine and NEU-GENE
technology, and has filed patent applications covering the basic compositions
of matter, methods of synthesis, and medical uses of CYTOPORTER compounds.
The Company intends to protect its proprietary technology with additional
filings as appropriate.
There can be no assurance that any patents applied for will be granted or
that patents held by the Company will be valid or sufficiently broad to
protect the Company's technology or provide a significant competitive
advantage, nor can the Company provide assurance that practice of the
Company's patents or proprietary technology will not infringe third-party
patents.
Although the Company believes that it has independently developed its
technology and attempts to ensure that its technology does not infringe the
proprietary rights of others, if infringement were alleged and proven, there
can be no assurance that the Company could obtain necessary licenses on terms
and conditions that would not have an adverse effect on the Company. The
Company is not aware of any asserted or unasserted claims that its technology
violates the proprietary rights of any person.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation.
The Federal Food, Drug and Cosmetics Act, as amended, and the regulations
promulgated thereunder, as well as other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's proposed products. Product development and
approval within this regulatory framework take a number of years and involve
the expenditure of substantial resources. In addition to obtaining FDA
approval for each product, each drug manufacturing establishment must be
registered with, and approved by, the FDA. Domestic manufacturing
establishments are subject to regular inspections by the FDA and must comply
with GMP. To supply products for use in the United States, foreign
manufacturing establishments must also comply with GMP and are subject to
periodic inspection by the FDA or by regulatory authorities in certain of
such countries under reciprocal agreement with the FDA.
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<PAGE>
NEW DRUG DEVELOPMENT AND APPROVAL. The United States system of new drug
approval is the most rigorous in the world. According to a February 1993
report by the Congressional Office of Technology Assessment, it cost an
average of $359 million and took an average of 15 years from discovery of a
compound to bring a single new pharmaceutical product to market.
Approximately one in 1,000 compounds that enter the pre-clinical testing
stage eventually makes it to human testing and only one-fifth of those are
ultimately approved for commercialization. In recent years, societal and
governmental pressures have created the expectation that drug discovery and
development costs can be reduced without sacrificing safety, efficacy and
innovation. The need to significantly improve or provide alternative
strategies for successful pharmaceutical discovery, research and development
remains a major health care industry challenge.
DRUG DISCOVERY. In the initial stages of drug discovery, before a compound
reaches the laboratory, typically tens of thousands of potential compounds
are randomly screened for activity in an assay assumed to be predictive of a
particular disease process. This drug discovery process can take several
years. Once a "screening lead" or starting point for drug development is
found, isolation and structural determination are initiated. Numerous
chemical modifications are made to the screening lead (called "rational
synthesis") in an attempt to improve the drug properties of the lead. After a
compound emerges from the above process, it is subjected to further studies
on the mechanism of action and further IN VITRO animal screening. If the
compound passes these evaluation points, animal toxicology is performed to
begin to analyze the toxic effect of the compound, and if the results
indicate acceptable toxicity findings, the compound emerges from the basic
research mode and moves into the pre-clinical phase. The Company has many
compounds at the drug discovery phase and three compounds that it expects to
move to pre-clinical testing within 12 to 24 months.
PRE-CLINICAL TESTING. During the pre-clinical testing stage, laboratory and
animal studies are conducted to show biological activity of the compound
against the targeted disease, and the compound is evaluated for safety. These
tests can take up to three years or more to complete.
INVESTIGATIONAL NEW DRUG APPLICATION. After pre-clinical testing, an IND is
filed with the FDA to begin human testing of the drug. The IND becomes
effective if the FDA does not reject it within 30 days. The IND must indicate
the results of previous experiments, how, where and by whom the new studies
will be conducted, how the chemical compound is manufactured, the method by
which it is believed to work in the human body, and any toxic effects of the
compound found in the animal studies. In addition, the IND must be reviewed
and approved by an Institutional Review Board consisting of physicians at the
hospital or clinic where the proposed studies will be conducted. Progress
reports detailing the results of the clinical trials must be submitted at
least annually to the FDA.
PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human
clinical trials can begin. These studies, involving usually between 20 and 80
healthy volunteers, can take up to one year or more to complete. The studies
determine a drug's safety profile, including the safe dosage range. The Phase
I clinical studies also determine how a drug is absorbed, distributed,
metabolized and excreted by the body, as well as the duration of its action.
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<PAGE>
PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled studies of
approximately 100 to 300 volunteer patients with the targeted disease assess
the drug's effectiveness. These studies are designed primarily to evaluate
the effectiveness of the drug on the volunteer patients as well as to
determine if there are any side effects on these patients. These studies can
take up to two years or more and may be conducted concurrently with Phase I
clinical trials. In addition, Phase I/II clinical trials may be conducted
that evaluate not only the efficacy but also the safety of the drug on the
patient population.
PHASE III CLINICAL TRIALS. This phase typically lasts up to three years or
more and usually involves 1,000 to 3,000 patients with the targeted disease.
During the Phase III clinical trials, physicians monitor the patients to
determine efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug.
NEW DRUG APPLICATION ("NDA"). After the completion of all three clinical
trial phases, the data are analyzed and if the data indicate that the drug is
safe and effective, an NDA is filed with the FDA. The NDA must contain all of
the information on the drug that has been gathered to date, including data
from the clinical trials. NDAs are often over 100,000 pages in length. The
average NDA review time for new pharmaceuticals approved in 1995 was
approximately 19 months.
FAST TRACK REVIEW. In December 1992, the FDA formalized procedures for
accelerating the approval of drugs to be marketed for the treatment of
certain serious diseases for which no satisfactory alternative treatment
exists, such as Alzheimer's disease and AIDS. If it is demonstrated that the
drug has a positive effect on survival or irreversible morbidity during Phase
II clinical trials, then the FDA may approve the drug for marketing without
completion of Phase III testing.
APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. The Company must continue to submit periodic reports
to the FDA, including descriptions of any adverse reactions reported. For
certain drugs which are administered on a long-term basis, the FDA may
request additional clinical studies (Phase IV) after the drug has begun to be
marketed to evaluate long-term effects.
In addition to regulations enforced by the FDA, the Company also is or will
be subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and future federal, state or
local regulations. The Company's research and development activities involve
the controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standard prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any such liability could exceed the resources of the
Company.
For marketing outside the United States, the Company or its prospective
licensees will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
18
<PAGE>
COMPETITION
Companies in the cancer vaccine development area include Progenics, Corixa,
RIBI, Biomira, Bristol Meyers-Squibb, and E. Merck. Several companies are
pursuing the development of antisense technology, including Glaxo, Boehringer
Ingelheim, Hybridon, and ISIS Pharmaceuticals. All of these companies have
products in development stages, and, in some cases, are in human trials with
antisense compounds generally similar to the Company's NEU-GENE compounds.
While the Company believes that none of these companies is likely to
introduce an antisense compound into the broad commercial market in the
immediate future, many pharmaceutical and biotechnology companies, including
most of those listed above, have financial and technical resources greater
than those currently available to the Company and have more established
collaborative relationships with industry partners than does the Company. The
Company believes that the combination of pharmaceutical properties of its
NEU-GENE compounds for cancer and restenosis afford it competitive advantages
when compared with the antisense compounds of competitors. Many companies are
pursuing drug delivery technology, including Biovail, Cygnus, and Noven,
among others. If the Company's antisense and drug delivery technologies
attain regulatory and commercial acceptance as the basis for the commercial
pharmaceutical products, it is to be expected that additional companies,
including large, multinational pharmaceutical companies, will choose to
compete in the Company's markets, either directly or through collaborative
arrangements.
The Company can also expect to compete with other companies exploiting
alternative technologies that address the same therapeutic needs, as does the
Company's technology. The biopharmaceutical market is subject to rapid
technological change, and it can be expected that competing technologies will
emerge and will present a competitive challenge to the Company.
RESEARCH AND DEVELOPMENT
The Company expensed $6,306,860 and $2,737,172 on research and development
activities during the years ended December 31, 1998 and 1997.
EMPLOYEES
As of December 31, 1998, the Company had 54 employees, 20 of whom hold
advanced degrees. Forty-eight employees are engaged directly in research and
development activities, and six are in administration. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies 18,400 square feet of leased laboratory and office space
at 4575 S.W. Research Way, Suite 200, Corvallis, Oregon 97333. The Company's
executive office is located in 2,400 square feet of leased space at One S.W.
Columbia, Suite 1105, Portland, Oregon 97258. The Company believes that its
facilities are suitable and adequate for its present operational requirements
and that it is not dependent upon any individually leased premises.
ITEM 3. LEGAL PROCEEDINGS
As of March 18, 1999, there were no material, pending legal proceedings to
which the Company or its subsidiaries are a party. From time to time, the
Company becomes involved in ordinary, routine or regulatory legal proceedings
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
("Nasdaq NMS") under the symbol "AVII." The following table sets forth the
high and low sales prices as reported by Nasdaq NMS from the time of the
Company's initial public offering, June 3, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------
<S> <C> <C>
Quarter 2 (from June 3, 1997) $ 7.25 $ 5.75
Quarter 3 7.50 6.44
Quarter 4 9.50 6.69
Year Ended December 31, 1998
--------------------------------------------
Quarter 1 $ 7.82 $ 5.75
Quarter 2 8.00 5.62
Quarter 3 6.31 2.62
Quarter 4 5.19 2.50
</TABLE>
The number of shareholders of record and approximate number of beneficial
holders on March 20, 1999 was 910 and 2,556, respectively. There were no cash
dividends declared or paid in fiscal years 1998 or 1997. The Company does not
anticipate declaring such dividends in the foreseeable future.
There were no sales of unregistered securities by the Company during the
period from June 3, 1997, the date of its initial public offering, through
December 31, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
The statements which are not historical facts contained in this discussion
are forward looking statements that involve risks and uncertainties,
including, but not limited to, the results of research and development
efforts, the results of pre-clinical and clinical testing, the effect of
regulation by FDA and other agencies, the impact of competitive products,
product development, commercialization and technological difficulties, and
other risks detailed in the Company's Securities and Exchange Commission
filings.
OVERVIEW
From its inception in 1980, the Company has devoted its resources primarily
to fund its research and development efforts. The Company has been
unprofitable since inception and, other than limited interest and grant
revenue, has had no material revenues from the sale of products or other
sources, and does not expect material revenues for at least the next 12
months. The Company expects to continue to incur losses for the foreseeable
future as it expands its research and development efforts. As of December 31,
1998, the Company's accumulated deficit was $42,775,436.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
Operating expenses increased from $4,019,386 in 1997 to $27,401,395 in 1998
principally due to a one-time charge of $19,473,154 for acquired in-process
research and development reflecting the recently completed acquisition of ITC
and increases in research and development staffing and increased expenses
associated with outside collaborations and pre-clinical testing of the
Company's technologies. In connection with the purchase price allocation for
ITC, the Company estimated the fair value of the intangible assets which
indicated that the majority of all of the acquired intangible assets
consisted of research and development projects in process. At that time, the
development of these projects had not reached technological feasibility and
the technology was believed to have no alternative future use. In accordance
with generally accepted accounting principles, the acquired in-process
research and development has been reflected in the accompanying financial
statements. The Company currently believes that the research and development
efforts may result in commercially feasible products after at least 36 months
and at an additional estimated cost of at least $10 million. Additionally,
increased general and administrative costs were incurred to support the
research expansion, and to broaden the Company's investor and public
relations efforts due to its change in status to a public company in
mid-1997. Net interest income increased from $389,051 in 1997 to $547,081 in
1998 due to earnings on increased cash balances, which consisted of proceeds
from the initial public offerings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
equity sales totaling $34,902,503 and grants and contract research funding of
$824,193 from various sources. The Company's cash and cash equivalents were
$8,510,020 at December 31, 1998, compared with $17,638,936 at December 31,
1997. The decrease of $9,128,916 was due to increases in research and
development staffing and increased expenses associated with outside
collaborations and pre-clinical testing of the Company's technologies and the
recently completed acquisition of ITC.
The Company's future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of its research
and development programs, the progress of its pre-clinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, the ability of the Company to establish collaborative
arrangements and the terms of any such arrangements, and the costs associated
with commercialization of its products. The Company's cash requirements are
expected to continue to increase significantly each year as it expands its
activities and operations. There can be no assurance, however, that the
Company will ever be able to generate product revenues or achieve or sustain
profitability.
The Company expects that its cash requirements over the next twelve months
will be satisfied by existing cash resources.
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<PAGE>
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly when
the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
The Company has evaluated its technology and data, including imbedded
non-informational technology, used in the creation and development of its
products and services and in its internal operations and has identified no
significant Year 2000 issues. The core business systems are compliant, or a
migration path to a compliant version will be in place by the year 2000. The
Company has not incurred material costs and believes that future costs
associated with addressing the Year 2000 issue will have an immaterial effect
on the Company's financial results.
Although the Company has inquired of certain of its significant vendors as to
the status of their Year 2000 compliance initiatives, no binding assurances
have been received. The Company believes that parts and services used in
normal operations can be obtained from multiple sources and therefore is not
overly reliant on any single vendor. Failure of telephone service providers
or other monopolistic utilities could have a significant detrimental effect
on the Company's operations. There can be no assurances that such third
parties will successfully address their own Year 2000 issues over which the
Company has no control.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item begins on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant
required by this item is included in the Company's definitive proxy statement
for its 1999 annual meeting of shareholders to be filed with the Commission
not later than 120 days after the end of the fiscal year covered by this
Annual Report and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1999 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1999 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for its 1999 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
Exhibit No. Description
- ----------- -----------
3.1 Third Restated Articles of Incorporation of AntiVirals Inc. (1)
3.2 Bylaws of Antivirals Inc. (1)
3.3 First Amendment to Third Restated Articles of Incorporation (4)
4.1 Form of Specimen Certificate for Common Stock. (1)
4.2 Form of Warrant for Purchase of Common Stock. (1)
4.3 Form of Warrant Agreement. (1)
4.4 Form of Representative's Warrant. (1)
4.5 Form of Warrant Agreement between AntiVirals Inc. and Immuno
Therapy Shareholders (3)
10.1 1992 Stock Incentive Plan. (1)
10.2 Employment Agreement with Denis R. Burger, Ph.D. dated
November 4, 1996. (1)
10.3 Employment Agreement with Alan P. Timmins dated November 4,
1996. (1)
10.4 Employment Agreement with Dwight Weller, Ph.D. dated
November 4, 1996. (1)
10.5 Technology Transfer Agreement between Anti-Gene Development
Group and AntiVirals Inc., dated February 9, 1992. (1)
10.6 Amendment to Technology Transfer Agreement between Anti-Gene
Development Group and AntiVirals Inc. dated January 20,
1996.(1)
10.7 License and Option Agreement between Anti-Gene Development
Group and AntiVirals Inc., dated February 9, 1993. (1)
10.8 Commercial Lease between Research Way Investments, Landlord,
and AntiVirals Inc., Tenant, dated June 15, 1992. (1)
10.9 Lease between Benjamin Franklin Plaza, Inc., Landlord, and
AntiVirals Inc., Tenant, dated June 17, 1992. (1)
10.10 First Amendment to Lease between Benjamin Franklin Plaza, Inc.,
Landlord, and AntiVirals Inc., Tenant, dated July 24, 1995. (1)
10.11 Employment Agreement with Patrick L. Iversen, Ph.D. dated
July 14, 1997. (2)
10.12 ImmunoTherapy Corporation 1997 Stock Option Plan (3)
10.13 Form of Employment Agreement with Jeffrey Lillard (3)
10.14 Promissory Note dated June, 1998 made by the Lillard Family
Trust to AntiVirals Inc. (3)
10.15 Oregon Deed of Trust Security Agreement and Fixture Filing
dated June, 1998, granted by the Lillard Family Trust to
Fidelity National Title Company of Oregon, as trustee, for the
benefit of AntiVirals Inc. (3)
10.16 License Agreement between ImmunoTherapy Corporation and Ohio
State University, dated March 12, 1996 (3)
10.17 License Agreement between ImmunoTherapy Corporation and Ohio
State University, dated December 26, 1996 (3)
10.18 Amendment to License Agreement between ImmunoTherapy
Corporation and Ohio State University, dated September 23,
1997 (3)
10.19 Agreement and Plan of Reorganization and Merger dated as of
February 2, 1998, among AntiVirals Inc., AntiVirals Acquisition
Corporation and ImmunoTherapy Corporation (3)
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<PAGE>
10.20 First Amendment to Plan of Reorganization and Merger dated as
of May 27, 1998, among AntiVirals Inc., AntiVirals Acquisition
Corporation and ImmunoTherapy Corporation (3)
10.21 Second Amendment to Plan of Reorganization and Merger dated
as of August 4, 1998, among AntiVirals Inc., AntiVirals
Acquisition Corporation and ImmunoTherapy Corporation (3)
10.22 Form of Escrow Agreement among AntiVirals Inc., the Escrow
Indemnitors and Jeffrey Lillard (3)
23.0 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule
(1) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2, as amended and filed with the Securities and
Exchange Commission on May 29, 1997 (Commission Registration No.
333-20513).
(2) Incorporated by reference to Exhibits to Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, and filed with
the Securities and Exchange Commission on March 30, 1998.
(3) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-4, as amended and filed with the Securities and
Exchange Commission on August 7, 1998 (Commission Registration No.
333-60849).
(4) Incorporated by reference to Exhibits to Registrant's current report on
From 8-K, as filed with the Securities and Exchange Commission on
September 30, 1998 (Commission Registration No. 000-22613).
REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
December 31, 1998.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 24, 1999 AVI BIOPHARMA, INC.
By:/s/ Denis R. Burger, Ph.D.
--------------------------
Denis R. Burger, Ph.D.
Chairman of the Board,
President and Chief Executive Officer
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 their capacities indicated on March 24, 1999:
Signature Title
- --------- -----
/s/ DENIS R. BURGER, Ph.D. Chairman of the Board,
- ------------------------- President and Chief Executive
Denis R. Burger, Ph.D. Officer (Principal Executive
Officer)
/s/ ALAN P. TIMMINS Chief Operating Officer,
- ------------------- Chief Financial Officer and
Alan P. Timmins Director (Principal Financial and
Accounting Officer)
/s/ PATRICK L. IVERSEN, Ph.D. Senior Vice President of Research
- ---------------------------- and Development and Director
Patrick L. Iversen, Ph.D.
/s/DWIGHT D. WELLER, Ph.D. Senior Vice President of Chemistry
- -------------------------- and Manufacturing and Director
Dwight D. Weller, Ph.D.
/s/JEFFREY L. LILLARD Vice President and Director
- ---------------------
Jeffrey L. Lillard
/s/ NICK BUNICK Director
- ---------------
Nick Bunick
/s/ BRUCE L.A. CARTER, Ph.D. Director
- ----------------------------
Bruce L.A. Carter, Ph.D.
/s/ JAMES B. HICKS, Ph.D. Director
- -------------------------
James B. Hicks, Ph.D.
/s/ JOSEPH RUBINFELD, Ph.D. Director
- ---------------------------
Joseph Rubinfeld, Ph.D.
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
AVI BIOPHARMA, INC.
We have audited the accompanying balance sheets of AVI BIOPHARMA, INC. (an
Oregon corporation in the development stage) as of December 31, 1998 and
1997, and the related statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and for the period from
inception (July 22, 1980) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AVI BIOPHARMA, INC. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1997 and for the period from
inception (July 22, 1980) to December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 27, 1999
F-1
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,510,020 $ 17,638,936
Other current assets 509,428 19,042
----------------- -------------------
Total Current Assets 9,019,448 17,657,978
Property and Equipment, net of accumulated
depreciation and amortization of $2,386,310
and $2,262,755 411,828 438,820
Patent Costs, net of accumulated amortization of
$305,310 and $218,773 730,960 553,063
Deferred Acquisition Costs - 102,506
Other Assets 29,847 29,847
----------------- -------------------
Total Assets $ 10,192,083 $ 18,782,214
================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 891,928 $ 219,083
Accrued liabilities 294,471 245,369
----------------- -------------------
Total Current Liabilities 1,186,399 464,452
Shareholders' Equity:
Preferred Stock, $.0001 par value, 2,000,000
shares authorized; none issued and outstanding - -
Common stock, $.0001 par value, 50,000,000
shares authorized; 13,346,166 and 11,125,617
issued and outstanding 1,335 1,113
Additional paid-in capital 51,779,785 34,358,122
Deficit accumulated during the development stage (42,775,436) (16,041,473)
----------------- -------------------
Total Shareholders' Equity 9,005,684 18,317,762
----------------- -------------------
Total Liabilities and Shareholders' Equity $ 10,192,083 $ 18,782,214
----------------- -------------------
----------------- -------------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 22, 1980
Year ended December 31, (Inception) to
1998 1997 December 31, 1998
---------------- ---------------- ------------------------
<S> <C> <C> <C>
Revenues, from grants and research contracts $ 120,351 $ 14,345 $ 824,193
Operating expenses:
Research and development 6,306,860 2,737,172 18,055,606
General and administrative 1,621,381 1,282,214 7,453,177
Acquired in-process research and
development 19,473,154 - 19,473,154
---------------- ---------------- ------------------------
27,401,395 4,019,386 44,981,937
Other Income:
Interest income, net 547,081 389,051 1,285,558
Realized gain on sale of short-term investments - - 96,750
---------------- ---------------- ------------------------
547,081 389,051 1,382,308
---------------- ---------------- ------------------------
Net loss $ (26,733,963) $ (3,615,990) $ (42,775,436)
---------------- ---------------- ------------------------
---------------- ---------------- ------------------------
Net loss per share - basic and diluted $ (2.27) $ (0.36)
---------------- ----------------
---------------- ----------------
Weighted average number of common shares
outstanding for computing basic and diluted
loss per share 11,801,453 10,078,962
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership -------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
---------- ----------- --------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 22, 1980 (Inception) - - $ - $ - $ - $ - $ -
No activity
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1980 - - - - - - -
Issuance of partnership units and common
stock in October 1981 for equipment and
supplies valued at $3,500 and technology 1,000 1,666,667 167 3,333 - - 3,500
Issuance of partnership units and common
stock for cash, $500 per unit 150 250,000 25 75,055 - - 75,080
Issuance of partnership units for consulting
services, $500 per unit 10 - - 5,000 - - 5,000
Issuance of common stock in connection with
financing agreement - 33,333 3 7 - - 10
Net loss - - - - - (9,224) (9,224)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1981 1,160 1,950,000 195 83,395 - (9,224) 74,366
Issuance of common stock for consulting
services - 54,600 5 11 - - 16
Net loss - - - - - (57,962) (57,962)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1982 1,160 2,004,600 200 83,406 - (67,186) 16,420
Issuance of partnership units and common
stock for cash, $550 per unit 60 100,000 10 33,020 - - 33,030
Issuance of common stock for consulting
services - 21,733 2 5 - - 7
Net loss - - - - - (27,475) (27,475)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1983 1,220 2,126,333 212 116,431 - (94,661) 21,982
Issuance of partnership units and common
stock for cash, $600 per unit 10 16,667 2 6,003 - - 6,005
Issuance of partnership units and common
stock for consulting services and $1,000
cash, $550 to $600 per unit 20 16,667 2 11,503 - - 11,505
Issuance of common stock for consulting
services - 2,533 - 1 - - 1
Issuance of common stock for donation to
charitable organizations - 100,000 10 20 - - 30
Net loss - - - - - (21,463) (21,463)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1984 1,250 2,262,200 226 133,958 - (116,124) 18,060
Issuance of partnership units and common
stock in December 1984 for technology 1,000 166,667 16 (16 - - -
Issuance of partnership units and common
stock for cash, $50 to $100 per unit 460 78,333 8 23,515 - - 23,523
Issuance of partnership units for cash, $50
to $550 per unit 140 - - 17,000 - - 17,000
Issuance of common stock for consulting
services - 6,733 1 1 - - 2
Net loss - - - - - (8,469) (8,469)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1985 2,850 2,513,933 251 174,458 - (124,593) 50,116
Issuance of partnership units and common
stock for cash, $50 to $500 per unit 90 105,000 11 31,521 - - 31,532
Issuance of common stock for consulting
services - 8,500 1 1 - - 2
Net loss - - - - - (32,353) (32,353)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1986 2,940 2,627,433 263 205,980 - (156,946) 49,297
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership -------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
---------- ----------- --------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1986 2,940 2,627,433 $ 263 $ 205,980 $ - $ (156,946) $ 49,297
Issuance of partnership units and common
stock for cash, $500 per unit 20 33,333 3 10,007 - - 10,010
Issuance of partnership units and warrants
to purchase 400,000 shares of common
stock for cash, $500 to $2,500 per unit 80 - - 100,000 - - 100,000
Issuance of common stock for consulting
services - 28,533 3 6 - - 9
Net loss - - - - - (71,616) (71,616)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1987 3,040 2,689,299 269 315,993 - (228,562) 87,700
Issuance of partnership units and common
stock for cash, $500 per unit 100 166,667 17 50,033 - - 50,050
Issuance of partnership units and common
stock for cash, $1,250 per unit 20 33,333 3 25,007 - - 25,010
Issuance of partnership units for cash, $50
per unit 20 - - 1,000 - - 1,000
Issuance of partnership units and warrants
to purchase 400,000 shares of common stock
for cash, $1,250 per unit 80 - - 100,000 - - 100,000
Compensation expense related to issuance of
warrants for partnership units - - - 10,000 - - 10,000
Issuance of common stock for consulting
services and employee compensation - 47,014 5 9 - - 14
Net loss - - - - - (266,194) (266,194)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1988 3,260 2,936,313 294 502,042 - (494,756) 7,580
Exercise of warrants for common stock - 141,667 14 28 - - 42
Issuance of partnership units and common
stock for cash, $1,250 per unit 10 16,667 1 12,504 - - 12,505
Issuance of partnership units and warrants
to purchase 800,000 shares of common stock
for cash, $1,250 per unit 160 - - 200,000 - - 200,000
Issuance of common stock for consulting
services and employee compensation - 17,733 2 4 - - 6
Compensation expense related to issuance
of warrants for partnership units - - - 2,500 - - 2,500
Net loss - - - - - (243,926) (243,926)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1989 3,430 3,112,380 311 717,078 - (738,682) (21,293)
Exercise of warrants for common stock - 33,333 3 7 - - 10
Issuance of partnership units and common
stock for cash, $1,250 per unit 74 123,334 12 92,525 - - 92,537
Issuance of partnership unit for cash,
$5,000 per unit 1 - - 5,000 - - 5,000
Issuance of common stock for cash, $4.56
per share - 1,100 - 5,000 - - 5,000
Issuance of partnership units and warrants
to purchase 200,000 shares of common stock
for cash, $1,250 per unit 40 - - 50,000 - - 50,000
Issuance of common stock for consulting
services and employee compensation - 11,400 2 51,678 - - 51,680
Compensation expense related to issuance of
warrants for partnership units - - - 40,000 - - 40,000
Exercise of warrant for partnership units 10 - - 12,500 - - 12,500
Net loss - - - - - (351,772) (351,772)
---------- ----------- --------- ------------ ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1990 3,555 3,281,547 328 973,788 - (1,090,454) (116,338)
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AVI BIOPHARMA INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ---------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
----------- ---------- ---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1990 3,555 3,281,547 $ 328 $ 973,788 $ - $ (1,090,454) $ (116,338)
Issuance of partnership units
for cash, $5,000 per unit 23.5 - - 117,500 - - 117,500
Exercise of warrants for partnership
units and common stock 1 1,100 - 1,250 - - 1,250
Issuance of common stock for cash,
$4.56 per share - 24,750 3 112,505 - - 112,508
Compensation expense related to
issuance of warrants for common stock - - - 1,520 - - 1,520
Issuance of common stock for consulting
services, $4.56 per share - 1,657 - 7,547 - - 7,547
Common stock subject to rescission - (7,127) (1) (32,499) - - (32,500)
Net loss - - - - - (274,844) (274,844)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT OCTOBER 31, 1991 3,579.5 3,301,927 33 1,181,611 - (1,365,298) (183,357)
Issuance of partnership units for
cash, $5,000 per unit 15.5 - - 77,500 - - 77,500
Issuance of common stock for cash,
$4.56 per share - 17,050 2 77,498 - - 77,500
Compensation expense related to issuance
of warrants for common stock - - - 7,500 - - 7,500
Common stock subject to rescission - (32,486) (3) (148,135) - - (148,138)
Net loss - - - - - (91,588) (91,588)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1991 3,595 3,286,491 329 1,195,974 - (1,456,886) (260,583)
Issuance of partnership units for cash,
$5,000 per unit 30.5 - - 152,500 - - 152,500
Exercise of warrants for partnership
units and common stock 22 2,200 - 28,750 - - 28,750
Conversion of debt into common stock and
partnership units 9 9,634 1 87,859 - - 87,860
Issuance of common stock for cash, $4.56
per share - 868,906 87 3,954,625 - - 3,954,712
Issuance of common stock for consulting
services, $4.56 per share - 22,872 2 104,167 - - 104,169
Compensation expense related to issuance of
warrants for common stock and partnership
units - - - 262,833 - - 262,833
Common stock subject to rescission - (410,099) (41) (1,870,008) - - (1,870,049)
Net loss - - - - - (1,731,138) (1,731,138)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1992 3,656.5 3,780,004 378 3,916,700 - (3,188,024) 729,054
Exercise of warrants for partnership
units 9 - - 4,500 - - 4,500
Issuance of common stock in exchange
for partnership units (1,809.5) 1,632,950 163 (163) - - -
Withdrawal of partnership net assets
upon conveyance of technology (1,856) - - (176,642) - - (176,642)
Issuance of common stock for cash and
short-term investments,
$4.95 per share - 507,084 50 2,510,014 - - 2,510,064
Exercise of warrants for common stock - 3,844 1 9,999 - - 10,000
Common stock subject to rescission - (808,902) (81) (901,119) - - (901,200)
Net loss - - - - - (2,346,939) (2,346,939)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1993 - 5,114,980 511 5,363,289 - (5,534,963) (171,163)
Issuance of common stock for cash,
$4.95 per share - 565,216 57 2,797,761 - - 2,797,818
Exercise of warrants for common stock - 24,667 2 122,098 - - 122,100
Issuance of common stock for consulting
services, $4.95 per share - 151 - 749 - - 749
Unrealized gain on available-for-sale
securities - - - - 61,000 - 61,000
Common stock subject to rescission - (34,359) (3) (170,075) - - (170,078)
Net loss - - - - - (2,246,272) (2,246,272)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1994 - 5,670,655 567 8,113,822 61,000 (7,781,235) 394,154
</TABLE>
F-6
<PAGE>
AVI BIOPHARMA INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ---------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
----------- ---------- ---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 - 5,670,655 $ 567 $ 8,113,822 $ 61,000 $ (7,781,235) $ 394,154
Issuance of common stock for cash,
$6.00 per share - 146,183 15 862,674 - - 862,689
Compensation expense related to
issuance of warrants for common stock - - - 213,000 - - 213,000
Unrealized gain on available-for-sale
securities - - - - 35,750 - 35,750
Net loss - - - - - (2,556,886) (2,556,886)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1995 - 5,816,838 582 9,189,496 96,750 (10,338,121) (1,051,293)
Exercise of warrants for common stock - 957,452 96 (96) - - -
Issuance of common stock for cash,
$6.00 per share - 712,500 71 4,031,461 - - 4,031,532
Liquidation of available-for-sale
securities - - - - (96,750) - (96,750)
Net loss - - - - - (2,087,362) (2,087,362)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1996 - 7,486,790 749 13,220,861 - (12,425,483) 796,127
Exercise of warrants for common stock - 50,000 5 5,010 - - 5,015
Exercise of options for common stock - 59,903 6 281,804 - - 281,810
Issuance of common stock and warrants
for cash, $9.00 per unit, net of
offering costs - 2,300,000 230 18,017,400 - - 18,017,630
Reclassified upon completion of rescission
offering - 1,228,924 123 2,833,047 - - 2,833,170
Net loss - - - - - (3,615,990) (3,615,990)
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1997 - 11,125,617 1,113 34,358,122 - (16,041,473) 18,317,762
Exercise of warrants for common stock - 34,567 3 17,922 - - 17,925
Exercise of options for common stock - 35,990 4 166,944 - - 166,948
Issuance of common stock and warrants for
the acquisition of ImmunoTherapy
Corporation - 2,132,592 213 17,167,199 - - 17,167,412
Issuance of common stock for consulting
services, $4.00 per share - 17,400 2 69,598 - - 69,600
Net loss - - - - - (26,733,963) (26,733,963)
----------- ---------- ---------- ---------- ----------- ------------ -------------
----------- ---------- ---------- ---------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1998 - 13,346,166 $ 1,335 $51,779,785 $ - $(42,775,436) $ 9,005,684
----------- ---------- ---------- ---------- ----------- ------------ -------------
----------- ---------- ---------- ---------- ----------- ------------ -------------
</TABLE>
F-7
<PAGE>
AVI BIOPHARMA INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
Year ended December 31, July 22, 1980
-------------------------------------- (Inception) to
1998 1997 December 31, 1998
---------------- ---------------- ------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (26,733,963) $ (3,615,990) $ (42,775,436)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 223,186 467,250 2,740,293
Realized gain on sale of short-term investments -
available for sale - - (96,750)
Compensation expense on issuance of common
stock and partnership units 69,600 - 251,992
Compensation expense on issuance of options and
warrants to purchase common stock or partnership units - - 562,353
Conversion of interest accrued to common stock - - 7,860
Acquired in-process research and development 19,473,154 - 19,473,154
(Increase) decrease in:
Other current assets (490,386) 9,213 (509,428)
Other assets - - (29,847)
Net increase in accounts payable and
accrued liabilities 721,947 133,645 1,186,399
---------------- ---------------- ------------------------
Net cash used in operating activities (6,736,462) (3,005,882) (19,189,410)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term investments - 30,000 247,750
Purchase of property and equipment (109,657) (323,798) (2,846,811)
Patent costs (264,434) (128,877) (1,036,270)
Acquisition costs (2,203,236) (102,506) (2,305,742)
---------------- ---------------- ------------------------
Net cash used in investing activities (2,577,327) (525,181) (5,941,073)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise of
options 184,873 18,447,565 34,025,940
Buyback of common stock pursuant to rescission offering - (288,795) (288,795)
Withdrawal of partnership net assets - - (176,642)
Issuance of convertible debt - - 80,000
---------------- ---------------- ------------------------
Net cash provided by financing activities 184,873 18,158,770 33,640,503
Increase (decrease) in cash and cash equivalents (9,128,916) 14,627,707 8,510,020
Cash and cash equivalents:
Beginning of period 17,638,936 3,011,229 -
---------------- ---------------- ------------------------
End of period $ 8,510,020 $ 17,638,936 $ 8,510,020
---------------- ---------------- ------------------------
---------------- ---------------- ------------------------
</TABLE>
F-8
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
AVI BioPharma, Inc. (the Company) was incorporated in the State of Oregon on
July 22, 1980. The mission of the Company is to develop and commercialize
improved therapeutic products based upon antisense and drug delivery
technology.
Through May 1993, the financial statements include the combined accounts of
the Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or
the Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit
sales have been paid to the Company under the terms of research and
development contracts entered into by the Partnership and the Company.
Significant transactions between the Company and the Partnership have been
eliminated.
In March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1, 1993,
each partner could elect to exchange each unit held or unit warrant held for
1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. One partner exchanged 325 partnership
units for warrants to purchase 357,500 shares of common stock. Total shares
and warrants to purchase shares issued in the exchange offer were 1,632,950
and 381,700, respectively.
Effective May 19, 1993, the Company and the Partnership entered into a
Technology Transfer Agreement wherein the Partnership conveyed all
intellectual property in its control to the Company. As part of the
conveyance, the Company tendered to the Partnership for liquidation all
partnership units received pursuant to the exchange offer and received a
49.37 percent undivided interest in the intellectual property. The Company
then purchased the remaining undivided interest in the intellectual property
for rights to payments of 2 percent of gross revenues from sales of products,
which would, in the absence of the Technology Transfer Agreement, infringe a
valid claim under any patent transferred to the Company. The Company also
granted to the Partnership a royalty-bearing license to make, use and sell
small quantities of product derived from the Intellectual Property for
research purposes only.
The remaining net assets of the Partnership, $176,642 of cash, were no longer
combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter
into research and development contracts with the Company. The Partnership
currently exists primarily for the purpose of collecting potential future
payments from the Company as called for in the Technology Transfer Agreement.
Beginning in 1991, the Company changed its fiscal year from a fiscal year
ending on October 31, to a calendar year. The new fiscal year was adopted
prospectively.
F-9
<PAGE>
The Company is in the development stage. Since its inception in 1980 through
December 31, 1998, the Company has incurred losses of approximately $43
million. Losses for 1998 include a one-time charge of $19,473,154 for
acquired in-process research and development reflecting the recently
completed acquisition of ITC and expenditures related to research and
development and general and administrative expenses. The Company has not
generated any material revenue from product sales to date, and there can be
no assurance that revenues from product sales will be achieved. Moreover,
even if the Company does achieve revenues from product sales, the Company
nevertheless expects to incur operating losses over the next several years.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company's ability to achieve a profitable
level of operations in the future will depend in large part on its completing
product development of its cancer vaccine, antisense and/or drug delivery
products, obtaining regulatory approvals for such products and bringing these
products to market. During the period required to develop these products, the
Company will require substantial financing. There is no assurance that such
financing will be available when needed or that the Company's planned
products will be commercially successful. If necessary, the Company's
management will curtail expenditures in an effort to conserve operating
funds. The likelihood of the long-term success of the Company must be
considered in light of the expenses, difficulties and delays frequently
encountered in the development and commercialization of new pharmaceutical
products, competitive factors in the marketplace as well as the burdensome
regulatory environment in which the Company operates. There can be no
assurance that the Company will ever achieve significant revenues or
profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, generally five years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful life of the asset.
PATENT COSTS
Patent costs consist primarily of legal and filing fees incurred to file
patents on proprietary technology developed by the Company. Patent costs are
amortized on a straight-line basis over the shorter of the estimated economic
lives or the legal lives of the patents, generally 17 years.
F-10
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred tax assets and liabilities are recorded based
on the tax effected difference between the tax bases of assets and
liabilities and their carrying amount for financial reporting purposes,
referred to as temporary differences, using enacted marginal income tax rates.
NET LOSS PER SHARE
Basic EPS is calculated using the weighted average number of common shares
outstanding for the period and diluted EPS is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position, there is no
difference between basic EPS and diluted EPS since the common stock
equivalents would be antidilutive.
The Company's net loss for the year ended December 31, 1998 includes a
one-time charge of $19,473,154, or $1.65 per share, for acquired in-process
research and development, reflecting the recently completed acquisition of
ImmunoTherapy Corporation (Note 6).
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ---------------------------------------------------------- ------------ -----------
<S> <C> <C>
Net loss $(26,733,963) $(3,615,990)
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Weighted average number of common shares
outstanding for computing basic earnings per share 11,801,453 10,078,962
Dilutive effect of warrants and stock options after
application of the treasury stock method * *
------------ -----------
Weighted average number of common shares outstanding
for computing diluted earnings per share 11,801,453 10,078,962
------------ -----------
------------ -----------
Net loss per share - basic and diluted $(2.27) $(0.36)
------------ -----------
------------ -----------
</TABLE>
* The following common stock equivalents are excluded from earnings per share
calculation as their effect would have been antidilutive:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ---------------------------------------------------------- ------------ -----------
<S> <C> <C>
Warrants and stock options 7,102,242 4,073,309
</TABLE>
F-11
<PAGE>
SEGMENT REPORTING
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information Based upon definitions contained within SFAS 131, the
Company has determined that it operates in one segment.
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," establishes standards for reporting and
display of comprehensive income. Comprehensive income includes charges or
credits to equity that did not result from transactions with shareholders.
SFAS No. 130 became effective during 1998. As net income and comprehensive
income were identical in 1998 and 1997, SFAS No. 130 did not have an impact
on the Company's financial statements.
RECENT PRONOUNCEMENTS
The Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," becomes
effective for the Company's year ending December 31, 2000. The Company does
not believe that SFAS No. 133 will have a material impact on its financial
statements.
3. SHAREHOLDERS' EQUITY:
In March 1996, the Company commenced a private offering wherein 712,500
shares of common stock were sold for net proceeds of $4,031,532, which
included warrants to purchase 60,201 shares of common stock at $9.00 per
share. These warrants are exercisable through the earlier of five years from
issuance or three years from the filing for an initial public offering.
In November 1996, the shareholders approved a reverse split of the Company's
outstanding Common Stock on the basis of one share for each three shares of
the then-outstanding common stock. The share information in the accompanying
financial statements has been retroactively restated to reflect the reverse
split. The Common Stock will continue to have $.0001 par value. The
shareholders approved the authorization of a new class of preferred stock
which includes 2,000,000 shares at $.0001 par value.
In May 1997, as a condition to its planned initial public offering, the
Company offered to holders of 1,292,973 shares of its common stock, the right
to rescind their purchase of shares of the Company's common stock. In July
1997, the Company completed its rescission offering to certain shareholders.
In this offering, the Company repurchased 64,049 shares of its common stock
for payments totaling $408,419, which included interest expense of $119,624.
In June 1997, in its initial public offering, the Company sold 2,000,000
units (the Units), each Unit consisting of one share of the Company's common
stock, and one warrant to purchase one share of common stock for $13.50. The
Units separated immediately following issuance and now trade only as separate
securities. Net proceeds of $15,555,230 were received by the Company.
F-12
<PAGE>
In July 1997, the Company's Underwriters exercised their over-allotment
option and purchased 300,000 additional Units at $9 per Unit, the initial
public offering price. Proceeds of $2,462,400 were received by the Company.
At December 31, 1998, the Company had two stock option plans, the 1992 Stock
Incentive Plan and the 1997 Stock Option Plan (the Plans). The 1992 Plan
provides for the issuance of incentive stock options to its employees and
nonqualified stock options, stock appreciation rights and bonus rights to
employees, directors of the Company and consultants. The 1997 Plan provides
for the assumption of the ImmunoTherapy Options under the Merger Agreement.
The Company has reserved 2,330,641 shares of common stock for issuance under
the Plans. Options issued under the Plans generally vest ratably over four
years and expire five to ten years from the date of grant.
The Financial Accounting Standards Board has issued SFAS 123, which defines a
fair value based method of accounting for an employee stock option and
similar equity instruments and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those
plans using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (APB 25). Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income (loss)
and, if presented, earnings (loss) per share, as if the fair value based
method of accounting defined in SFAS 123 had been adopted. The Company has
elected to account for its stock-based compensation plans under APB 25;
however, the Company has computed, for pro forma disclosure purposes, the
value of all options granted during 1998 and 1997 using the Black-Scholes
options pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ------------------------------------- --------- ---------
<S> <C> <C>
Risk-free interest rate 6.25% 6.25%
Expected dividend yield 0% 0%
Expected lives 6 Years 6 Years
Expected volatility 76% 56%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1998 and 1997 was $3,043,771 and $1,984,033, respectively, which would
be amortized on a pro forma basis over the vesting period of the options
(typically four years). The weighted average fair value of options granted
during 1998 and 1997 was $4.08 and $3.95, respectively. Included in options
granted during 1998, are options assumed in connection with the ImmunoTherapy
Corporation acquisition as discussed in Note 6. As the fair value of the
assumed options was recorded as part of the purchase price allocation, these
assumed options have not been included in the SFAS 123 fair value calculation.
F-13
<PAGE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998 1997
- ------------------------------- ------------------------------------- -------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net loss $(26,733,963) $(28,791,068) $(3,615,990) $(4,949,440)
Net loss per share - basic
and diluted $(2.27) $(2.44) $(0.36) $(0.49)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards are anticipated in future
years.
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998 1997
- ---------------------------------- -------------------------------------- ------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 1,240,209 $5.30 1,123,838 $4.73
Granted 971,856 5.29 502,361 6.51
Exercised (35,990) 4.64 (59,903) 4.70
Canceled (39,181) 4.65 (326,087) 5.29
---------------- ------------------ -------------- ------------------
Options outstanding at end
of year 2,136,894 5.32 1,240,209 5.30
---------------- ------------------ -------------- ------------------
---------------- ------------------ -------------- ------------------
Exercisable at end of year 1,428,798 $5.05 980,206 $5.01
---------------- ------------------ -------------- ------------------
---------------- ------------------ -------------- ------------------
</TABLE>
At December 31, 1998, 193,747 shares were available for future grant.
F-14
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Shares at Remaining
Exercise December 31, Contractual Life Exercisable
Price 1998 (Years) Options
- --------- ------------ ---------------- -----------
<S> <C> <C> <C>
$0.04 12,600 6.93 12,600
2.98 5,040 0.09 5,040
3.13 50,000 9.71 ---
3.75 33,334 9.92 ---
3.81 138,034 6.46 59,065
3.97 203,854 7.03 198,814
4.56 576,580 3.50 576,580
4.95 143,142 5.67 126,475
6.00 79,568 6.83 34,566
6.38 239,317 8.36 209,317
6.63 522,052 9.02 169,218
6.69 100,000 8.70 25,000
7.94 5,040 4.02 5,040
8.13 28,333 8.84 7,083
</TABLE>
The Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. The value of
warrants granted in 1997 have not been considered in the fair value based
method of accounting defined in SFAS 123 as such warrant grants related to
the raising of additional equity. Of the 2,166,814 warrants granted during
1998, 2,116,814 were in connection with the ImmunoTherapy Corporation
acquisition as discussed in Note 6. The fair value of such warrants was
considered in the purchase price of ImmunoTherapy Corporation and therefore
has not been considered in the fair value based method of accounting defined
in SFAS 123. The remaining 50,000 warrants were granted to non-employees of
the Company. A summary of the status of the Company's warrants and changes
are presented in the following table:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998 1997
- ---------------------------------- -------------------------------------- ------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
Warrants outstanding at
beginning of year 2,833,101 $12.88 427,434 $4.42
Granted 2,166,814 13.36 2,700,000 13.30
Exercised (34,567) 0.54 (50,000) 0.10
Canceled --- --- (244,333) 5.39
---------------- ------------------ -------------- ------------------
Warrants outstanding at end of
year 4,965,348 13.17 2,833,101 12.88
---------------- ------------------ -------------- ------------------
---------------- ------------------ -------------- ------------------
Exercisable at end of year 4,965,348 $13.17 2,433,101 $12.99
---------------- ------------------ -------------- ------------------
---------------- ------------------ -------------- ------------------
</TABLE>
F-15
<PAGE>
In connection with the initial public offering, the Company authorized the
issuance of the Underwriters' Warrants (the Warrants) and reserved 400,000
shares of Common Stock for issuance upon exercise of such Warrants (including
the warrants to purchase common stock issuable upon exercise of the
Warrants). The Warrants entitle the holder to acquire up to an aggregate of
200,000 Units at an exercise price of $10.80 per Unit and are exercisable one
year from the date of the initial public offering. Each Unit consists of one
share of Common Stock and one redeemable warrant. Each warrant initially
entitles the holder thereof to purchase one share of Common Stock at a price
of $13.50 per share.
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Warrants at Remaining Contractual
Exercise Price December 31, 1998 Life (Years) Exercisable Warrants
- ----------------- ------------------- ---------------------- --------------------
<S> <C> <C> <C>
$ 0.0003 33,334 Varies 33,334
1.14 5,000 Varies 5,000
9.00 60,200 1.42 60,200
7.25 50,000 0.14 50,000
10.80 200,000 3.42 200,000
13.50 4,616,814 Varies 4,616,814
</TABLE>
4. INCOME TAXES:
At December 31, 1998 and 1997, the Company had federal and state tax net
operating loss carryforwards of approximately $23,900,000 and $12,622,000,
respectively. The difference between the operating loss carryforwards on a
tax basis and a book basis is due principally to differences in depreciation,
amortization, and treatment of research and development costs. The federal
carryforwards began to expire in 1997 and the state carryforwards will begin
to expire in 2008, if not otherwise used. Of this $23,900,000, approximately
$4,150,000 relates to net operating losses assumed as part of the
ImmunoTherapy Corporation acquisition. Utilization of such losses is limited
to approximately $1,200,000 per year. In addition, the Internal Revenue Code
rules under Section 382 could limit the future use of the remaining
$19,750,000 in losses based on ownership changes and the value of the
Company's stock.
The Company had a net deferred tax asset of $10,566,000 and $6,260,000 at
December 31, 1998 and 1997, primarily from net operating loss carryforwards.
A valuation allowance was recorded to reduce the net deferred tax asset to
zero. The net change in the valuation allowance for deferred tax assets was
an increase of approximately $4,306,000 and $1,600,000 for the years ended
December 31, 1998 and 1997, respectively, mainly due to the increase in the
net operating loss carryforwards.
F-16
<PAGE>
An analysis of the deferred tax assets and liabilities as of December 31,
1998, is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
---------------- ----------------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 9,569,000 $ - $ 9,569,000
Depreciation 4,000 - 4,000
Research and development tax credits 1,285,000 - 1,285,000
Patent costs - (292,000) (292,000)
---------------- ----------------- ------------
$ 10,858,000 $ (292,000) 10,566,000
================ =================
Valuation allowance (10,566,000)
------------
$ -
============
</TABLE>
An analysis of the deferred tax assets and liabilities as of December 31, 1997,
is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 5,049,000 $ - $ 5,049,000
Accrued expenses 20,000 - 20,000
Depreciation 482,000 - 482,000
Research and development tax credits 930,000 - 930,000
Patent costs - (221,000) (221,000)
------------------ ------------------ ---------------
$ 6,481,000 $ (221,000) 6,260,000
================== ==================
Valuation allowance (6,260,000)
=================
$ -
=================
</TABLE>
5. LEASE OBLIGATIONS:
The Company leases office and laboratory facilities under various
noncancelable operating leases through December 2004. Rent expense under
these leases was $293,000 and $313,000 for the years ended December 31, 1998
and 1997, respectively, and $1,440,000 for the period from July 22, 1980
through December 31, 1998.
At December 31, 1998, the aggregate noncancelable future minimum payments
under these leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $ 325,000
2000 333,000
2001 341,000
2002 350,000
2003 335,000
Thereafter 298,000
=============
Total minimum lease payments $ 1,982,000
=============
</TABLE>
F-17
<PAGE>
6. ACQUISITION:
On September 15, 1998, the Company acquired all of the equity of
ImmunoTherapy Corporation (ITC), a privately held biotechnology company based
in Seattle, Washington. ITC was in the process of developing a therapeutic
vaccine targeting cancer. The purchase consideration consisted of 2,132,592
shares of AVI BioPharma common stock and 2,116,814 warrants to purchase AVI
BioPharma common stock. The transaction was accounted for as a purchase. In
connection with the purchase price allocation, the Company estimated that
substantially all of the intangible assets consist of research and
development projects in process. At that time, the development of these
projects had not reached technology feasibility and the technology was
believed to have no alternative future use. In accordance with generally
accepted accounting principles, a one-time charge for acquired in-process
research and development of $19,473,154, or $1.65 per share, has been
reflected in the accompanying financial statements.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
the expected product sales of such products, and discounting the net cash
flows to their present value using a risk-adjusted discount rate.
Remaining development efforts for the acquired R&D projects include various
stages of clinical testing and development work to manufacture the product in
accordance with functional and commercial specifications. If none of these
products is successfully developed, the sales and profitability of the
combined company may be adversely affected in future periods.
Unaudited pro forma combined statements of operations assume the ITC
acquisition occurred at beginning of each period and include acquired
in-process research and development are as follows:
<TABLE>
Year Ended December 31, 1998 1997
- --------------------------------------- ------------ ----------
<S> <C> <C>
Revenues $120,351 $ 14,345
Net loss (27,684,092) (4,940,483)
Net loss per share - basic and diluted $(2.08) $(0.40)
</TABLE>
As part of the acquisition, the Company loaned $440,000 in relocation related
costs to a former ITC executive who joined the management of the Company. The
resulting note receivable bears interest at 9 1/2 percent per year, is due
March 31, 1999, and is included in Other current assets.
F-18
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent public accountants, we hereby consent to the incorporation of
our report dated January 27, 1999, included in this Form 10-KSB into the
Company's previously filed registration Statement No. 333-34047 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,510,020
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,019,448
<PP&E> 2,798,138
<DEPRECIATION> 2,386,310
<TOTAL-ASSETS> 10,192,083
<CURRENT-LIABILITIES> 1,186,399
<BONDS> 0
0
0
<COMMON> 1,335
<OTHER-SE> 9,004,349
<TOTAL-LIABILITY-AND-EQUITY> 10,192,083
<SALES> 0
<TOTAL-REVENUES> 120,351
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,401,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (26,733,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,733,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,733,963)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
