<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26034
ORAVAX, INC.
(Exact Name of Registrant as Specified In Its Charter)
<TABLE>
<S> <C>
DELAWARE 04-3085209
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation of Organization) Identification Number)
38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS 02139
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1339
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: NOT APPLICABLE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 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 [ ]
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF COMMON STOCK,
AS OF LATEST PRACTICABLE DATE.
<TABLE>
<S> <C>
CLASS OUTSTANDING AS OF AUGUST 3, 1998
COMMON STOCK, $.001 PAR VALUE 13,256,750
</TABLE>
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<PAGE> 2
ORAVAX, INC
FORM 10-Q/A
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997..................................... 4
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997......... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997....................... 6
Notes to Condensed Consolidated Financial Statements........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 9
PART II. OTHER INFORMATION................................. 16
Signatures.................................................. 17
</TABLE>
2
<PAGE> 3
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES IN CERTAIN INFORMATION
The undersigned registrant hereby amend in its entirety Part 1 of its
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998.
During the course of discussions with the staff of the Securities and
Exchange Commission (the "Commission"), certain issues were raised regarding the
presentation of the Convertible Preferred Stock and the calculation of the
conversion discount attributable to the private placement financing that
occurred in December 1997.
The Company originally calculated the value of the discount as $846,788,
which was recorded as a deferred financing cost and an addition to paid-in
capital at December 31, 1997 and was to be amortized over the eighteen month
discount period. In the Second Quarter of 1998, the Company changed the
amortization period from eighteen to twelve months to reflect the volume of
conversions of the preferred stock to common stock. During fiscal 1999, after
consideration of the issues raised by the staff of the Commission and a re-
examination of the facts surrounding the assumptions used in the calculation,
the Company recalculated the amount of the discount as $1,675,800, eliminated
the deferred financing costs at December 31, 1997 and revised its amortization
schedule to recognize the discount as a return to preferred shareholders over
the original eighteen month discount period on which the shareholders could
realize the discount by accreting preferred dividends as a credit to additional
paid-in capital and a charge to retained earnings in each reporting period.
The Company originally presented the Convertible Preferred Stock as a
component of stockholders' equity at December 31, 1997. Upon further review of
the Preferred Stock Purchase Agreement and based on discussions with the
Commission, the Company has determined that $2,464,186 of the total issuance has
mandatory redemption features at December 31, 1997 and, therefore, should not be
included in stockholders' equity at December 31, 1997. The amount was determined
based on the number of common shares into which the preferred stock was
convertible at December 31, 1997 that were subject to shareholders approval
which was voted on March 10, 1998.
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORAVAX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,107 $ 10,274
Short-term investments...................................... 398 1,448
Prepaid and other current assets............................ 288 1,529
-------- --------
Total current assets........................................ 4,793 13,251
Property and equipment, net................................. 2,578 3,524
Investment in and advances to Joint Venture................. (299) (535)
Other assets................................................ 257 257
-------- --------
Total assets................................................ $ 7,329 $ 16,497
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 1,378 $ 935
Accrued expenses............................................ 2,289 3,659
Deferred joint venture revenue.............................. -- 91
Obligation under capital leases............................. 715 1,316
Obligation under installment debt........................... 260 260
-------- --------
Total current liabilities................................... 4,642 6,261
Obligation under capital leases, excluding current
portion................................................... 257 416
Installment debt, excluding current portion................. 953 882
-------- --------
Total liabilities........................................... 5,852 7,559
Mandatory redeemable preferred stock, $.001 par value; 2,772
shares issued and outstanding in 1997..................... -- 2,464
Stockholders' equity :
Preferred stock, $.001 par value; 2,000,000 shares
authorized in 1998 and 1997; none issued or
outstanding........................................... -- --
Convertible preferred stock, $.001 par value; 9,000
shares authorized in 1998 and 1997; 3,600 and 6,300
shares issued and outstanding in 1998 and 1997
(liquidation preference of $3,600).................... 3,059 3,137
Common stock, $.001 par value; 50,000,000 and
25,000,000 shares authorized in 1998 and 1997;
13,114,818 and 10,371,543 shares issued and
outstanding in 1998 and 1997.......................... 13 10
Additional paid-in capital.................................. 77,519 74,115
Deferred compensation....................................... (65) (94)
Accumulated deficit......................................... (79,049) (70,694)
-------- --------
Total stockholders' equity.................................. 1,477 6,474
-------- --------
Total liabilities and stockholders' equity.................. $ 7,329 $ 16,497
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
ORAVAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Collaborative research and
development -- related party... $ 2,048 $ 1,850 $ 3,957 $ 3,712
Government grants and other...... 220 81 437 202
Interest......................... 74 199 204 434
----------- ---------- ----------- ----------
2,342...... 2,130 4,598 4,348
----------- ---------- ----------- ----------
Expenses:
Research and development......... 3,376 3,485 7,158 7,176
General and administrative....... 990 849 1,847 1,839
Interest......................... 66 114 142 237
----------- ---------- ----------- ----------
4,432 4,448 9,147 9,252
----------- ---------- ----------- ----------
Loss from operations.................. (2,090) (2,318) (4,549) (4,904)
Equity in operations of joint
venture............................. (1,487) (1,514) (2,979) (3,171)
----------- ---------- ----------- ----------
Net loss from operations.............. $ (3,577) $ (3,832) $ (7,528) $ (8,075)
=========== ========== =========== ==========
Convertible Preferred Stock
dividend............................ 64 -- 158 --
Accretion to conversion discount of
Convertible Preferred Stock......... 469 -- 669 --
Net loss to common shareholders....... $ (4,110) $ (3,832) $ (8,355) $ (8,075)
=========== ========== =========== ==========
Net loss per basic and diluted common
share............................... $ (0.35) $ (0.38) $ (0.75) $ (0.81)
Weighted average number of basic and
diluted shares outstanding.......... 11,782,000 9,988,768 11,086,577 9,984,637
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
ORAVAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations............................... $(7,528) $(8,075)
Adjustments to reconcile net loss from operations to
net cash used in operating activities:
Depreciation and amortization.......................... 997 1,117
Equity in operations of joint venture.................. 2,979 3,171
Amortization of debt discount.......................... 71 82
Non-cash compensation.................................. 29 76
Changes in operating assets and liabilities:
Prepaid expenses and other current assets......... (159) (4)
Other assets...................................... -- 27
Accounts payable and accrued expenses............. (927) (1,041)
Deferred revenue -- related party................. (91) (473)
------- -------
Net cash used in operating activities....................... (4,629) (5,120)
------- -------
Cash flows from investing activities:
Sales of short-term investments........................ 1,050 6,021
Expenditures for property and equipment................ (51) (142)
Investment in joint venture............................ (3,215) (2,844)
------- -------
Net cash used in investing activities....................... (2,216) 3,035
------- -------
Cash flows from financing activities:
Proceeds from Common Stock issuances................... 38 69
Proceeds from Convertible Preferred Stock issuances.... 1,400 --
Principal payments under capital lease obligations..... (760) (787)
------- -------
Net cash provided by (used in) financing activities......... 678 (718)
------- -------
Net decrease in cash and cash equivalents................... (6,167) (2,803)
Cash and cash equivalents at beginning of period............ 10,274 14,916
------- -------
Cash and cash equivalents at end of period.................. $ 4,107 $12,113
======= =======
</TABLE>
Non-cash disclosure of Convertible Preferred and Common Stock conversions:
as of June 30, 1998, 2700 shares of Convertible Preferred Stock, including
applicable stock dividends, had been converted into 2,710,426 shares of Common
Stock.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE> 7
ORAVAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND
1997 IS UNAUDITED.
1. NATURE OF BUSINESS
OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in
1990 and has its principal offices and laboratories at 38 Sidney Street,
Cambridge, Massachusetts and manufacturing facilities in Canton, Massachusetts.
OraVax's mission is the discovery, development and commercialization of
biologic products for the prevention or treatment of human infectious diseases.
The Company's products are vaccines that stimulate the body's own immunity to
provide long term protection against disease, as well as antibody products that
provide immediate passive immunity to treat existing infections or to protect
against acute disease risk. The Company employs both classical biologic product
methods and innovative technologies to produce therapeutics and preventatives
that meet the challenges of each infection and disease process.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company's capital
requirements may change depending upon numerous factors, including progress of
the Company's research, development and clinical programs, time required to
obtain regulatory approvals, resources the Company devotes to self-funded
projects, proprietary manufacturing methods and advanced technologies and demand
for the Company's products, if and when approved.
While management believes that additional capital will be available to fund
operations, there can be no assurance that additional funds will be available
when required, on terms acceptable to the Company.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, manufacturing limitations, third party
reimbursements, collaborative arrangements, and compliance with government
regulations.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1998, and the consolidated
statements of operations and cash flows for the three and six months ended June
30, 1998 and 1997 are unaudited, have been prepared on a basis substantially
consistent with the audited financial statements, and, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The preparation of interim financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the interim financial statements and the reported amounts of revenues and
expenses during the reporting period. The results for the six months ended June
30, 1998 are not necessarily indicative of results for the entire year, although
the Company expects to incur a significant loss for the year ending December 31,
1998. These interim financial statements should be read in conjunction with the
annual consolidated financial statements included in the Company's annual report
filed on Form 10-K for the year ended December 31, 1997.
The accompanying condensed consolidated financial statements as of June 30,
1998 have been restated to reflect a change in the original accounting for the
6% Convertible Preferred Stock and the related discount attributable to the
private placement financing that occurred in December 1997, as a result of
discussions with the staff of the Securities and Exchange Commission (the
"Commission").
The Company originally calculated the value of the discount as $846,788,
which was recorded as a deferred financing cost and an addition to paid-in
capital at December 31, 1997 and was to be amortized over the eighteen month
discount period. In the Second Quarter of 1998, the Company changed the
amortization period from eighteen to twelve months to reflect the volume of
conversions of the preferred stock to common stock. During fiscal 1999, after
consideration of the issues raised by the staff of the Commission and a re-
7
<PAGE> 8
examination of the facts surrounding the assumptions used in the calculation,
the Company recalculated the amount of the discount as $1,675,800, eliminated
the deferred financing costs at December 31, 1997 and revised its amortization
schedule to recognize the discount as a return to preferred shareholders over
the original eighteen month discount as a credit to additional paid-in capital
and a charge to retained earnings in each reporting period. As a result, the
amount of the additional discount recognized in the year ended December 31, 1998
was $246,000.
The Company originally presented the Convertible Preferred Stock as a
component of stockholders' equity at December 31, 1997. Upon further review of
the Preferred Stock Purchase Agreement and based on discussions with the
Commission, the Company has determined that $2,464,186 of the total issuance has
mandatory redemption features at December 31, 1997 and, therefore, should not be
included in stockholders' equity at December 31, 1997. The amount was determined
based on the number of common shares into which the preferred stock was
convertible at December 31, 1997 that were subject to shareholder approval which
was voted on March 10, 1998. The June 30, 1998 balance sheet reflects the return
from mezzanine to stockholders' equity of the preferred stock released from
mandatory redemption by virtue of the common shareholder vote.
The table below details the previously reported financial position as of
December 31, 1997 and June 30 1998, and the effect of the restatement:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Total assets -- previously reported.............. $17,344 $7,753
Adjustment related to recalculation of preferred
stock discount................................. (847) (424)
------- ------
As adjusted...................................... $16,497 $7,329
------- ------
Total stockholder's equity -- previously
reported....................................... $ 9,785 $1,901
------- ------
Adjustment related to presentation of preferred
stock that is redeemable....................... (2,464)
Adjustment related to recalculation of preferred
stock discount................................. (847) (424)
------- ------
As adjusted...................................... $ 6,474 $1,477
------- ------
</TABLE>
The table below details the previously reported net loss to common
shareholders for the three months period ended June 30, 1998 and the effect of
the restatement:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Total net loss to common shareholders --
previously reported...................... $(3,923) $(8,109)
Adjustment related to recalculation of
preferred stock discount................. (187) (246)
------- -------
As adjusted................................ $(4,110) $(8,355)
------- -------
Net loss per common share -- previously
reported................................. $ (0.33) $ (0.73)
------- -------
As adjusted................................ $ (0.35) $ (0.75)
------- -------
</TABLE>
3. COMPUTATION OF NET LOSS PER COMMON SHARE
For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standards No. 128 ("SFAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of SFAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of common stock equivalents. Common stock
equivalent shares consist of Convertible Preferred Stock and stock options. The
dilutive computations do not include common stock equivalents for stock options
of 1,196,320 and 1,202,814 at June 30, 1998 and
8
<PAGE> 9
June 30, 1997, respectively, and Convertible Preferred Stock convertible to
3,357,613 shares of Common Stock at June 30, 1998, as there inclusion would be
antidilutive.
4. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified , as required. For the three
and six months ended June 30, 1998 and 1997 comprehensive income was the same as
net income.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS" 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000. The Company does not expect SFAS 133 to have a material impact on its
financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in 1990, the Company has been engaged in the discovery
and development of vaccines and injected antibody products to prevent or treat
human infectious diseases.
OraVax is currently pursuing four proprietary product development programs
which target diseases that have high rates of incidence, compelling
pharmaco-economic profiles, and against which no adequate therapeutic or
preventative antibody products or vaccines are currently available. The diseases
targeted by these products include, 1) peptic ulcers, gastritis and stomach
cancer, 2) viral pneumonia in children, 3) antibiotic-associated colitis, and 4)
a group of related viral diseases including Yellow Fever, Japanese encephalitis,
dengue, tick borne encephalitis and hepatitis C. The Company's product
candidates are designed to generate either mucosal or systemic immunity, as
appropriate to each disease target. The Company has developed a portfolio of
biologic production technologies appropriate to the biology of each infectious
agent.
9
<PAGE> 10
The Company's principal product candidates are the following:
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION TECHNOLOGY STATUS
----------------- ---------- ---------- ------
<S> <C> <C> <C>
Helicobacter pylori Prevention and Recombinant protein Phase II trials
(H. pylori) vaccines treatment of peptic vaccine
ulcers, gastritis and
stomach cancer
HNK20 antibody Prevention of Monoclonal IgA Phase III trials
pneumonia caused by nosedrop antibody
respiratory syncytial
virus in high risk
children
CdVax vaccine and CdIG Prevention and Toxoid vaccine and Toxoid IND 1998
immune-globulin treatment of Hyper-immune globulin Phase I trial 1998
antibiotic-associated
colitis
ChimeriVax(TM)Japanese Prevention of Chimeric live IND 1998
encephalitis infection by the attenuated viral
(follow-on products Japanese encephalitis vaccine
include dengue, and other flavi
hepatitis C, TBE) viruses
Arilvax(R) YF vaccine Prevention of Single-dose live OraVax to facilitate
(a product of Evans infection by the attenuated viral US registration
Medical, Limited) Yellow Fever virus vaccine (already marketed in
the UK and Europe)
Phase III trials
</TABLE>
In addition to its proprietary products, OraVax entered into a teaming
agreement in November 1996 with DynPort, the Prime Systems Contract Integrator
for the US Department of Defense's Joint Vaccine Acquisition Program ("JVAP").
OraVax has been identified as the anticipated manufacturer of certain live virus
and bacterial vaccines. The JVAP mandate includes up to eighteen vaccines
against viruses and bacteria that are potential bio-warfare agents. The teaming
agreement provides OraVax the opportunity to negotiate a role in the development
and lot manufacture of selected vaccines. The Company has been in contractual
negotiations for the first two products, Tularemia and Vaccinia. Discussions
with DynPort have been terminated for these initial products based upon the
inability to reach agreement on an acceptable price. In accordance with the
teaming agreement, DynPort intends to offer the Company future proposal
opportunities, as candidate vaccines transition to the Contract which match the
capabilities of the Company.
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000. The
first product revenues are anticipated from sales of the Yellow Fever vaccine,
under the Company's partnership with Evans Medical Limited. The Company's losses
incurred since inception resulted principally from expenditures under its
research and development programs and the Company expects to incur significant
operating losses over the next several years due primarily to expanded research
and development efforts, preclinical testing and clinical trials of its product
candidates, the acquisition of additional technologies, the establishment of
manufacturing capability and the performance of commercialization activities.
Results of operations may vary significantly from quarter to quarter depending
on, among other factors, the progress of the Company's research and development
efforts, the receipt, if any, of milestone payments, the timing of certain
expenses and the establishment of collaborative research agreements.
RESULTS OF OPERATIONS
Three Months ended June 30, 1998 compared with Three Months ended June 30,
1997
The Company's total revenues increased to $2,342,000 in the three months
ended June 30, 1998 from $2,130,000 in the three months ended June 30, 1997. In
the three months ended June 30, 1998, the Company's revenues consisted of
$2,048,000 of collaborative research revenues earned under the Company's
collaboration (the "Joint Venture") with Pasteur Merieux Connaught ("PMC"),
$220,000 from government grants and other, and $74,000 in interest earned on
invested funds. In the three months ended June 30, 1997, the Company's revenues
consisted of $1,850,000 of collaborative research revenues earned under the
Joint
10
<PAGE> 11
Venture, $81,000 from government grants and $199,000 in interest earned on
invested funds. The increased revenue was attributable to an increase in 1998
budgeted research and development activities of the Joint Venture with PMC and
an increase in grant revenue from the October 1997 award of a C.difficile Phase
II Small Business Innovation Research (SBIR) grant from the National Institute
of Health (NIH) offset by a decrease in interest income as a result of declining
cash investments.
The Company's total costs and expenses decreased to $4,432,000 in the three
months ended June 30, 1998 from $4,448,000 in the three months ended June 30,
1997. Research and development expenses decreased 3% to $3,376,000 in the three
months ended June 30, 1998 from $3,485,000 in the three months ended June 30,
1997. Significant contributors to the Company's research and development
expenditures in the second quarter of 1998, versus the second quarter of 1997,
included the conduct of three small-scale Phase II clinical studies under its
H.pylori program and advanced activities under its Japanese encephalitis
program, including the investment in other aspects of the Chimerivax family of
vaccine opportunities. These expenditures were offset by a decrease in costs
resulting from expenses that were incurred in the second quarter of 1997, under
its RSV program, that were not incurred in the second quarter of 1998, and from
aggressive cost control. The 17% increase in general and administrative expenses
to $990,000 in the three months ended June 30, 1998 from $849,000 in the three
months ended June 30, 1997 is principally due to advanced H.pylori patent
efforts and an increase in business development costs as the Company continues
to focus its efforts on obtaining strategic collaborations offset by a decrease
in expenses associated with the Company's workforce reduction in the second
quarter of 1997. Interest expense decreased to $66,000 in the three months ended
June 30, 1998 from $114,000 in the three months ended June 30, 1997.
The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$1,487,000 and $1,514,000 share of the Joint Venture Partnerships' losses in the
second quarter of 1998 and 1997, respectively. The decreased loss is principally
due to third party obligations, incurred by the Joint Venture Partnerships' in
the second quarter of 1997 as compared to the same period in 1998, which were
offset by an increase in the 1998 budgeted research and development activities
of both OraVax and PMC.
The Company incurred a net loss from operations of $3,577,000 in the three
months ended June 30, 1998 compared to a net loss from operations of $3,832,000
in the three months ended June 30, 1997.
In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend, that accrues in stock, on its Convertible Preferred
Stock and the amortization of the conversion discount related to the December
1997 Convertible Preferred Stock financing.
The Company incurred a net loss to common shareholders of $4,110,000 three
months ended June 30, 1998 compared to a net loss to common shareholders of
$3,832,000 in the three months ended June 30, 1997.
Six Months ended June 30, 1998 compared with Six Months ended June 30, 1997
The Company's total revenues increased to $4,598,000 in the six months
ended June 30, 1998 from $4,348,000 in the six months ended June 30, 1997. In
the six months ended June 30, 1998, the Company's revenues consisted of
$3,957,000 of collaborative research revenues earned under the Company's
collaboration (the "Joint Venture") with Pasteur Merieux Connaught ("PMC"),
$437,000 from government grants and other, and $204,000 in interest earned on
invested funds. In the six months ended June 30, 1997, the Company's revenues
consisted of $3,712,000 of collaborative research revenues earned under the
Joint Venture, $202,000 from government grants and $434,000 in interest earned
on invested funds. The increased revenue was attributable to an increase in 1998
budgeted research and development activities of the Joint Venture with PMC and
an increase in grant revenue from the October 1997 award of a C.difficile Phase
II Small Business Innovation Research (SBIR) grant from the National Institute
of Health (NIH) offset by a decrease in interest income as a result of declining
cash investments.
The Company's total costs and expenses decreased to $9,147,000 in the six
months ended June 30, 1998 from $9,252,000 in the six months ended June 30,
1997. Research and development expenses decreased to $7,158,000 in the six
months ended June 30, 1998 from $7,176,000 in the six months ended June 30,
1997.
11
<PAGE> 12
Significant contributors to the Company's research and development expenditures
in the six months ended June 30,1998, versus the six months ended June 30, 1997,
included the conduct of three small-scale Phase II clinical studies under its
H.pylori program and advanced activities under its Japanese encephalitis
program, including the investment in other aspects of the Chimerivax family of
vaccine opportunities. These expenditures were offset by a decrease in costs
resulting from expenses that were incurred in the six months ended June 30,
1997, under its RSV program, that were not incurred in the six months ended June
30, 1998, and from aggressive cost control. The increase in general and
administrative expenses to $1,847,000 in the six months ended June 30, 1998 from
$1,839,000 in the six months ended June 30, 1997 is principally due to advanced
H.pylori patent efforts and an increase in business development costs as the
Company continues to focus its efforts on obtaining strategic collaborations
offset by a decrease in expenses associated with the Company's workforce
reduction in the second quarter of 1997. Interest expense decreased to $142,000
in the six months ended June 30, 1998 from $237,000 in the six months ended June
30, 1997.
The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$2,979,000 and $3,171,000 share of the Joint Venture Partnerships' losses in the
second quarter of 1998 and 1997, respectively. The decreased loss is principally
due to third party obligations, incurred by the Joint Venture Partnerships' in
the six months ended June 30,1997 as compared to the same period in 1998, which
were offset by an increase in the 1998 budgeted research and development
activities of both OraVax and PMC.
The Company incurred a net loss from operations of $7,528,000 in the six
months ended June 30, 1998 compared to a net loss from operations of $8,075,000
in the six months ended June 30, 1997.
In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend, that accrues in stock, on its Convertible Preferred
Stock and the amortization of the conversion discount related to the December
1997 Convertible Preferred Stock financing.
The Company incurred a net loss to common shareholders of $8,355,000 in the
six months ended June 30, 1998 compared to a net loss to common shareholders of
$8,075,000 in the six months ended June 30, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000. The Company does not expect SFAS 133 to have a material impact on its
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's aggregate cash and investments were $4,505,000 at June 30,
1998, a decrease of $7,217,000 since December 31, 1997. Cash used by operations
during the six months ended June 30, 1998, principally to support research and
development, was $4,629,000. In early 1998, the Company received the $1,400,000
remainder of cash proceeds from the December 1997 Convertible Preferred Stock
financing. In addition, the Company invested $3,215,000 in the Joint Venture
with Pasteur Merieux Connaught and repaid $760,000 of its capital lease
obligations during the period.
Since inception, the Company's cash expenditures have exceeded its
revenues. Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's Joint Venture with PMC, government grants and interest income. The
Company's future capital requirements will depend on many factors, including,
but not limited to, the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs
12
<PAGE> 13
involved in obtaining regulatory approvals, the funding of the Company's share
of the expenses of collaborative arrangements, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the acquisition of additional facilities and
capital equipment.
The Company plans to finance these cash needs in the near term principally
through its existing cash reserves, together with interest earned thereon, and
revenues from the Joint Venture with PMC and previously awarded government
grants. The Company believes, based upon its current operating plan, that, in
addition to its available cash balances and known revenues, it will need
additional financing in the third quarter of 1998 in order to fund the Company's
operations. The Company will require additional funds to conduct, if planned, a
second Phase III trial of its HNK20 product candidate and for HNK20
manufacturing. This effort will not proceed without sponsorship of the corporate
partner. Moreover, changes in the Company's research and development plans or
other events affecting the Company's operations may result in accelerated or
unexpected expenditures. In addition, the Company will need substantial
additional capital to fund its operations for the manufacturing and marketing of
any of its successful product candidates. The Company is actively pursuing
additional funding through private equity financings, the sale of assets,
formation of new corporate partnerships, which include up-front signing fees,
milestone payments and sponsorship of research and development costs, and the
award of new government grants. The Company is continuing to review its burn
rate and has implemented initiatives to conserve its cash resources, including
putting non-essential expenditures on hold. If additional funds are raised by
issuing equity securities, further dilution to existing stockholders may result
and future investors may be granted rights superior to those of existing
stockholders. There can be no assurance, however, that additional financing will
be available from any of these sources, or if available, will be available on
terms satisfactory to the Company. If the Company does not consummate an equity
financing, a sale of assets or additional collaborative arrangements, then the
Company's current cash position will not be sufficient to meet its financial
obligations or to fund operations at the current level beyond the third quarter
of 1998. The Company's inability to obtain needed funding on satisfactory terms
may require the Company to delay, scale back or eliminate one or more of its
planned product development programs, scale back its planned manufacturing
operations or enter into collaborative arrangements that may require the Company
to issue additional equity or relinquish rights to certain technologies or
product candidates that the Company would not otherwise issue or relinquish.
NASDAQ DELISTING
At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) is $1.5 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company expects to receive a notice of delisting from the
Nasdaq Stock Market, Inc. ("Nasdaq") indicating that because the Company is not
in compliance with the minimum net tangible asset requirement the Company's
stock will be delisted from trading on the Nasdaq NM if the Company does not
raise capital sufficient to meet the minimum requirement as determined by
Nasdaq. The Company intends to submit a plan of restoration to Nasdaq. However,
there is no assurance that Nasdaq will find the plan to be acceptable or if
acceptable, that the Company will be successful in achieving that plan. If the
Company's stock is delisted from the Nasdaq NM, the Company intends to make
application for listing on the Nasdaq SmallCap Market if the Company meets the
minimum initial listing requirements of the Nasdaq SmallCap Market at that time.
The delisting of the Company's stock from the Nasdaq NM could have a material
adverse effect on the Company's efforts to raise additional equity capital.
SUBSEQUENT EVENT
Since July 23, 1998, the Company's stock has been trading below the $1 per
share minimum requirement for continued listing by the Nasdaq NM. The Company
expects to receive a notice of delisting from Nasdaq indicating that because the
Company is not in compliance with the minimum share requirement the Company's
stock will be delisted from trading on the Nasdaq NM if the Company does not
raise its stock price to the minimum requirement. The Company is pursuing all
efforts to raise its share price to the
13
<PAGE> 14
minimum level. However, there is no assurance that the Company's efforts will be
successful. If the Company's stock is delisted from the Nasdaq NM due to share
price the Company would not meet the minimum initial listing requirement of $4
per share required for listing on the Nasdaq SmallCap Market and would be traded
on the OTC Bulletin Board.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the following, that could cause
actual results to differ materially from those indicated by the forward-looking
statements made herein and presented elsewhere by management from time to time.
Early Stage of Product Development. The products under development by the
Company will require significant additional research and development efforts,
including extensive clinical testing and regulatory approval, prior to
commercial use. The Company's potential products are subject to the risks of
failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that the Company's
therapeutic approach will not be successful, that any or all of the Company's
potential products will be found to be unsafe, ineffective, toxic or otherwise
fail to meet applicable regulatory standards or receive necessary regulatory
clearances, that the potential products, if safe and effective, will be
difficult to develop into commercially viable products, to manufacture on a
large scale or be uneconomical to market, that proprietary rights of competitors
or other parties will preclude the Company from marketing such products; or that
competitors or other parties will market superior or equivalent products.
Future Capital Needs. In addition, the Company will require substantial
additional funds in order to continue its research and development programs,
preclinical and clinical testing of its product candidates and to conduct full
scale manufacturing and marketing of any pharmaceutical products that may be
developed. The Company's capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of preclinical and clinical testing, 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, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the purchase of additional facilities and
capital equipment. The Company believes, based upon its current operating plan,
that, in addition to its available cash balances and known revenues, it will
need to raise additional capital in the third quarter of 1998 in order to fund
operations. If the Company does not consummate an equity financing, a sale of
assets or additional collaborative arrangements, then the Company's current cash
position will not be sufficient to meet its financial obligations or to fund
operations at the current level beyond the third quarter of 1998. There can be
no assurance, however, that changes in the Company's research and development
plans, acquisitions or other events affecting the Company's operations will not
result in accelerated or unexpected expenditures. Thereafter, the Company will
need to raise substantial additional capital to fund its operations. There can
be no assurance, however, that additional financing will be available, or if
available, will be available on acceptable or affordable terms. The delisting of
the Company's stock from the Nasdaq National Market could have a material
adverse effect on the Company's efforts to raise additional equity capital.
Manufacturing Limitations. At present, the Company's ability to
manufacture its products is limited to clinical trial quantities. The Company
currently does not have the capability to manufacture commercial quantities of
products. The Company's strategy is to develop its manufacturing facilities for
producing both pilot-scale and commercial quantities of its products. To ensure
compliance with current Good Manufacturing Practices ("cGMP") imposed by the
FDA, OraVax will need to establish sufficient technical staff to oversee all
product operations, including quality control, quality assurance, technical
support and manufacturing management. The Company may enter into arrangements
with contract manufacturing companies to expand its own production capacity in
order to meet requirements for its product candidates. If the Company chooses to
contract for manufacturing services and encounters delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
its finished pharmaceutical or other medical products (if any), clinical trials,
market introduction and subsequent sales of such products would be adversely
affected. Moreover, contract manufacturers must operate in compliance with cGMP.
The Company's potential
14
<PAGE> 15
dependence upon third parties for the manufacture of its products may adversely
affect the Company's profit margins and its ability to develop and deliver such
products on a timely and competitive basis.
Risks Associated with Collaborative Arrangements. The Company's product
development strategy may require the Company to enter into various additional
arrangements with corporate, government and academic collaborators, licensors,
licensees and others. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. There can be no assurance that the Company will be able to
establish additional collaborative arrangements or license agreements that the
Company deems necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful.
Patent and Proprietary Rights. The Company seeks to protect its trade
secrets and proprietary know-how, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will not be violated by the other parties, that
OraVax will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Certain of the technology that may be used in the products of
OraVax is not covered by any patent or patent application. There can be no
assurance that any pending patent applications relating to the Company's product
candidates will result in patents being issued. Moreover, there can be no
assurance that any such patents will afford protection against competitors with
similar technology. There may be pending or issued third-party patents relating
to the product candidates of OraVax. OraVax may need to acquire licenses to, or
to contest validity of, any such third party patents. It is likely that
significant funds would be required to defend any claim that OraVax infringes a
third-party patent, and any such claim could adversely affect sales of the
challenged product of OraVax until the claim is resolved. There can be no
assurance that any license required under any such patent would be made
available.
Government Regulation. The rigorous preclinical and clinical testing
requirements and regulatory approval process of the FDA and of foreign
regulatory authorities can take a number of years and require the expenditure of
substantial resources. The Company has limited experience in conducting and
managing preclinical and clinical testing necessary to obtain government
approvals. There can be no assurance that the Company will be able to obtain the
necessary approvals for clinical testing or for the manufacturing and marketing
of any products that it develops. Additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
product candidates. Delays in obtaining regulatory approvals would adversely
affect the marketing of any products developed by the Company and the Company's
ability to receive product revenues or royalties. If regulatory approval of a
potential product is granted, such approval may include significant limitations
on the indications for which such product may be marketed. Even if initial
regulatory approvals for the Company's product candidates are obtained, the
Company, its products and its manufacturing facilities are subject to continual
review and periodic inspection. The regulatory standards for manufacturing are
applied stringently by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product,
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties.
Uncertainty of Third-Party Reimbursement. Government and other third-party
payers are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third party payers for uses of the Company's
products, the market acceptance of these products would be adversely affected.
Year 2000 Issues. The approaching millennium ("Year 2000") could result in
challenges related to the Company's computer software, accounting records and
relationships with suppliers, collaborative partners and licensees. The
Company's management is studying Year 2000 issues and is seeking to avoid such
problems. Based on the Company's review of its business and operating systems,
the Company does not expect to incur material costs with respect to assessing
and remediating Year 2000 problems. However, there can be no
15
<PAGE> 16
assurance that such problems will not be encountered or that costs incurred to
resolve such problems will not be material.
Because of these and other factors, past financial performance should not
be an indicator of future performance. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in the biotechnology
and pharmaceutical industries and recommendations by analysts or other events.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its Annual Meeting of Stockholders on June 30, 1998. At
this meeting, the stockholders of the Company:
1. Elected Lance K. Gordon (by a vote of 6,964,842 shares of common stock
in favor and 470,841 shares of common stock withheld) to serve as Class
III Director of the Company until the 2001 Annual Meeting of
Stockholders;
2. Approved an amendment to the Company's Second Amended and Restated
Certificate of Incorporation (by a vote of 7,218,433 shares of common
stock in favor, 201,485 shares of common stock against and 15,765
shares of common stock abstaining) to increase the number of shares of
common stock which the Company is authorized to issue from 25,000,000
shares to 50,000,000 shares;
3. Approved an amendment to the Company's 1995 Employee Stock Purchase
Plan (by a vote of 6,882,433 shares of common stock in favor, 533,810
shares of common stock against and 19,440 shares of common stock
abstaining) providing for an increase from 100,000 to 225,000 in the
number of shares of common stock reserved for issuance thereunder; and
4. Ratified the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 1998
(by vote of 7,405,493 shares of common stock in favor, 16,050 shares of
common stock against and 14,140 shares of common stock abstaining).
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1998.
16
<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORAVAX, INC.
/s/ Lance K. Gordon
------------------------------------
LANCE K. GORDON
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: March 31, 1999
/s/ Brigid A. Makes
------------------------------------
BRIGID A. MAKES
CHIEF FINANCIAL OFFICER (CFO AND
PRINCIPAL ACCOUNTING OFFICER)
Date: March 31, 1999
17
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