ITEM 1.
Business
GENERAL
Overview
We are a development stage biotechnology company specializing in the development and future commercialization of individualized vaccine therapies and other technologies for the treatment of cancer. Our vaccine consists of autologous (the patient’s own) cancer cells that have been treated with a chemical (“haptenized”) to make them more visible to the patient’s immune system. We refer to our cancer vaccine technology as autologous cell vaccine immunotherapy and to the vaccine as the AC Vaccine. Our previous clinical trials for the AC Vaccine have concentrated on melanoma, ovarian carcinoma, which are our primary indications, and non-small cell lung cancer. We refer to our AC Vaccine candidates as:
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M-Vax® for the treatment of melanoma. The current clinical status of our M-Vax program is as follows:
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Phase I-II - Dose-response safety and immunological efficacy study launched in June 2005 and completed in December 2007.
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Phase III - Registration study enrollment commenced in November 2007. The study is the subject of a Special Protocol Assessment granted by the U.S. Food and Drug Administration (“FDA”).
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L-Vax ™ for the treatment of non-small cell lung cancer. The current clinical status of our L-Vax program is as follows:
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Phase I-II - Dose-response, safety and immunological efficacy study launched in December 2005.
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O-Vax ™ for the treatment of ovarian cancer. The current clinical status of our O-Vax program is as follows:
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Phase I-II - Dose-response, safety and immunological efficacy study anticipated to launch in 2008, subject to obtaining sufficient financing to implement fully our plan of operation described in this prospectus.
M-Vax®, L-Vax™ and O-Vax™ are registered trade names or trademarks of the company.
We also offer biological manufacturing services to other biotechnology and pharmaceutical companies. These services are provided utilizing the same facilities and personnel that produce our products for clinical and commercial purposes. In Europe, and more recently in South America, we have made M-Vax available for patient treatment on a compassionate use basis. Compassionate use is considered for patients who have failed to respond to accepted standards of care for their cancer and are facing a prognosis of imminent death. Although it is not the primary purpose of compassionate use of our vaccine, we receive payments for the vaccine from the hospitals that contract for the acquisition of the vaccine.
In 1995, we identified the AC Vaccine research being conducted by Dr. David Berd, an oncologist and professor at Thomas Jefferson University in Philadelphia, and licensed the rights to Dr. Berd’s research. Since then, we have focused our efforts on the development of an immunotherapy for the treatment of cancer, the AC Vaccine technology. On November 1, 2004, Dr. Berd joined our company as our Chief Medical Officer.
In August 2000, we acquired Genopoietic S.A. and its corporate affiliate, based in Lyon, France, which developed cell and gene-based therapies in collaboration with Pierre et Marie Curie University and Centre National de la Recherche Scientifique. As part of that acquisition, we acquired a biological clean room facility in Lyon, France, at which we now conduct all AC Vaccine manufacturing. In the last three years, much of our development and manufacturing efforts relating to the AC Vaccine have shifted to our Lyon facility, due to the expertise and staffing at that facility and recent developments in France and other European countries that should facilitate development of autologous products, such as the AC Vaccine, in Europe.
The Lyon facility has been inspected, and is the subject of ongoing inspections, by AFSSAPs (the French equivalent of the U.S. Food and Drug Administration) and received the designation of “Etablissement Pharmaceutique” in 2002 and obtained the designation “Etablissement Thérapies Gèniques et Cellulaires” in 2004. The Etablissement Pharmaceutique designation is required for the production of any commercial product to be sold in France and throughout Europe. The Etablissement Therapies Geniques et Cellulaires designation is required in France for the commercial production of cell and gene therapy products.
Current Cancer Therapies
Cancer is a diverse and complex disorder with multiple causes and variable outcomes. Genetic pre-disposition, environmental factors and diet are among the numerous contributing factors that are associated with the development and evolution of this heterogeneous disease. Each year in the U.S. alone, over 1.5 million new individuals are diagnosed with various forms of cancer and, as our overall life span increases, the incidence of the disease is expected to increase.
In a healthy person, tissues and organs consist of cells that are, in part, regulated by the immune system. Normal cell function is characterized by cell growth, cell division and then programmed cell death (the latter referred to as apoptosis) as new cells are generated and function in place of the original cell. Cancer is characterized by the unregulated growth of cells that proliferate as tumors, which can metastasize (i.e., spread) throughout the body, resulting in distant deposits of tumor cells, called metastases. Cancer cells have adopted many mechanisms by which they can elude the defense systems of the body. A significant feature of their proliferation is their ability to evade recognition by the patient’s immune system. The metastatic tumors disrupt normal tissue and organ functions, which in the worst circumstances leads to the death of the patient.
We believe that for a therapy to be effective, it must eliminate or control the growth of the cancer, both at its site of origin and at the site of metastases. Patients with cancer typically undergo a first line of treatment through surgical removal of tumors. Treatments that follow surgery (referred to as adjuvant treatments) include radiation, hormone therapy and chemotherapy. Initial surgery and radiation therapy treat cancer at its origin, but are limited because certain tissues cannot be removed surgically or do not tolerate radiation. Moreover, cancers frequently spread prior to detection, and surgery and radiation cannot control metastases. Chemotherapy and hormonal therapy are frequently used to treat tumor metastases. These therapies, however, can cause severe side effects, including damage to normal tissue. Additionally, chemotherapy and hormonal therapy may shrink tumors, but rarely eliminate them completely. Our approach to the development of cancer therapies is to find targets that are novel or to discover compounds that are structurally different from existing therapies, with the intent of making the treatments more specific and less toxic.
The Immune System
The immune system is involved intimately in the regulation of the growth of cells and tissues within the body as well as acting as a natural defense against disease. These functions are performed by a variety of specialized cells. These cells recognize specific chemical structures, called antigens, which are found on disease-causing agents, including tumors. Antigens trigger an immune response, which results in the eventual removal of antigen from the body.
The type of immune response is characterized by the way the response was initiated through specialized cells known as lymphocytes. There are two main categories of lymphocytes: B-lymphocytes, or B-cells, and T-lymphocytes, or T-cells. Each category of lymphocytes has a different role in the immune response. T-cells combat disease by killing antigen bearing cells directly or by making chemicals called cytokines that work indirectly. In this way, T-cells eliminate cancers and virally infected tissue. T-cell immunity is an example of cell-mediated immunity and is commonly thought to be a key defense against tumors and cells chronically infected by viruses. In contrast, activation of B-cells leads to the production of specific antibodies. The antibodies are secreted by B-cells and bind to antigen found on pathogens or tumor cells resulting in their destruction.
Cancerous cells are cells that have changed (or mutated) so that they express certain antigens that may or may not be recognized as foreign by the immune system. We believe that the antigens are distinct for each patient so that effective immunization can only be accomplished by using each patient’s own cancer cells. In addition, we believe that, by a process called haptenization, the cancer antigens are changed so that they become visible to the patient’s immune system. This allows the immune system to mount a response against the cancer antigens.
Development and Clinical Programs
Autologous Cell Vaccine Immunotherapy (AC Vaccine)
The only major program that we are presently developing for the treatment of cancer is our AC Vaccine technology, licensed from Thomas Jefferson University. The AC Vaccine immunotherapy technology is based on the concept of haptenization. This idea has a long history, beginning with the work of the immunologist and Nobel laureate Karl Landsteiner in the 1920’s. He and other scientists showed in animal models that attaching a small chemical (a hapten) to a protein allowed that protein to be recognized by the immune system, even if the animals were originally unresponsive to the protein. This work has been expanded by a number of researchers in various animal models. We now understand that a large number of T-cells (or T-lymphocytes, which are white blood cells that are crucial in tumor rejection) react against the haptenized material and that a small percentage of the T-cells also react against the unmodified, natural material. We believe that tumor antigens, which are proteins, are similarly affected by haptenization.
Our AC Vaccine technology utilizes the patient’s tumor as the basis for a therapeutic vaccine. By extracting cancer cells from a tumor and then treating them with a hapten called dinitrophenyl (“DNP”), a vaccine is prepared that should be able to elicit a systemic immune response to the unmodified, native cancer cells. The induction of an immune response has been documented in a number of scientific publications. We believe that the best test of tumor immunity in patients is Delayed Type Hypersensitivity (“DTH”). DTH has long been used as a test for immunity to microbes, such as tuberculosis and is familiar to patients as the Tine test or PPD. DTH to cancer cells is tested in the same way, except that the patient’s cancer cells are the test agent. We have demonstrated that the DTH test to cancer cells is meaningful by showing a strong statistical relationship between the intensity of DTH and clinical outcomes, especially 5-year survival.
Our leading AC Vaccine product candidate is M-Vax, which is designed as an immunotherapy for the post-surgical treatment of late stage (stages 3 and 4) melanoma. Melanoma is a highly malignant tumor that can spread so rapidly that it can be fatal within months of diagnosis. According to a report published in the British Journal of Dermatology, worldwide, the number of cases of melanoma is increasing faster than any other cancer. Although there are several causative factors, rising exposure by the general population to ultraviolet radiation in sunlight appears to be the most significant. According to the American Cancer Society, it is estimated that in 2007 there will be 59,940 new cases of melanoma in the U.S. and there will be an estimated 8,110 deaths related to melanoma.
Melanoma patients may be categorized according to the following staging system:
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Stage 1-lesion less than 1.5mm thickness and no apparent spreading (metastasis) from primary cancer site;
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Stage 2-lesion greater than 1.5mm thickness and no apparent spreading from primary cancer site;
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Stage 3-metastasis to regional draining lymph nodes; and
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Stage 4-distant (bloodbourne) metastasis.
Historically, patients with stage 3 melanoma have been treated with surgery followed by a year-long regimen of the drug, alpha interferon. This is a biological drug and currently the only FDA-approved post-surgical treatment for patients with stage 3 melanoma. While alpha interferon has been proven to prolong relapse-free survival, its impact on overall survival has been questioned. Further, use of alpha interferon can be associated with many severe side effects, often leading to either reduction in dosage or complete discontinuation before the full course of treatment is completed. Due to limited efficacy and highly toxic side effects, chemotherapy has not been widely used in the treatment of stage 3 patients. Stage 4 melanoma is usually treated with chemotherapy or cytokines, such as interferon or IL-2. Long-term remissions, however, are unusual and five-year survival rate for stage 4 melanoma is very low.
Clinical Results Achieved with the AC Vaccine
We believe that M-Vax is the first immunotherapy to suggest, from clinical trial results, that its use may result in a significant improvement in the survival rate for patients with stage 3 melanoma. There have been 214 patients with stage 3 melanoma treated with M-Vax, who had already had their lymph node tumors excised and processed into vaccines. These studies are mature, in that all surviving patients have completed the planned 5-year follow-up. The 5-year overall survival of these patients is 44%. This compares with the historical post-surgical survival rates of approximately 22-32%. In a total of over 600 patients treated with the AC Vaccine by us or at Thomas Jefferson University in clinical trials, no serious side effects have been reported. We believe that only relatively minor side effects, such as brief bouts of mild nausea and soreness and swelling at the site of the injection, have been observed to date.
Patients who receive M-Vax may develop an immune response to their own melanoma cells as measured by a DTH test to autologous melanoma cells. DTH, which is manifest by the development of a hive at the site of injection of the test material, is known to be a measure of the activity of T-lymphocytes, which are white blood cells that are crucial in tumor rejection. In the stage 3 adjuvant studies, patients who developed positive DTH to their own melanoma cells that were not modified with the hapten had a significantly greater chance of 5-year year survival than those who did not (59% vs. 29%, P<.001). This difference is highly statistically significant. In all of these patients, DTH to autologous melanoma cells was tested in conjunction with control materials that indicated that all patients had functioning immune systems and that the DTH reactions were not artifactual.
We believe that the DTH test can be used as a surrogate marker of vaccine activity. In our planned future clinical activities, we will propose to use the DTH test as a primary endpoint to measure activity of the vaccine. As we expand the use of the vaccine into new indications our intent is to use DTH response as the primary indicator of activity of the vaccine and the basis upon which we will proceed further with clinical development. Use of DTH response as an indicator of vaccine activity significantly decreases the duration of studies and, thus, reduces the cost of conducting clinical trials and reaching a primary endpoint.
As is noted below, we currently treat patients outside the U.S. on a compassionate use basis. Certain clinicians have reported to us that they have administered the M-Vax vaccine with IL-2 or interferon, which are two current cytokine therapies available to melanoma patients. These European clinicians have reported to us what they believe were positive clinical responses to the combined treatment regimes. Additional published work in a peer-reviewed journal by another clinician who has treated patients with their DNP modified tumor cells, using techniques similar to M-Vax, followed by IL-2 reported response rates in patients of 35%. This compares with previously reported response rates of patients treated with M-Vax alone of 11%. Response rates are defined by clinical criteria known as RECIST (or Response Evaluation Criteria in Solid Tumors, as defined by the National Cancer Institute). This means that the patient’s tumors have decreased by 50% or more from their base-line evaluation (partial response), or that their tumors have completely disappeared (complete response).
These published and unpublished reports were used by us in developing our Phase III registration trial for M-Vax, including the submissions to the FDA that supported the Special Protocol Assessment agreement we have with the FDA for accelerated approval of M-Vax.
Current Commercial and Clinical Activities with the AC Vaccine
The FDA has authorized us to begin our Phase III registration study of M-Vax. We are not able to continue our Phase III registration study for M-Vax, beyond preliminary planning efforts, until we raise additional capital, as discussed in our Current Plan of Operation under Item 7 below. Related to the protocol, the FDA has issued to us a Special Protocol Assessment for the study, agreeing that the proposed protocol, as designed, will allow us to gain regulatory approval with the successful conduct of the study. In addition the Special Protocol Assessment indicates that we may use response rate (using modified RECIST criteria) as an acceptable “surrogate” endpoint as a basis to obtain accelerated approval. The Special Protocol Assessment is a written agreement between us and the FDA regarding the trial design, surrogate endpoints to be used as a basis for filing for accelerated approval of M-Vax and the statistical analysis plan necessary to support the full regulatory approval of M-Vax.
The Phase III study will enroll up to 387 patients with stage 4 melanoma, who will be assigned in a double-blind fashion at a 2:1 ratio to M-Vax or a placebo vaccine. The M-Vax arm will consist of an initial dose of M-Vax (autologous DNP-modified tumor cells) followed by cyclophosphamide (“CY”) and six weekly doses of M-Vax administered with Bacillus of Calmette and Guerin (“BCG”). Following vaccine administration, patients will receive a course of low dose IL-2 administered subcutaneously. Patients assigned to the control group will receive a treatment identical to the M-Vax group, except that a placebo vaccine will replace M-Vax. The primary endpoints of the study are best overall anti-tumor response rate and the percentage of patients surviving 2 years. Secondary endpoints of the study will include overall survival time, response duration, percentage complete and partial responses, progression free survival and treatment related adverse events.
In December 2007, we successfully completed the Phase I-II clinical trial in the U.S. for M-Vax for the treatment of Stage 3 and 4 melanoma patients. That study was launched in June 2005. Patients were treated with M-Vax after being assigned to one of four dosage arms, one of which was a zero dose. The study was designed to evaluate four doses of M-Vax with dose defined by the number of cells injected in each vaccine; the doses tested were: 5x106 cells (high dose), 2.5x106 cells (medium dose), 0.5x106 cells (low dose), and zero cells (zero dose). All dosages were administered according to a previously developed optimum schedule, which included an induction dose without adjuvant followed by low dose cyclophosphamide and then 6 doses admixed with the immunological adjuvant, BCG. Endpoints of the study were safety and an immunological endpoint of delayed-type hypersensitivity (DTH), which is a T-cell-mediated immune response to autologous melanoma cells. Patients were tested for DTH response to their own DNP-modified and unmodified melanoma cells prior to treatment and after the initial seven weekly vaccine injections. DTH results were obtained at 2 ½-months, and the maximum duration of the study for an individual patient was 9 months. The study was also designed to demonstrate that the frozen formulation of M-Vax is bio-equivalent to the original, freshly-prepared autologous, hapten-modified vaccine.
The high dose arm of vaccine was highly effective immunologically with positive DTH responses to hapten-modified autologous melanoma cells observed in 22/29 (76%) patients following a course of M-Vax; baseline DTH responses were negative, as a condition of enrollment. In contrast, the zero dose arm was ineffective. Linear regression analysis of DTH responses of all evaluable patients showed a clear dose-response relationship when DTH responses for each patient were plotted against the M-Vax dose received. These results are important, because previously published studies by AVAX and others showed a statistically significant relationship was seen between survival and induction of DTH after M-Vax administration.
The safety profile of M-Vax appeared to be very favorable. There were no serious adverse events attributed to M-Vax. Non-serious adverse events were similar to what has been observed in previous trials of the autologous, haptenized vaccine: mild-moderate injection site reactions in all patients, mild nausea from cyclophosphamide in some patients, and mild constitutional symptoms, such as fatigue, in some patients after M-Vax administration.
Eight clinical sites in the U.S. participated in the Phase I-II clinical study of M-Vax, and we are targeting up to 50 centers in the U.S., Europe and Israel to participate in the Phase III registration trial.
In March 2005, we submitted a Biological License Application filing with AFSSAPs (the French counterpart of the U.S. FDA) for the treatment of stage 3 and 4 melanoma patients in France. In February 2006, AFSSAPs notified us that the filing was not approvable with the current data and that additional data would be necessary to support an approval. We are continuing to work with AFSSAPs to define what additional data are necessary and to evaluate the opportunities to treat patients in France under a compassionate use protocol while we are generating the additional data.
We have previously conducted clinical trials to evaluate the safety and efficacy of M-Vax and O-Vax (our AC Vaccine for ovarian cancer). In March and April 2001, we received first oral notification and then written confirmation from the FDA that clinical activities then underway for both our M-Vax and O-Vax autologous cancer vaccines were placed on clinical hold pending further review by the agency. The written notification from the FDA confirming the clinical hold identified the specific issues that the FDA wanted addressed, which dealt primarily with the sterility of autologous tumors received by us at the Philadelphia facility and the assurance that vaccines being provided to patients would meet FDA sterility guidelines.
In conjunction with the clinical hold, the FDA conducted an inspection of our manufacturing facility in Philadelphia, which inspection was completed in May 2001. As a result of that facility inspection, we received a Form 483, which is a finding of manufacturing facility deficiencies, to which we initially responded at the end of June 2001. The issues raised in the Form 483 were essentially consistent with those in the clinical hold letters, focusing primarily with the sterility of autologous tumors received by us at the Philadelphia facility, the handling of sterile and non-sterile tumors and assurance that vaccines being provided to patients would meet FDA sterility guidelines. No significant new areas of concern were identified in the Form 483.
In developing our response to the FDA clinical hold letters and the Form 483, we identified and began to implement a number of product development initiatives related to the AC Vaccine technology. As a result, we determined certain product improvements to the vaccine could be instituted that would address certain concerns of the FDA and make the vaccine more viable from a regulatory and commercial perspective. Throughout the remainder of 2001 and into 2002, we continued to evaluate (1) the prospect of freezing the haptenized cells for distribution to the end user, (2) steps that could be taken to help ensure that final released vaccines prepared by us are sterile and (3) tests to determine the minimal number of cells necessary for the vaccine to be effective. Based upon the results of these efforts, we reengineered the manufacturing steps to create and release the vaccine technology to take advantage of these potential product improvements.
In working with the FDA to resolve the issues identified as part of the clinical hold, we concluded that (1) it would no longer be feasible to continue the clinical development of the original AC Vaccine format without the ability to ensure clinical samples have completed sterility testing prior to administration (referred to as the “fresh” vaccine product format), and (2) a revised product format needed to be established, tested and reviewed by the FDA which allowed us to test the vaccine for sterility prior to administration of the vaccine to patients. Through these research and development activities, we developed a new product format for the production and distribution of the AC Vaccine, referred to as the “frozen” vaccine technology. Based upon the changes to the manufacturing of the product, the FDA recommended that we consider preparing and filing new Investigational New Drug Applications for the frozen vaccine. At the recommendation of the FDA, we inactivated the INDs for M-Vax and O-Vax, given the FDA’s view that the revisions to the manufacturing process, necessary to address the FDA’s concerns, would result in a new product from a regulatory perspective and given the FDA’s recommendation that we file new INDs for indications utilizing the new product.
Based upon the continuing interactions with the FDA, in 2002, we determined it was necessary to file new INDs for the revised product format for the AC Vaccine for melanoma and ovarian cancer, which IND filings were accepted by the FDA. Our Philadelphia facility was cleared to begin processing clinical samples for administration to patients in clinical trials. Due to a lack of funding at that time, we decided not to initiate the clinical trials at that time.
Non-Small-Cell Lung Cancer
According to the American Cancer Society, lung cancer is the leading cause of cancer death for both men and women. The American Cancer Society estimates that there will be 213,380 new cases of lung cancer and 160,390 deaths from lung cancer in the U.S. in 2007. Historically, 80-85% of lung cancer cases have been non-small cell lung cancer (“NSCLC”). The low cure rate associated with NSCLC can be attributed to the absence of effective screening, the propensity for early spread, and the lack of effective treatment options for metastatic spread.
We believe that NSCLC may be a good target for our AC Vaccine immunotherapy approach. Lung cancers are chemically induced, which increases the likelihood that they will express antigens recognized by the immune system. Also, in clinical trials of M-Vax, we observed that melanoma lung metastases were more likely to respond well to the AC Vaccine than metastases in other sites.
In February 2004, we announced a collaboration with the thoracic surgery team at the University of Pennsylvania Cancer Center. This collaboration allowed us to complete a feasibility study of the autologous, hapten-modified AC Vaccine for NSCLC. The study demonstrated that vaccines could be manufactured successfully from most early stage tumors. All the vaccines manufactured as part of the feasibility study also passed sterility tests. These results formed the basis of our Phase I-II clinical trial of L-Vax to determine the safety of an autologous, hapten-modified NSCLC vaccine and its ability to induce a positive DTH response, as described below.
In November 2005, the FDA approved our IND for the treatment of resectable NSCLC. We commenced a Phase I-II clinical study of L-Vax for the treatment of NSCLC at the University of Pennsylvania Cancer Center in January 2006. The study subjects are patients with completely resectable primary NSCLC (stage 1, 2, and early 3). They undergo standard surgical resection, and the tumor tissue will be sent to us for manufacture of the L-Vax vaccine. Eligible patients are assigned to one of three dosage groups. The schedule of administration is the same as the one optimized in previous melanoma trials. The regimen for the NSCLC Phase I-II study includes low dose cyclophosphamide, which potentiates the immune response, probably by inhibiting regulatory T-cells, which, in turn, dampen the anti-tumor immune response. Also, BCG is admixed with the vaccines because it functions as an immunological adjuvant.
The major endpoints of this study are the development of immunity to the patient’s own NSCLC cells and a formal assessment of the safety of L-Vax. Patients are tested for DTH response to their own DNP-modified and unmodified NSCLC cells prior to treatment and after the initial seven weekly vaccine injections. Following completion of the post-vaccine DTH testing, patients are offered standard chemotherapy, which is now considered a standard of care, as an adjuvant treatment. After chemotherapy, patients who remain well will be eligible for a booster injection of L-Vax at the eight-month point. Adverse events caused by the L-Vax vaccine will be measured and recorded, with DTH results obtained at 2 ½ months and the maximum duration of the study for an individual patient being 12 months.
We do not have the current cash resources to continue this Phase I-II clinical study unless we raise additional capital, as discussed in our Current Plan of Operation under Item 7. Even if we are successful in raising additional capital, we anticipate that we will seek to enter into one or more alliances or strategic partnerships with large pharmaceutical companies for the further development and eventual commercialization of O-Vax or L-Vax.
Compassionate Use of M-Vax
Beginning in 2003 and continuing through the present, we have made M-Vax available on a compassionate use basis in various European countries. We have recently made M-Vax available on a compassionate use basis in various South American countries. Compassionate use is considered for patients who have failed to respond to accepted standards of care for their cancer and are facing a prognosis of imminent death. Compassionate use of M-Vax has been permitted by regulatory authorities in France, Spain, Greece, Venezuela and Belgium (even though there is no approval for marketing of M-Vax in those countries) when the patient’s prognosis is poor and there are no alternative treatments available. Through December 31, 2007, we had 128 patients present for treatment on a compassionate use basis, of which 60 patients were treated and 16 vaccines have been produced and tested and are awaiting release to the clinical site. The patients who were not treated were untreatable with the vaccine as a result of inadequate cell count in the tumor sample received, the tumor samples received were not melanoma, sterility issues with the tumor sample, or the death of the patient prior to treatment being available. We expect to continue to treat patients on a compassionate use basis outside the U.S. This development is important to us and our AC Vaccine technology because it expands the availability of the AC Vaccine within the scientific and medical communities that are now seeking out the compassionate use of M-Vax. These experiences of oncology leaders in various countries may become critical to the overall scientific acceptance of the AC Vaccine technology in these countries. This also will allow us to educate practitioners to maintain and aseptically handle and ship tumors to reduce incidences where tumors become contaminated. Additionally, although it is not the primary purpose of compassionate use of our vaccine, we receive payments for the vaccine from the hospitals that contract for the acquisition of the vaccine.
Contract Manufacturing
As a result of our clinical activities in the U.S. and France, we have developed a level of expertise related to the clinical production and regulation of cell and gene therapy, and biological products. Cell and gene therapy, and biological products research and development has been ongoing for a number of years, but specific regulations of these products by most regulatory agencies are just beginning to evolve. In February 2002 (effective April 2002), the United States Pharmacopia published a chapter on manufacturing and testing requirements relating to cell and gene therapies. Prior to the publication of this chapter, there was no published guidance for companies engaged in the production and testing of cell and gene therapies. Likewise, in Europe the European Medicines Evaluation Agency is currently developing guidelines for the production, testing and regulation of cell and gene therapy, and biological products.
Based on our expertise, we have entered into various contract manufacturing relationships in France. Contract manufacturing has been made possible by the validation of our manufacturing facility first in France by AFSSAPs and secondly through successful IND filings in the U.S. and in Europe. A contract manufacturing engagement normally consists of two components. The first component of the engagement is a feasibility study. The feasibility study typically involves the transfer of production techniques from an unrelated scientific laboratory to our facilities. After transferring the techniques, we are engaged to develop the required procedures, tests and assays so that the product can be produced in compliance with current Good Manufacturing Practices requirements. After validating the procedures, tests and assays, we would then contract to produce the necessary components for the manufacturing section to be filed as part of an IND application.
Upon acceptance of the IND by a regulatory agency, the second component of the engagement would then commence. This component consists of the manufacturing and testing of clinical samples for administration to patients as part of a clinical trial. As part of this operation, we contract to maintain all the necessary paperwork and documentation to demonstrate the work was done in compliance with standards established by the applicable regulatory agency. In addition, the documentation would be used to support further IND filings and could be used as a component of a Biological License Application for approval to market the product.
We have entered into new agreements and intend to enter into future contract manufacturing arrangements only to the extent the required work does not limit or interfere with our own clinical development programs.
License and Research Agreements
The Thomas Jefferson University License and Research Agreement
We entered into a license agreement with Thomas Jefferson University for the AC Vaccine technology in November 1995. The TJU license is a perpetual royalty-bearing license for the rights to the AC Vaccine technology, and provides for certain payments upon the occurrence of certain milestones. As partial consideration, we paid $10,000 to TJU for the TJU license, $10,000 upon initiation of the first clinical trial, and $25,000 upon our receipt of approval from the FDA (or comparable international agency) to market products relating to the AC Vaccine technology (which payment was triggered by our receipt of that regulatory approval in Australia). We also issued to each of TJU and Dr. Berd, 229,121 shares of our common stock, representing 7.5% (15% in the aggregate) of our total outstanding voting securities at that time.
In addition to the milestone payments we have already made to TJU, we are obligated to pay TJU $10,000 upon the first filing of a marketing application with the FDA (or comparable filing with a comparable international agency).
We are presently obligated under the TJU license to spend a minimum of $500,000 per year on the development of the AC Vaccine technology until commercialized in the U.S. If we file for FDA approval of a company-sponsored marketing application for the right to market an AC Vaccine product, we may elect to spend less than $500,000 per year on the development of the AC Vaccine technology during the period of time the marketing application is under review by the FDA.
In connection with the TJU license, we also entered into a Clinical Study and Research Agreement with TJU in 1995. Under the TJU license and the TJU research agreement, we agreed to provide TJU with minimum sponsored research funding relating to the development of additional immunotherapies based on the AC Vaccine technology. We renewed this agreement for a three-year period through November 2004. The research conducted by Dr. Berd and TJU under the TJU research agreement pertained to applications of the AC Vaccine technology beyond the core vaccine products we are developing.
In 2004, we reached an agreement with TJU to terminate the TJU research agreement and all our obligations thereunder in exchange for a final payment by us to TJU of $300,000, half of which we paid in 2004. In April 2005, we paid the balance of $150,000 to TJU. We do not believe that the termination of the TJU research agreement has had any meaningful effect upon us or our ability to continue our AC Vaccine development efforts.
In November 2004, Dr. Berd joined our staff as our Chief Medical Officer. Dr. Berd continues to be instrumental to our regulatory and development efforts for the AC Vaccine technology.
We are also obligated to pay TJU royalties on our net sales revenue and a percentage of all revenues received from sublicenses relating to the AC Vaccine technology. We bear the expense of maintaining and defending the patents that are subject to the TJU license.
Research and Development Expense
Our research and development activities focus primarily on clinical development and trials of our AC Vaccine technology for the treatment of melanoma, ovarian cancer, lung cancer and other cancers. Our clinical development program includes the development of techniques, procedures and tests that need to be developed as part of the manufacturing of our biological product so that the product can be evaluated and potentially approved by regulatory authorities.
Our research and development expenses consist primarily of costs associated with the clinical trials of our product candidates, compensation and other expenses for research personnel, payments to collaborators under contract research agreements, costs for our consultants and compensation, materials, maintenance and supplies for the operation and maintenance of our biological clean room facilities, which are necessary for the production of materials to be used in clinical trials. All of these costs qualify as research and development expenses in accordance with the guidance included in Statement of Financial Accounting Standards No. 2 “Accounting for Research and Development Costs.”
Manufacturing costs included in this category relate to the costs of developing, supporting and maintaining facilities and personnel that produce clinical samples in compliance with current Good Manufacturing Practices. Our facilities and the personnel maintained for manufacturing are currently at what we feel are the minimum required for compliance with cGMP. Based upon the current capacity of our facilities, our personnel and our current and future planned clinical trials, we have excess capacity for the production and testing of biological products. We use this excess capacity to generate cash in the form of contract manufacturing alliances. Because the incremental costs incurred to provide these services are not material or quantifiable, they are not presented separately.
Contract manufacturing encompasses services we provide to other biotechnology or pharmaceutical companies that are pursuing the clinical development of biological products. The engagements generally consist of two components. The first component is process validation in which the contracting company provides information on its product and the processes and techniques used to produce the product. Procedures are developed, documented and cataloged for the cGMP production of the product using known and acceptable techniques, tests and materials. Small-scale lots are produced, and techniques, feasibility of the production processes and tests validated. The end product of the first phase of an engagement is a pilot batch of product and the necessary production formulation and techniques to be used to file an IND with regulatory authorities for human clinical trials. The second phase of an engagement consists of the production of batches of product to be used in human clinical trials. The typical engagement results in production of small batches of product to be used in early stage (Phase I and II) clinical trials.
In 2007, we incurred research and development expense of $4,595,972 compared to $4,244,268 in 2006, and $3,534,948 in 2005. Research and development expenses were $52,247,740 for the period from inception through December 31, 2007. The majority of these costs relate to clinical research and development of the AC Vaccine technology. Our management estimates that greater than 90% of the periodic and cumulative research and development expenses incurred relate to our one major program, the AC Vaccine. At this time, due to the risks inherent in the clinical trial process, risks associated with the product and product characterization and risks associated with regulatory review and approval of clinical product candidates, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.
Intellectual Property and Other Technology Protections
We intend to seek appropriate patent protection for our proprietary technologies by filing patent applications when possible in the U.S. and selected other countries. In November 1995, we entered into an exclusive, worldwide license agreement with Thomas Jefferson University for all of its patents and pending patent applications relating to the AC Vaccine. Currently, five U.S. patents have been issued, all of which are subject to the TJU license. In addition, one European patent (EP1162996) has been granted and validated in France, Germany, Spain and the United Kingdom, and one European patent has been allowed by the European Patent Office (pending grant), both of which are subject to the TJU license. Also, three Australian patents (AU727316, AU757980, and AU785031) have been issued that are subject to this license. Several patent applications are currently pending in the U.S. and other jurisdictions. The following table summarizes the issued U.S. patents relating to the AC Vaccine:
U.S. Patent No. 5,290,551, “Treatment of Melanoma with a Vaccine comprising Irradiated Autologous Melanoma Tumor Cells Conjugated to a Hapten,” was originally issued on March 1, 1994, and was placed in reissue. The reissue application was subsequently abandoned.
These patents cover methods of making the vaccine, composition of matter, as well as therapeutic use. We intend to continue using our scientific expertise to pursue and file patent applications on new developments with respect to processes, methods and compositions to enhance our intellectual property position in the field of cancer treatment.
Any patents or patent rights that we obtain may be circumvented, challenged or invalidated by our competitors. In addition, others may challenge that our products and processes specifically infringe their patents. On September 17, 1999, a complaint was filed against us in the U.S. District Court for the District of Maryland by Intracel Corporation. Intracel sought monetary damages and an injunction against the use of our autologous cell vaccine technologies. Intracel claimed that our technologies infringed their U.S. patent entitled “Active Specific Immunotherapy.” Intracel later withdrew their case.
We also rely on trade secrets and proprietary know-how related to the production and testing of our products, especially when we do not believe that patent protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants and advisors to execute a confidentiality and inventions agreement prohibiting the disclosure of our confidential information and requiring assignment of all inventions to us before they begin a relationship with us. Likewise, we require a confidentiality agreement with all third parties with whom we collaborate.
Manufacturing and Marketing
AC Vaccines - General
Our AC Vaccine products under development are individualized therapies that are manufactured by first receiving tumors from a patient, treating those tumors to break them down to the basic cancer cell and creating a liquid vaccine using the cells as a raw material, then delivering the vaccine to the doctor’s office for administration to the patient. We believe that the key to success in developing and distributing individualized therapies relies upon a model employing central processing, so that manufacturing cell based products can be a standardized process that can benefit from economies of scale and efficient distribution. The basic model for the vaccine is “cells in-product out,” where the final product looks like a traditional mass-produced drug to the end-user, but is manufactured individually. We are not currently treating patients in the U.S. or Europe, other than on a compassionate use basis in certain European countries, because the AC Vaccine products have not yet been approved for treatment.
We are in the process of revalidating our Philadelphia facility with the FDA for the purpose of re-establishing that facility as a current Good Manufacturing Practices facility in which our vaccines and other biologics can be produced. We anticipate completing this process by the second half of 2008.
Manufacturing the AC Vaccine
Based upon re-engineering the manufacture of the vaccine technology, we no longer require regional manufacturing capabilities. We made a strategic decision in early 2003 to use our facility in Lyon, France as our primary facility for the production of our cell based therapies. The Lyon facility has been inspected by AFSSAPs (the French equivalent of the U.S. FDA) and has received the designation of “Etablissement Pharmaceutique” and more recently has obtained the designation “Etablissement Thérapies Gèniques et Cellulaires.” The Etablissement Pharmaceutique designation is required for the production of any commercial product to be sold in France and throughout Europe. The Etablissement Therapies Geniques et Cellulaires designation is required in France for the commercial production of cell and gene therapy products.
Other Foreign Markets for M-Vax
During 2002, we entered into a distribution agreement with Ferrer Internacional, S.A. for the sales and marketing of the vaccine in certain territories in Europe, Latin America and Asia. With the assistance of Ferrer, we are investigating potential market opportunities to begin initiating sales of M-Vax in certain countries in Europe. The commercialization of M-Vax in one or more European countries will be subject to meeting certain requirements determined by each applicable regulatory agency.
Sources and Availability of Raw Materials
We do not expect to encounter significant difficulties in obtaining raw materials for M-Vax, O-Vax, L-Vax or any of our other AC Vaccine products, because they consist primarily of a readily available chemical reagents and the patient’s own tumor cells. We administer the AC Vaccine with BCG. BCG is an approved product for other cancer indications and is being administered by other companies as a separate vaccine. There are several sources of BCG, each formulation of which differs based upon the original source of the product. If we are unable to continue to obtain the current strain of BCG used in our clinical trials, we may not be permitted by regulatory authorities to use another strain of BCG without conducting additional clinical studies with the new strain of BCG.
For our Phase III registration trial for M-Vax, the six weekly doses of M-Vax administered with BCG will be followed by the patients receiving a course of low dose IL-2 administered subcutaneously. IL-2 is produced exclusively by Novartis AG. While IL-2 is not a raw material used in our vaccines, it is an important part of our current Phase III registration trial.
Competition
We face substantial competition in the development of our products. Competition comes from other companies that are developing the same type of products as ours, as well as other companies that are developing different types of products that are designed for the same uses as our products. Competition also comes in the form of new product types or extension of existing product types that are being continuously researched and developed by scientists, government contractors and other companies. We expect that this competition will continue in both the U.S. and international markets.
Cancer immunotherapies continue to evolve rapidly with new scientific breakthroughs that are expected to continue in the coming years with the evolution of new techniques and equipment. We are aware of a number of groups that are currently developing cancer immunotherapies that include academic institutions, government agencies and research institutions, early stage and developed biotechnology companies and pharmaceutical companies. For example, MEDAREX, in partnership with Bristol-Myers Squibb, launched two Phase III programs for the treatment of late stage melanoma patients with immunotherapy products. IDM Pharma has an ongoing Phase II clinical trial for a cell based therapeutic for the treatment of melanoma. Other companies that are developing immontherapies for the treatment of cancer include Dendreon Corporation, Opexa Therapeutics, Therion Biologics Corporation, Onyvax Ltd., Antigenics, Genitope Corporation, Cell Genesys Corporation, Biomira, Inc and Favrille, Inc. Vical Incorporated and Genta Incorporated both indicate that they have Phase III programs underway for melanoma. At the National Institute of Health’s website, clinicaltrials.gov, there are 275 clinical studies that are recruiting patients that reference melanoma.
The competition we face from these companies is in the areas of clinical trial site and patient recruitment, in establishing alliances with academic institutions and thought leaders, recruiting and retaining employees, hiring contractors to provide services in the execution of clinical studies and in establishing relationships with large bio-tech or pharmaceutical partners for joint development and collaboration relationships. Negative clinical studies by other immunotherapy companies as well as failures in later stage clinical trials in our key indications could also have a negative effect on our development efforts, the acceptance of our development plans or the future commercialization of our products.
Government Regulation
The research, pre-clinical development, clinical trials, product manufacturing and marketing conducted by us or on our behalf are subject to regulation by the FDA in the U.S., AFSSAPs (the French equivalent of the U.S. FDA) in France, and similar health authorities in other foreign countries, as well as the European Medical Evaluations Agency (“EMEA”) which has broad oversight over most European Member States. Our proposed products and technologies also may be subject to certain other international, U. S. federal, state and local government regulations, including, the Federal Food, Drug and Cosmetic Act, Public Health Service Act, and their state, local and foreign counterparts.
Generally, the steps required before a pharmaceutical or therapeutic biological agent may be marketed in the U.S. include: (i) pre-clinical laboratory tests, pre-clinical studies in animals, toxicity studies and formulation studies; (ii) the submission to the FDA of an IND for human clinical testing, that must become effective before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a marketing application to the FDA; (v) approval of the manufacturing processes and controls; and (vi) FDA approval of the marketing application prior to any commercial sale or shipment of the drug.
Pre-clinical studies include laboratory evaluation of the product, mostly conducted under Good Laboratory Practice regulations, and animal studies to assess the pharmacological activity and the potential safety and effectiveness of the drug. The results of the pre-clinical studies are submitted to the FDA in the IND. Unless the FDA objects to an IND, it becomes effective 30 days following submission and the clinical trial described in the IND may then begin.
Clinical trials begin when a drug is approved for testing on humans. There are usually said to be three main phases of clinical trials that a drug must go through in the U.S. before the drug is approved to be manufactured and marketed to the public. These phases may involve testing of drugs in healthy human volunteers (Phase I) for assessment of safety, followed by tests of effectiveness and safety in patients with illnesses the drug is designed to treat (Phases II and III). In most instances, Phase III studies are the final group of studies that are conducted before a product can be approved by the FDA for commercial use. In the case of life-threatening illness, the study process and phases of clinical trials may be compressed and accelerated. In some cases, Phase II trials are deemed sufficient for market approval by the FDA or foreign regulatory authorities. Pivotal registration trials are large-scale Phase II or III trials, the data obtained from which are intended to be used to provide for the registration of a drug or product for market use.
Every clinical trial must be conducted under the review and oversight of an institutional review board at each institution participating in the trial. The institutional review board evaluates, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution. In addition, when a sponsor has more than one clinical site participating in a study, they typically establish a Data Safety Monitoring Board that has oversight responsibilities for the safe conduct of the clinical studies.
The results of the pre-clinical and clinical trials are submitted to the FDA as part of an application to market the drug. The marketing application also includes information pertaining to the chemistry, formulation and manufacture of the drug and each component of the final product. The FDA review of a marketing application takes from one to two years on average to complete, though reviews of treatments for cancer and other life-threatening diseases may be accelerated. The process may take substantially longer, however, if the FDA has questions or concerns about a product. Following review, the FDA may ultimately decide that an application does not satisfy regulatory and statutory criteria for approval or that further information and testing is required. In some cases, the FDA may approve a product but require additional clinical tests following its approval, which are referred to as post marketing studies (i.e., Phase IV).
In addition to obtaining FDA approval for each product, each domestic drug manufacturing facility must be registered with, and approved by the FDA. Domestic manufacturing facilities are subject to inspections by the FDA and must comply with current Good Manufacturing Practices. To supply products for use in the U.S., foreign manufacturing facilities also must comply with current Good Manufacturing Practices, and are subject to periodic inspection by the FDA or by comparable foreign regulatory agencies under reciprocal agreements with the FDA.
If marketing approval of any of our products is granted, we must continue to comply with FDA requirements not only for manufacturing, but also for labeling, advertising, record keeping, and reporting to the FDA of adverse experiences and other information. In addition, we must comply with federal and state health care anti-kickback laws and other health care fraud and abuse laws that affect the marketing of pharmaceuticals. Failure to comply with applicable laws and regulations could subject us to administrative or judicial enforcement actions, including product seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products or withdrawal of existing approvals, as well as increased product liability exposure.
The regulatory approval process for new drugs in France is substantially similar to the process described above for the U.S. Generally, the steps required before a pharmaceutical or therapeutic biological agent may be marketed in France include (i) pre-clinical laboratory tests, pre-clinical studies in animals, toxicity studies and formulation studies; (ii) the submission to AFSSAPs of an IND for human clinical testing, that must be approved before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a marketing application to AFSSAPs; (v) approval of the manufacturing processes and controls; and (vi) AFSSAPs approval of the marketing application prior to any commercial sale or shipment of the drug.
The primary difference between the U.S. and French regulatory processes is the evolution of the thinking of each regulatory agency to the application of the procedures described above, which were designed for traditional, mass-produced prescription drugs and similar procedures, to the regulation of autologous products, meaning those products, such as the AC Vaccine, whose origin is primarily from the patient with minimal manipulation.
In 2002, AFSSAPs published the first regulations specific to the regulation of cell and gene therapies that are produced on an individual patient basis, which includes the AC Vaccine technology. These regulations differentiate these products from standard pharmaceutical products. We interpret that these regulations will evaluate cell and gene therapy products by the level and type of manipulation to the product. We believe that certain cellular products, including M-Vax, will be regulated differently from standard drugs. For these technologies, marketing approval will be authorized upon the satisfaction of two criteria. One of the requirements will be that the therapeutic is manufactured in a cGMP-compliant facility and manner. Secondly, the therapeutic will need to be able to demonstrate a reasonable claim for efficacy.
Using the data generated in the studies conducted at Thomas Jefferson University as the basis for the efficacy claims of M-Vax, we submitted the equivalent of a Biologics License Application to the French authorities in March 2005 under their Cell and Gene Therapy Regulations. In preparing the submission, we utilized the format for the Common Technical Document (“CTD”) provided by the International Conference of Harmonization and adopted by the U.S., Europe and Japan. The purpose of the CTD is to harmonize the filing requirements for biologic products in the various regions. We received acknowledgement from AFSSAPs of receipt of our submission effective March 23, 2005. In February 2006, we received notification from AFSSAPs that additional clinical data will be necessary for approval of the product under these regulations. We have met and will continue to meet with the agency to discuss the additional requirements, potential planned studies to obtain the information and to discuss our ability to make the vaccine available on a compassionate use basis while this data is being accumulated.
For clinical investigation and marketing outside the U.S. and France, we also are subject to certain foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely for European countries both within and outside the European Union (“EU”). Normally, foreign marketing authorizations are applied for at a national level, although within the EU certain registration procedures are available to companies wishing to market their products in more than one EU member state. If any applicable regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. The system for obtaining marketing authorizations within the EU registration system is a dual one in which certain products, such as biotechnology and high technology products and those containing new active substances, will have access to a central regulatory system that provides registration throughout the entire EU. Other products will be registered by national authorities in individual EU member states, operating on a principle of mutual recognition.
Employees
As of December 31, 2007, we had 29 employees, consisting of 23 full-time employees at our subsidiary in France and 6 full-time employees in the U.S.
ITEM 1A.
ITEM 1A.
Risk Factors
Investing in our securities involves a high degree of risk. Before making a decision about investing in our securities, one should carefully consider the risk factors listed below, as well as the rest of the information contained in this annual report on Form 10-K and our other reports filed with the Securities and Exchange Commission.
Because of our immediate need for capital, our ability to continue as a going concern is in question.
We presently anticipate that our current cash resources will be sufficient to fund operations through May 2008. We have only a limited ability to generate revenues from operations, and any revenues we generate are almost certain to be substantially less than our operating expenses. Accordingly, we have an immediate need to raise additional equity capital. Because of our limited cash and financial resources, our ability to continue as a going concern beyond May 2008, without a meaningful cash infusion, is in question.
In the past, we have had periods in which we have been unable to raise adequate capital, and as a result, we have ceased certain of our product development programs and have taken numerous other steps to reduce our cash expenditures. Each of these steps, while conserving cash, has slowed the prospects of success in various product development efforts. We have recently slowed our development efforts, particularly in the ramp up of our Phase III registration study for M-Vax. The slowdown in our clinical trials can impair the timing of and ultimate success of those trials.
We have no way of knowing if we will be able to complete any additional financings.
We now conduct all AC Vaccine manufacturing out of our Lyon, France facility, which creates business uncertainties and logistical risks for the treatment of patients in our clinical trials.
We previously manufactured our AC Vaccine for U.S. patients enrolled in our clinical trials at our facility in Philadelphia. We now conduct all AC Vaccine manufacturing at our Lyon, France facility. In our current clinical trials in the U.S. for M-Vax and L-Vax, we encounter various business uncertainties and logistical risks associated with the transport of biologics (consisting of human tumor cells) to France and shipping a patient’s individualized AC Vaccine back to the U.S. Had we been using this business model in September 2001, the September 11 attacks in the U.S. and the resultant suspensions and interruptions of international travel and shipments would have significantly disrupted our treatment of patients. There are additional risks associated with the transport of biologics and vaccines, including the time constraints under which a tumor must be received and processed and the specialized shipping requirements of the vaccine after it is manufactured. Although we have developed plans to manage these risks, we may encounter disruptions that we are unable to control, which could adversely affect the willingness of U.S. patients to enroll in our clinical studies or otherwise disrupt our clinical development of the AC Vaccine.
We may not be successful in revalidating our Philadelphia facility, and may be unable to produce vaccines at that facility in the future.
We are in the process of revalidating our Philadelphia facility for the purpose of re-establishing that facility as a current Good Manufacturing Practices facility in which our vaccines and other biologics can be produced. We may not be successful in those efforts, or those efforts may take longer or cost more than we currently anticipate. Our failure to revalidate the Philadelphia facility will heighten our continued reliance upon our Lyon, France facility for the production of all vaccines, and the logistical risks associated with manufacturing the vaccine in Europe while many of our clinical trials sights are in the U.S. Our current objective is to have approximately half of the patients in the Phase III registration trail for M-Vax be from the U.S., with the vaccine produced in the U.S., and approximately half of the patients from Europe, with the vaccine produced at the Lyon facility.
We will be required to produce the vaccine for commercial purposes from the same facility at which vaccines were produced for clinical trial purposes, which may limit our manufacturing options after regulatory approval is received.
Under current FDA regulations, if we obtain FDA regulatory approval for the commercialization or one or more of our vaccines, we will be required initially to produce the vaccine for commercial purposes at the same facility or facilities at which we produced the vaccine during the Phase III registration trail for that indication. Accordingly, we may have limited flexibility to change our manufacturing facilities after commercialization of a vaccine has been approved by the FDA until a new facility can be validated and pass all required FDA regulatory approvals for the production of the vaccine. The FDA may even require a new or expanded clinical trial of the vaccine produced at a new manufacturing facility before the vaccine may be produced for commercial purposes at that facility. Those additional regulatory approvals could be time consuming and expensive and could delay commercialization of the approved vaccine product.
The U.S. clinical trial and regulatory approval process for our products has been and will continue to be expensive and time consuming and the outcome uncertain.
To obtain regulatory approval for the commercial sale of our products in the U.S., we must demonstrate through clinical trials that our products are safe and effective. We will continue to incur substantial expense for, and devote a significant amount of time to, pre-clinical testing and clinical trials of our products in the U.S. The results from pre-clinical testing and early clinical trials are not totally predictive of results that may be obtained in later clinical trials. Data obtained from pre-clinical testing and clinical trials are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. Our business and financial condition will be materially and adversely affected by any delays in, or termination of, our clinical trials.
Our clinical trials for the AC Vaccine were placed on clinical hold by the FDA in spring 2001. We did not re-file the INDs until fall 2002 to recommence clinical trials. That delay was costly to us in terms of both time and money. During that 16-month period, we were unable to proceed with any patients in our AC Vaccine clinical trials. Similar delays could occur in the future, resulting in significant delays, expense and lost opportunities. Even though the new INDs have been initiated, we still may not be able to obtain the funding to complete the U.S. regulatory approval process or we may fail to obtain FDA approval for our products. We may never be able to commercialize our AC Vaccine products in the U.S.
The European regulatory approval process for our products has been and will continue to be expensive and time consuming and the outcome uncertain.
To offer any of our vaccine products for commercial sale in European Union countries, we must either obtain the regulatory approval from the European Medicines Evaluation Agency (EMEA), which approval will be binding upon all European Union countries, or from the applicable regulatory body in each European or other country in which we desire to offer the product for commercial sale. We have encountered regulatory delays in Europe in the past and may well experience further delays in our desired regulatory approval path in the future.
For example, in March 2005, we submitted a Biological License Application filing with AFSSAPs (the French counterpart of the U.S. FDA) for the treatment of stage 3 and 4 melanoma patients in France. In February 2006, AFSSAPs notified us that the filing was not approvable with the current data and that additional data would be necessary to support an approval. Our business and financial condition may be materially and adversely affected by future delays in the regulatory approval process in Europe, and we may never be able to commercialize our AC Vaccine products in Europe.
We utilize two products in our AC Vaccines or clinical trials that are produced by third parties, and the unavailability of those products could adversely affect our regulatory approval process in the U.S. or Europe.
We administer the AC Vaccine with Bacillus Calmette-Guerin (“BCG”), which is an approved product for other cancer indications and is being administered by other companies as a separate vaccine. There are several sources of BCG, each formulation of which differs based upon the original source of the product. If we are unable to continue to obtain the current strain of BCG used in our clinical trials, we may not be permitted by regulatory authorities to use another strain of BCG without conducting additional clinical studies with the new strain of BCG.
For our Phase III registration trial for M-Vax, the M-Vax arm will consist of an initial dose of M-Vax (autologous DNP-modified tumor cells) followed by cyclophosphamide (“CY”) and six weekly doses of M-Vax administered with BCG. Following vaccine administration, patients will receive a course of low dose IL-2 administered subcutaneously. IL-2 is produced exclusively by Novartis AG, and if we or our clinicians are unable to continue to obtain IL-2 from Novartis, we may not be permitted by the FDA to continue our current Phase III clinical trial for M-Vax.
We compete with other clinical programs and other treatments for patients for our clinical trials, which will affect our ability to enroll quickly our clinical trials.
We compete with numerous clinical trials and other treatment regimens (both in the U.S. and Europe) for patients for our clinical trials and will compete with those programs for patients for our clinical trials. Companies with clinical trials, including us, provide information and other incentives to oncologists and other specialists as an inducement to participate in clinical trials. A physician is required to place patients in clinical trials based upon the physician’s assessment of the likely benefits of that clinical trial to the patient. The information provided by us regarding any future clinical trials may not be sufficient to persuade physicians to place their patients in our clinical trials. We have experienced intense competition for patients for our previous clinical trials.
We raise capital in U.S. dollars, but have significant expenses in France, which exposes us to currency exchange rate fluctuation risk.
We conduct our capital raising efforts in U.S. dollars, while a significant portion of our revenues and expenses are generated and incurred in currencies other than U.S. dollars, mainly Euros. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our results of operations and cash flows.
We are operating in a regulated industry where the guidance for acceptable manufacturing and testing of our products and processes is evolving, which creates uncertainties, delays and expense for us.
Regulatory standards require that we produce our products in compliance with current Good Manufacturing Practices. These requirements, as dictated by the applicable U.S. and European regulatory authorities, adopt the methods for end product standards and methods of analysis, for which the U.S. guidance is published in the United States Pharmacopoeia (similar guidance for Europe is published in the European Pharmacopoeia). In February 2002, the United States Pharmacopeia issued a new general information chapter entitled “cell and gene therapy products,” which became effective April 2002. This relates to the production and testing of cell and gene therapy products. This is the first known industry general guideline specifically related to the manufacture of cell and gene therapy products. New guidance can be expected as the cell and gene therapy areas of the pharmaceutical industry expand. We will be required to adapt our existing physical facilities, process and procedures to these standards for the production of our products during clinical testing and for future commercialization. The inability to adapt to these evolving standards will delay our ability to produce product for clinical testing and would delay our ability to enter into clinical trials.
We are a development stage biopharmaceutical company, and we may never develop or successfully market any products.
Investors must evaluate us in light of the expenses, delays, uncertainties and complications typically encountered by development stage biopharmaceutical businesses, many of which we have already experienced and many of which are beyond our control. The risks of a development stage biopharmaceutical company that we have already encountered include:
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the FDA clinical hold of our AC Vaccine clinical trials in 2001 and the resultant substantial expenses and delays in resolving the FDA concerns and refiling new INDs for the reformulated AC Vaccine products;
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manufacturing challenges relating to the production of a vaccine from the patient’s own cancer cells, such as the sterility issues we previously experienced at our Philadelphia facility;
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our failure to develop a market for the AC Vaccine in Australia, notwithstanding substantial expenditures of time and money to do so;
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our past inability to agree with the FDA on an acceptable potency assay (which is a biological measure of the drug’s active ingredients) of our product prior to administration of the vaccine, which agreement was required before we could commence a Phase III registration trial for M-Vax;
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our inability to generate any meaningful revenues from any other products or services while we work to develop our lead products and technologies; and
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the cutbacks in our development plans and programs due to the limited cash resources in recent years, and our continual need to raise additional capital.
As a result of these and likely continuing challenges of being a development stage biopharmaceutical company, our products may never be successfully developed or marketed.
Even if our AC Vaccine technology receives regulatory approval and is determined to be safe and effective, our products may not gain commercial acceptance.
Even if the AC Vaccine technology is safe and effective, there is no guarantee of commercial acceptance. Because the AC Vaccine technology is a new approach to the treatment of cancer, it must be accepted by both patients and physicians before it can be successfully commercialized. Due to the nature of the vaccine technology, it requires that current practitioners revise the way they think about cancer and cancer treatment. The marketplace of ideas, technologies and information is crowded, and we must develop the means to reach leading specialist physicians in each market with the AC Vaccine story.
If governmental and insurance reimbursement is not available or is insufficient, a market for our products may never develop or be economically feasible.
The availability of governmental and insurance reimbursements of the costs of the vaccine is critical to ultimate physician and patient acceptance of the AC Vaccine technology. In both the U.S. and other countries, sales of our products will depend in part upon the availability of reimbursement from third-party payors, which include government health administration authorities, managed care providers, and private health insurers. For new products or technologies, reimbursement must be established under existing governmental or insurance regulations or practices. We will be required to obtain reimbursement approvals (both governmental and insurance) in each country in which we obtain appropriate regulatory authority to market the AC Vaccine products.
In addition, third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. Significant uncertainty surrounds the reimbursement status of newly approved health care products, and our products may not be considered cost effective by a particular governmental authority or insurer. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in the research and development of our products.
We may lose control over the development, marketing and distribution of our vaccines if we enter into third party arrangements to perform or assist us in performing any of those functions.
We may seek alliances or strategic partnerships for one or more of our AC Vaccine products with large pharmaceutical companies to maximize our regulatory, clinical and commercialization efforts. We may also have to depend on third parties to market and distribute our products. We currently do not have the resources to develop fully, market or distribute M-Vax, O-Vax, L-Vax or any other products that we may develop in the future. Moreover, it is particularly difficult and expensive to develop and distribute the AC Vaccine products, because they are custom made for each individual patient.
If we enter into alliances, strategic partnerships or distribution agreements with third parties, we may have less control over the development, marketing and distribution activities performed by third parties than if we were performing those functions with our own facilities and employees. This lack of direct control could adversely affect the results of these activities.
Current and future legislation may make our products unprofitable.
Current and future legislation can and likely will continue to affect directly the ultimate profitability of pharmaceutical products and technologies. The U.S. and other countries continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of our products may change before the products are approved for marketing to the public. Adoption of new legislation and regulations could further limit reimbursement for our products. If third-party payors fail to provide adequate coverage and reimbursement rates for our products, the market acceptance of the products may be adversely affected. In that case, our business and financial condition will suffer. We are not aware of any specific legislation or regulation in the U.S. or Europe designed to limit reimbursement for products like ours, but we believe that there is a credible risk that political and budget considerations could change dramatically the funding available for vaccine reimbursement.
We may not be able to control the pricing of our products overseas.
Foreign government regulations and programs will likewise affect foreign pricing opportunities for our products. Virtually all foreign countries regulate or set the prices of pharmaceutical products, which is a separate determination from whether a particular product will be subject to reimbursement under that government’s health plans. There are systems for reimbursement and pricing approval in each country and moving a product through those systems is time consuming and expensive.
We may not be able to obtain or defend our patents or operate without infringing upon the rights of others.
We, as well as our current and potential future licensors, may be unable or have difficulty obtaining and defending our patents and maintaining our trade secrets. If so, we could be delayed or prevented from manufacturing, using or selling our products. It is also possible that one of our products or technologies may infringe upon an existing U.S. or foreign patent of a third party, or that other patents could issue in the future that could interfere with our ability to make or sell our products. If we are involved in a patent dispute, we may have to pay significant legal costs, license fees or damages, and may have to stop producing and selling our products and technologies. It is also possible that if we require the use of other patents in order to be able to commercialize our products, we may not be able to obtain licenses for those patents.
We are heavily dependent upon the personal reputation and personal contacts of our Chief Medical Officer, and the loss of his services could materially adversely affect our plan of operation.
The inventor of the AC Vaccine technology is Dr. David Berd, who has served as our Chief Medical Officer since November 1, 2004. Prior to then, we obtained his services in directly through our research and license agreements with Thomas Jefferson University, where Dr. Berd was a professor in the Medical School. The acceptance of the AC Vaccine technology within the oncology world is highly dependent upon the personal reputation and the personal contacts of Dr. Berd. Dr. Berd is also critical in guiding the technology through the regulatory process in both the U.S. and Europe. If we lost his services, the development of our AC Vaccine technology could be significantly slower and less successful that it otherwise would be with his services.
We have recently appointed a new Chief Executive Officer, and the transition to a new Chief Executive Officer could disrupt our plan of operation.
Effective December 1, 2007, we appointed Francois R. Martelet, M.D. as our new President and Chief Executive Officer, and Richard P. Rainey, our then current President, Chief Executive Officer and Chief Financial Officer, agreed to remain with the company as our Principal Accounting Officer until May 31, 2008. We do not anticipate that Mr. Rainey will continue in his current position with the company beyond May 31, 2008. The change to a new Chief Executive Officer and the future loss of our current Principal Accounting Officer could result in delays to or future changes in the implementation of the plan of operation, which delays or changes could adversely affect our current plan of operation. We have always been dependent upon our small management team to obtain funding for the research and development of our products, to decide which of our products to promote, to shepherd the products through the clinical trial and regulatory approval process, and to stimulate business development and seek out new products and technologies for development. In addition, our current financial condition makes it more difficult for us to retain our current executives and key employees.
We may not be able to compete with other companies, research institutes, hospitals or universities that are developing and producing cancer treatment products and technologies.
Many other companies, research institutes, hospitals and universities are working to develop products and technologies in our specific field of cancer research. Many of these entities have more experience than we do in developing and producing cancer treatment products. Most of these entities also have much greater financial, technical, manufacturing, marketing, distribution and other resources than we possesses. We believe that numerous pharmaceutical companies are engaged in research and development efforts for products that could directly compete with our products under development. In addition, some of our competitors have already begun testing products and technologies similar to our own. These other entities may succeed in developing products before us or that are better than those that we are developing. We expect competition in our specific area of research to intensify.
The trading volume of our common stock is relatively low and a more active market may never develop.
The average daily trading volume in our common stock varies significantly, but is usually low. On many days, the common stock trades less than 15,000 shares. This low average volume and low average number of transactions per day may affect the ability of our stockholders to sell their shares in the public market at prevailing prices. A more active trading market for our common stock may never develop.
Our common stock was delisted from NASDAQ in 2003, which will continue to have an adverse impact on the liquidity and pricing of our common stock.
Our common stock was moved from the NASDAQ National Market to the NASDAQ Small Cap Market in 2002 and was delisted from the NASDAQ Small Cap Market in 2003 due to the continuing failure of our stock to meet the continuing listing requirements of both the NASDAQ National and Small Cap Markets (currently the NASDAQ Global and NASDAQ Capital Markets, respectively). We believe that the delisting has hurt the liquidity and pricing of our common stock, which trades on the OTC Bulletin Board. The trading efficiencies for our common stock associated with a listing on NASDAQ or a national security exchange will continue until our stock is re-listed, which may never occur.
Because our common stock is a “penny stock,” you may have difficulty selling our common stock in the secondary trading market.
The SEC has adopted regulations that generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange or NASDAQ, the equity security also would constitute a “penny stock.” Because our common stock falls within the definition of penny stock, these regulations require the delivery, prior to certain transactions involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. Disclosure is also required to be made in certain circumstances regarding compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. Accordingly, the ability of broker-dealers to sell our common stock and the ability of stockholders to sell our common stock in the secondary market is limited. As a result, the market liquidity for our common stock is adversely affected by the application of these penny stock rules. Trading in our common stock will likely continue to be adversely affected by the application of these rules.
The rights of our preferred stockholders are superior to the rights of our common stockholders.
The holders of our Series C preferred stock have certain rights that are superior to the rights of holders of our common stock, including a liquidation preference over the common stock. In the case of (1) a liquidation, (2) if we cease to exist by virtue of a merger in which we are not the surviving corporation, or (3) if one person or entity acquires more than 50% of the voting power of the company, holders of our Series C preferred stock will receive $100 per share in cash or securities (a total of $3,350,000 as of December 31, 2007), before any distributions are made to the holders of our common stock. Additionally, the holders of the Series C preferred stock are entitled to the consideration per share of common stock that they would have received from the transaction if they had converted all of their shares of Series C preferred stock into common stock immediately before the transaction. These rights of the Series C preferred stock holders could result in the holders of those shares receiving substantially more of the consideration in a merger transaction than they would otherwise have received if they had actually converted their shares of Series C preferred stock into common stock before the merger transaction. The holders of our common stock would, accordingly, receive a lesser amount in a merger transaction of that type than they would have received if there were no outstanding shares of the Series C preferred stock.
ITEM 2.
ITEM 2.
Properties
We lease a pharmaceutical and gene therapy clinical manufacturing facility in Lyon, France. The facility consists of approximately 13,500 square feet, of which approximately 10,100 square feet are utilized for manufacturing development, including 3,000 square feet of clean rooms and 3,400 square feet for office space. Currently, the monthly rental on the facility at the current exchange rate is approximately $21,100. The lease is for a 9-year period through 2009 and is extendable for another 9-year period.
We lease a facility in Philadelphia, Pennsylvania, which is used for our executive offices and is suitable for our clinical manufacturing activities. The facility consists of approximately 11,900 square feet, of which approximately 9,300 square feet are suitable for manufacturing development, while the remaining 2,600 square feet are used for office space. We have options for additional space. Currently, the monthly rental on the facility is approximately $16,625. The lease was recently extended for a 5-year period through January 2013 and is extendable for one additional five-year period.
ITEM 3.
ITEM 3.
Legal Proceedings
On February 1, 2008, we were sued by the Texas A&M University System in the District Court of Brazos County, Texas, case no. 08-000255-CV-85. In February 1997, we licensed from the University an issued U.S. patent and certain U.S. and foreign patent applications relating to a series of novel cancer-fighting anti-estrogen compounds that we believed could be effective against hormone-dependent tumors. We determined several years ago that the development of the anti-estrogen compounds was no longer a significant part of our plan of operation and ceased any development work with the compounds. The lawsuit by the University alleges that we are in breach of our license agreement with the University by failing to reimburse the University approximately $62,000 for patent expenses incurred by the University with respect to the anti-estrogen compounds. We have filed our answer to the petition, denying any liability to the University. No discovery has commenced in this matter.
In April 2007, we completed a private placement of securities to various institutional and accredited investors. The Company had previously entered into an engagement letter, as subsequently amended, with MDB Capital Group LLC in connection with the proposed capital raising engagement. MDB Capital has made a demand that we pay MDB Capital $195,000 in cash and issue MDB Capital warrants to purchase 2,080,000 shares of common stock of the company at an exercise price of $0.15 per share, all as compensation to MDB Capital under the engagement letter. We have conceded that we owe MDB Capital $15,000 in placement agent fees and a placement agent warrant to purchase 160,000 shares of common stock of the company at $0.15 per share under the engagement letter. We believe that MDB Capital had no role in identifying the other investors in the offering for which MDB Capital claims compensation, and thus have denied that we owe MDB Capital any additional cash compensation or placement agent warrants under the engagement letter. MDB Capital has indicated its intention to pursue binding arbitration of this dispute in accordance with the terms of the engagement letter, but has to date made no effort to pursue any arbitration of this matter.
We are periodically involved in ordinary, routine litigation and administrative proceedings incidental to our business. As of the date of this report, there are no other pending or, to our knowledge, threatened material claims against us.
ITEM 4.
ITEM 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended December 31, 2007.
PART II
ITEM 5.
ITEM 5.
Market For Registrant’s Common Equity and Related Stockholder Matters.
Our common stock was publicly traded on the OTC Bulletin Board from December 19, 1996, through July 9, 1997. From 1997 until 2003, our common stock was listed for quotation on NASDAQ under the symbol “AVXT,” initially on the NASDAQ Small Cap Market and later on the NASDAQ National Market (Currently, the NASDAQ Capital and NASDAQ Global Markets, respectively). The stock was moved from the NASDAQ National Market to the NASDAQ Small Cap Market in 2002 and was delisted from NASDAQ in August 2003 due to our failure to maintain NASDAQ’s minimum continuing listing standards. Since that time, the common stock has been traded on the OTC Bulletin Board under the symbol “AVXT.OB.” The following table sets forth, for the periods indicated, the high and low sales price for the common stock, as reported by OTC for the quarters presented. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The last reported sale price for our common stock on the OTC Bulletin Board on April 8, 2008, was $0.09 per share. At April 11, 2008, there were 141,574,997 shares of common stock outstanding, which were held by approximately 4,000 record and beneficial stockholders. The 33,500 shares of Series C preferred stock outstanding at December 31, 2007, are convertible into 1,030,756 shares of common stock, excluding the effect of any fractional shares.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock since our formation. We do not intend to declare any dividends on our common stock in the foreseeable future. We anticipate that all our earnings and other resources, if any, will be retained for investment in our business.
RECENT SALES OF UNREGISTERED SECURITIES
On April 5, 2005, we closed a private placement of 25,343,430 shares of common stock at a purchase price of $0.34 per share with 12 accredited or institutional investors. We received gross proceeds of approximately $8,616,000. In connection with the private placement, we also issued to the investors warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.41 per share, and warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.48 per share. In addition, the company issued warrants to its advisors relating to this fundraising to purchase 2,287,293 shares of common stock at a warrant exercise price of $0.37 per share. These warrants were valued at $435,705 using the Black-Scholes pricing model. Offering related expenses in connection with this fundraising amounted to $1,065,945 of which $630,240 was paid in cash and the balance relates to the warrants issued to the advisors. We are using the proceeds of this private offering for general working capital purposes, including funding our current plan of operation discussed below. The common stock and warrants were issued to accredited investors only in reliance upon Regulation D under Section 4(2) of the Securities Act.
In addition, on April 13, 2007, we closed a private placement of 80,060,000 shares of common stock at a purchase price of $0.125 per share with 25 accredited or institutional investors. We received gross proceeds of $10,007,500. In connection with the private placement, we also issued to the investors warrants to purchase 80,060,000 shares of common stock at a warrant exercise price of $0.15 per share. In addition, we have agreed to pay $580,350 and to issue warrants to purchase 6,190,400 shares of common stock at a warrant exercise price of $0.15 per share to certain advisors relating to this private offering. We received net proceeds from this private offering, after offering related expenses, of approximately $9.0 million. We are using the net proceeds to continue to implement the plan of operation described in the prospectus. The common stock and warrants were issued to accredited investors only in reliance upon Regulation D of the Securities Act.
ITEM 7.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Since our inception, we have concentrated our efforts and resources on the development and commercialization of individualized vaccine therapies and other technologies for the treatment of cancer. These efforts require that we expend money in the development and clinical testing of our products.
We have been unprofitable since our founding and we fund our losses primarily through equity offerings of common stock. We incurred net losses of $6,413,648, $5,355,500, $3,703,768, $3,457,908, $3,286,100 and $9,425,564 for the 12 months ended December 31, 2007, 2006, 2005, 2004, 2003 and 2002, respectively, and have a cumulative net loss of $84,254,830 as of December 31, 2007. We expect to continue to incur operating losses, primarily due to the expenses associated with our product development efforts, the cost of maintaining our manufacturing facilities in Europe and the U.S. and Europe.
Our ability to continue as an operating company depends upon our immediate need to raise additional capital before the end of May 2008, and if we are successful in raising capital in 2008, our ability in the future to raise additional capital from time to time to allow us to develop products, obtain regulatory approval for our proposed products, and enter into agreements for product development, manufacturing and commercialization. Our M-Vax product does not currently generate any material revenue, and we may never achieve significant revenues or profitable operations from the sale of M-Vax or any other products that we may develop.
The major challenges for us and others in the biopharmaceutical industry are the significant costs, time and uncertainties related to efforts to obtain regulatory approval to market drug products in the U.S. and foreign countries. We have encountered a number of these challenges in our efforts to develop the AC Vaccine into marketable products including the following:
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the FDA clinical hold of our AC Vaccine clinical trials in 2001 and the resultant substantial expenses and delays in resolving the FDA concerns and refiling new INDs for a revised AC Vaccine;
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manufacturing challenges relating to the production of a vaccine from the patient’s own cancer cells, such as the sterility issues we previously experienced at our Philadelphia facility;
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our failure to develop a market for the AC Vaccine in Australia notwithstanding substantial expenditures of time and money to do so;
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our past inability to agree with the FDA on an acceptable potency assay (which is a biological measure of the drug’s active ingredients) of our product prior to administration of the vaccine, which was required before we could commence our Phase III registration trial for M-Vax;
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our inability to generate any meaningful revenues from any other products or services while we work to develop our lead products and technologies; and
•
the periodic cutbacks in our development plans and programs due to the limited cash resources from time to time in recent years.
As a result of the FDA clinical hold, we concluded that (1) it would no longer be feasible to continue the clinical development of the original AC Vaccine using the established manufacturing format (referred to as the “fresh” vaccine product format), and (2) a revised product format needed to be established, tested and reviewed by the FDA. Through these research and development activities we re-engineered the manufacturing steps for the production and distribution of the AC Vaccine, referred to as the “frozen” vaccine technology, which we believe has substantial advantages over the former “fresh” product.
Research and Development Expenses
Our research and development activities focus primarily on clinical development and trials of our AC Vaccine technology for the treatment of melanoma, ovarian cancer, lung cancer and other cancers. Our clinical development program includes the development of techniques, procedures and tests that need to be developed as part of the manufacturing of our biological product so that the product can be evaluated and potentially approved by regulatory authorities.
Our research and development expenses consist primarily of costs associated with the clinical trials of our product candidates, compensation and other expenses for research personnel, payments to collaborators under contract research agreements, costs for our consultants and compensation, materials, maintenance and supplies for the operation and maintenance of our biological clean room facilities, which are necessary for the production of materials to be used in clinical trials. All of these costs qualify as research and development expenses in accordance with the guidance included in Statement of Financial Accounting Standards No. 2 “Accounting for Research and Development Costs.”
Manufacturing costs included in this category relate to the costs of developing, supporting and maintaining facilities and personnel that produce clinical samples in compliance with current Good Manufacturing Practices (“cGMP”). Our facilities and the personnel maintained for manufacturing are currently at what we feel are the minimum required for compliance with cGMP. Based upon the current capacity of our facilities, our personnel and our current and future planned clinical trials, we have excess capacity for the production and testing of biological products. We use this excess capacity to generate cash in the form of contract manufacturing alliances. Because the incremental costs incurred to provide these services are not material or quantifiable, they are not presented separately.
Contract manufacturing encompasses services we provide to other biotechnology or pharmaceutical companies that are pursuing the clinical development of biological products. The engagements generally consist of two components. The first component is process validation in which the contracting company provides information on its product and the processes and techniques used to produce the product. Procedures are developed, documented and cataloged for the cGMP production of the product using known and acceptable techniques, tests and materials. Small-scale lots are produced, and techniques, feasibility of the production processes and tests validated. The end product of the first phase of an engagement is a pilot batch of product and the necessary production formulation and techniques to be used to file an IND with regulatory authorities for human clinical trials. The second phase of an engagement consists of the production of batches of product to be used in human clinical trials. The typical engagement results in production of small batches of product to be used in early stage (Phase I and II) clinical trials.
Research and development costs incurred through December 31, 2007, were $52,247,740. Research and development costs were $4,595,972 and $4,244,268, for the twelve months ended December 31, 2007 and 2006, respectively. The majority of these costs relate to clinical research and development of our AC Vaccine technology. Our management estimates that greater than 90% of the periodic and cumulative research and development expenses incurred relate to our one major program, the AC Vaccine. At this time, due to the risks inherent in the clinical trial process, risks associated with the product and product characterization and risks associated with regulatory review and approval of clinical product candidates, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.
PLAN OF OPERATION
Background
In November 1995, we acquired the rights to the AC Vaccine technology pursuant to the TJU license. Assuming we can continue to obtain the necessary funding, we intend to continue to be engaged in the development and commercialization of our AC Vaccine products.
We experienced events during 2001 that significantly affected our operations. In March and April 2001, we received first oral notification and then written confirmation from the FDA that clinical activities for both our M-Vax and O-Vax autologous cancer vaccines were placed on clinical hold pending further review by the agency. The written notification from the FDA confirming the clinical hold identified the specific issues that the FDA wanted addressed, which primarily dealt with the sterility of autologous tumors received by us at the Philadelphia facility and the assurance that vaccines being provided to patients would meet FDA sterility guidelines.
In conjunction with the clinical hold, the FDA conducted an inspection of our manufacturing facility in Philadelphia, which inspection was completed in May 2001. As a result of that facility inspection, we received a Form 483, which is a finding of manufacturing facility deficiencies, to which we initially responded at the end of June 2001. The issues raised in the Form 483 were essentially consistent with those in the clinical hold letter, with no new significant areas of concern identified.
In developing our response to the FDA clinical hold letters and the Form 483, we identified and began to implement a number of product development initiatives related to the AC Vaccine technology. As a result, we determined certain product improvements to the vaccine could be instituted that would address certain concerns of the FDA and make the vaccine more viable from a regulatory and commercial perspective. Throughout the remainder of 2001 and into 2002, we continued to evaluate (1) the prospect of freezing the haptenized cells for distribution to the end user, (2) steps that could be taken to help ensure that final released vaccines prepared by us are sterile and (3) tests to determine the minimal number of cells necessary for the vaccine to be effective. Based upon the results of these efforts, we re-engineered the manufacturing steps to create and release the vaccine technology to take advantage of these potential product improvements.
Based upon the changes to the product, the FDA recommended that we consider preparing and filing new INDs for the frozen vaccine. At the recommendation of the FDA, we decided to place our original INDs for M-Vax and O-Vax on inactive status, given the FDA’s view that the revisions to the manufacturing process, necessary to address the FDA’s concerns, would result in a new product from a regulatory perspective and given the Agency’s recommendation that we file new INDs for indications utilizing the new product. Based upon the continuing interactions with the FDA in 2002, we decided to file new INDs for the revised product format for the AC Vaccine for melanoma and ovarian cancer. Our Philadelphia facility was validated and cleared to begin processing clinical samples for administration to patients in clinical trials. Due to a lack of funding at that time, however, we decided not to initiate the clinical trials at that time.
Also during 2002, based upon a negative reaction by authorities in Australia to an application for product reimbursement for M-Vax, we determined that we would be unable to support further the operation in Australia and a decision was made to discontinue and liquidate the Australian joint venture companies. We had not received formal rejection of our reimbursement application, but a panel of oncologists selected by the regulatory authority in Australia had recommended against governmental reimbursement for M-Vax in Australia. Subsequent to our liquidation of the Australian entity, we received formal notification of our rejection of reimbursement by the appropriate authorities. Our experience in Australia demonstrated the importance of obtaining support for the technology among the leading oncologists within a particular country or community, which we were never able to achieve in Australia during that period.
On April 13, 2007, we closed a private placement of 80,060,000 shares of common stock at a purchase price of $0.125 per share with 25 accredited or institutional investors. We received gross proceeds of $10,007,500. In connection with the private placement, we also issued to the investors warrants to purchase 80,060,000 shares of common stock at a warrant exercise price of $0.15 per share. In addition, we agreed to pay up to $580,350 and to issue warrants to purchase up to 6,190,400 shares of common stock at a warrant exercise price of $0.15 per share to certain advisors relating to this private offering. We received net proceeds from this private offering, after offering related expenses, of approximately $9.3 million. We are using the net proceeds of this private placement to continue to implement the plan of operation described below.
Current Plan of Operation
Our plan of operation is to continue on a limited basis our Phase III registration trial for M-Vax and to initiate the Phase II clinical trial for O-Vax. To continue to operate and to continue our development programs, including these two clinical trials, we need to raise additional capital by the end of May 2008. Assuming we are able to raise a minimum of $10.0 million of additional capital, the key components of our plan of operation for the balance of 2008 are:
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Enroll patients in our Phase III registration trial U.S. for M-Vax for the treatment of Stage 3 and 4 melanoma patients, which trial will proceed under the Special Protocol Assessment that we received from the U.S. FDA in October 2006.
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Continue the treatment of melanoma patients outside the U.S. on a compassionate use basis with M-Vax.
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Initiate the launch of the O-Vax study with Cancer Treatment Centers of America.
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Continue our discussions with the European Medical Evaluations Agency and AFSSAPs, the FDA equivalent regulatory bodies for the European Union and France, respectively, regarding the regulatory requirements for the AC Vaccine and its continued development in Europe and France.
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Initiate discussion with Japanese regulatory authorities regarding the regulatory approval process for autologous products like our AC Vaccines and the requirements for making M-Vax available for compassionate use in Japan.
As noted above, the continuation of our current plan of operation requires us to raise additional capital immediately. If we are unable to do so, our ability to continue as a going concern may be in jeopardy.
Liquidity and Capital Resources
We presently anticipate that our current cash resources will be sufficient to fund operations through May 2008, and we must raise additional capital immediately if we are to continue as a going concern. Our current limited cash resources require that we significantly curtail our efforts to enlist new clinical sites for the Phase III registration trial for M-Vax and to significantly slow the patient enrollment in that trial until we are successful in raising additional capital. We will use the proceeds of any offering primarily to fund the additional costs associated with enlisting clinical sites for and patient enrollment in the Phase III trial. To implement the current plan of operation described above for the balance of 2008 and into the first quarter of 2009, we need to raise a minimum of $10.0 million in additional capital.
We continually evaluate our plan of operation discussed above to determine the manner in which we can most effectively utilize our limited cash resources. The timing of completion of any aspect of our plan of operations is highly dependant upon the availability of cash to implement that aspect of the plan and other factors beyond our control.
Even if we raise additional capital in the near future, if our current and planned clinical trials for the AC Vaccine in the U.S. and Europe do not demonstrate continuing progress toward taking one or more products to market, our ability to raise additional capital in the future to fund our product development efforts would likely be seriously impaired. The ability of a biotechnology company, such as AVAX, to raise additional capital in the marketplace to fund its continuing development operations is conditioned upon the company continuing to move its development products toward ultimate regulatory approval and commercialization. If in the future we are not able to demonstrate adequate progress in the development of one or more products, we will not be able to raise the capital we need to continue our then-current business operations and business activities, and we will likely not have sufficient liquidity or cash resources to continue operating.
We conduct our capital raising efforts in U.S. dollars, while a significant portion of our revenues and expenses are generated and incurred in currencies other than U.S. dollars, mainly Euros. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our results of operations and cash flows.
Because our working capital requirements depend upon numerous factors, including progress of our research and development programs, pre-clinical and clinical testing, timing and cost of obtaining regulatory approvals, changes in levels of resources that we devote to the development of manufacturing and marketing capabilities, competitive and technological advances, status of competitors, and our ability to establish collaborative arrangements with other organizations, there can be no assurance that our current cash resources will be sufficient to fund our operations beyond May 2008. Because we have no committed external sources of capital, and expect no significant product revenues for the foreseeable future, we will require additional financing to fund future operations or will need to enter into contract manufacturing relationships on terms favorable to us. There can be no assurance, however, that we will be able to obtain the additional funds sought in this offering or attract contract manufacturing relationships on acceptable terms, if at all. We have begun to curtail certain initiatives and projects due to the fact we have not raised additional capital as of the date of this report.
Results of Operations for the Year Ended December 31, 2007, Compared with the Year Ended December 31, 2006
Revenue recognized in 2007 was $617,384 compared to revenue recognized in 2006 of $734,774. The decrease in revenues was due to lower manufacturing reimbursements related to compassionate use treatments and lower revenues realized from contract manufacturing. The decrease in revenues was partially offset by a higher exchange rate in the current year and the realization of deferred revenue related to the completion of participation in certain French government grants.
During 2007, our research and development expenses increased 8.3% from $4,244,268 in 2006 to $4,595,972 in 2007. Expenses for the periods are broken out by region as follows:
In the U.S., the expense increase is the result of the launch of the Phase III registration study, MAVALDI, for M-Vax in the U.S., Europe and Israel. Costs incurred related to new site initiation plus costs incurred for the contract research organization. These increased expenses were partially offset by a decline in expenses for the Phase I/II study in M-Vax, which was completed during 2007. The increase in costs in France was due to higher salaries and taxes for new employees plus higher facility costs related to an increase in the amount of space.
Selling, general and administrative expenses increased approximately 36.0%, from $1,989,188 for the year ended 2006 to $2,714,292 for the year ended 2007. Expenses for the periods are broken out by region as follows:
In the U.S., the increase in costs relates to higher salary costs with the addition of a new Chief Executive Officer, salary adjustments and the accrual of a $350,000 past services bonus for the services of the Principal Accounting Officer. In addition, there were increased legal costs for securities counsel, general counsel related to employment agreements and modifications and patent counsel fees related to the filing and execution of ongoing patent expenses. Also, there were increased travel costs associated with investor relations and public relations activities. The decrease in administrative costs in France is due to lower salaries paid in France and lower taxes, which were partially offset by increased costs related to facility lease. Other decrease in expenses recorded in 2007 was the reversal of previously recorded obligations related to our Australian subsidiaries that were placed into liquidation proceedings in the fourth quarter of 2002.
Interest income increased from $143,182 earned in 2006 to $279,232 in 2007. The increase is the function of higher interest rates with the overall rise in short-term interest rates plus a higher average invested balance of cash after completing the financing in April 2007.
Assuming we are successful in raising additional capital, we anticipate our spending over the next 12 months for research and development and selling, general and administrative expenses will increase as compared with 2007, as we continue to implement and accelerate the plan of operation described above.
Off-Balance Sheet Arrangements
As of December 31, 2007, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies are described in more detail in Note 1 to our consolidated financial statements. We have identified the following as the most critical accounting policies and estimates used in the preparation of our consolidated financial statements.
Goodwill. In accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, we do not amortize goodwill. Instead, we review goodwill for impairment at least annually and when events or changes in circumstances indicate a reduction in the fair value of the reporting unit to which the goodwill has been assigned. Conditions that necessitate a goodwill impairment assessment include (i) a significant adverse change in legal factors or in the business climate, (ii) an adverse action or assessment by a regulator, (iii) unanticipated competition, (iv) a loss of key personnel, or (v) the presence of other indicators that would indicate a reduction in the fair value of our Genopoeitic subsidiary to which the goodwill has been assigned. SFAS No. 142 prescribes a two-step process for impairment testing of goodwill. The first step of the impairment test is used to identify potential impairment by comparing the fair value of the entity to which the goodwill has been assigned to its carrying amount, including the goodwill. Such a valuation requires significant estimates and assumptions, including estimating future cash inflows from contracts and other sources, and developing appropriate discount rates and probability rates. If the carrying value of the reporting unit exceeds the fair value, the second step of the impairment test is performed in order to measure the impairment loss.
Our goodwill had a carrying value of $188,387 at December 31, 2007, resulting from our acquisition of Genopoeitic in August 2000. We performed our annual goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was recoverable. We considered internal risk-adjusted cash flow projections, which utilize several key assumptions, including estimated timing of cash inflows into Genopoeitic.
Impairment of Long-Lived Assets. Long-lived assets to be held and used, including property and equipment and intangible assets subject to amortization, are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which an asset or asset group is being used, a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, or the presence of other indicators that would indicate that the carrying amount of an asset or asset group is not recoverable. Determination of recoverability is based on the undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. The determination of the undiscounted cash flows requires significant estimates and assumptions including determining the timing and expected costs to complete in-process projects, projecting regulatory approvals and estimating future cash inflows from product sales and other sources. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset or asset group, the carrying amount of the asset is written down to its estimated fair value. Following our long-lived asset impairment review for the fiscal year ended December 31, 2007, we have determined that no impairment of long-lived assets existed.
Research and Development Costs. Research and development costs, including payments related to research and license agreements, are expensed when incurred. Contractual research expenses are recorded pursuant to the provisions of the contract under which the obligations originate. Research and development costs include all costs incurred related to the research and development, including manufacturing costs incurred, related to our research programs. We are required to produce our products in compliance with current Good Manufacturing Practices, which requires a minimum level of staffing, personnel and facilities testing and maintenance. Based upon our current staffing level required to be in compliance with cGMP, we have excess capacity. Utilizing this excess capacity, revenue is generated in the form of contract manufacturing engagements. Accordingly, costs associated with the contract manufacturing revenues are not broken out from our research and development costs, as these costs would not differ even if the contracts were not in place.
Impact of Recently Issued Accounting Standards
On January 1, 2007, we adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position. At the adoption date and as of December 31, 2007, we did not have any unrecognized tax benefits and no adjustments to liabilities or results of operations were required.
In September 2006, the FASB issued SFAS No. 157,” Fair Value Measurements”. FAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this pronouncement does not require any new fair value measurements. We are required to adopt FAS No. 157 beginning January 1, 2008. We have evaluated the impact of adopting FAS 175 on our consolidated financial statements and do not expect any impact on our results of operations or financial position.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115”. FAS No. 159 permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. FAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. We have evaluated the impact of adopting FAS 159 on our consolidated financial statements and do not expect any impact on our results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, with limited exceptions, this pronouncement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. As we do not have any defined benefit pension plans or other postretirement plans, the adoption of this standard did not have any impact on our financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” or Issue 07-3, which addresses the accounting for nonrefundable advance payments. The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If an entity’s expectations change such that it does not expect it will need the goods to be delivered or the services to be rendered, capitalized nonrefundable advance payments should be charged to expense. Issue 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. We have evaluated the impact of adopting Issue 07-3 on our consolidated financial statements and do not expect any impact on our results of operations or financial position.
In December 2007, the FASB ratified the final consensuses in Emerging Issues Task Force Issue No. 07-1, “Accounting for Collaborative Arrangements,” or Issue 07-1, which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. Issue 07-1 is effective for us beginning January 1, 2009. We have evaluated the impact of adopting Issue 07-1 on our consolidated financial statements and do not expect any impact on our results of operations or financial position.
ITEM 8.
ITEM 8.
Financial Statements and Supplementary Data
Our consolidated financial statements appear following the signature page to this report. See Financial Statements.
The accompanying Financial Statements have been prepared assuming that we will continue as a going concern. The report of independent registered public accounting firm included with the Financial Statements is an unqualified opinion with an explanatory paragraph about conditions raising substantial doubt about our ability to continue as a going concern.
ITEM 9.
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A(T).
ITEM 9A(T).
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by us is accumulated and communicated to management, including our President and Chief Executive Officer, Principal Accounting Officer and our Executive Chairman to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer, Principal Accounting Officer and our Executive Chairman, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of December 31, 2007. Based upon that evaluation, our President and Chief Executive Officer, Principal Accounting Officer and Executive Chairman concluded that our disclosure controls and procedures were not effective as of December 31, 2007, due to the material weakness described below in Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)).
In light of the material weaknesses, in preparing our consolidated financial statements as of and for the fiscal year ended December 31, 2007, we performed additional analyses and other post-closing procedures to ensure our consolidated financial statements included in this annual report fairly present, in all material respect, our financial condition, results of operations and cash flows for the fiscal years covered thereby in conformity with generally accepted accounting principles.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is identified in Exchange Act Rule 13a-15(f) and 15d-15(f). Our internal control system is a process designed to provide reasonable assurance to our management, Board of Directors and shareholders regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
In order to ensure that our internal control over financial reporting is effective, management regularly assesses controls for our financial reporting, and did so as of December 31, 2007. This assessment was based on criteria for effective internal controls over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 2007.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of our assessment, we have identified the following material weaknesses in our internal control over financial reporting for the year ended December 31, 2007:
o
Our lack of sufficient personnel at the U.S. headquarters in the accounting, treasury and financial reporting functions affected our ability to have adequate segregation of duties over financial transactions and adequate monitoring controls over the annual and quarterly financial close processes.
o
The lack of segregation of duties often results in the same individual performing two or more of the following functions: initiation and authorization of financial transactions, recording of transactions, and custody of financial assets. The lack of segregation of duties also prevented us from satisfying important monitoring control objectives, such as authorization, completeness and accuracy, and reconciliation of accounting transactions and information.
We are currently undergoing an effort in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This effort, under the direction of senior management, includes the documentation, testing and review of our internal controls over financial transactions and financial statement preparation and reporting. During the course of these activities, we will identify other potential improvements to our internal controls over financial reporting.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We plan to take corrective actions to remediate the material weaknesses noted above. Specifically, assuming we are successful in raising additional capital, we plan to hire additional qualified personnel to assist it with various accounting and finance functions within the organization. We believe this new personnel will reduce the risk associated with our lack of segregation of duties and thus enhance our system of internal controls over financial reporting.
Management believes that the actions described above, when fully implemented, will be effective in remediation of the specific material weakness discussed above.
Limitations of Effectiveness of Controls
As of the date of this filing, we are satisfied that actions implemented to date and the planned actions described above will remediate the material weaknesses and deficiencies in the internal controls and information systems that have been identified. We note that, like other companies, any system of internal controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the internal control system will be met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of the limitations inherent in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9B.
Item 9B.
Other Information
None.
PART III
ITEM 10.
ITEM 10.
Directors, Executive Officers and Corporate Governance
Our executive officers and directors, as well as certain information about them, are as follows:
John K. A. Prendergast, Ph.D., has been a director of the company since July 1996. Dr. Prendergast has served as President and principal of Summercloud Bay, Inc., a biotechnology-consulting firm, since 1993. He is a co-founder and a member of the board of directors of Avigen, Inc. and Palatin Technologies, Inc. as well as Lead Director of MediciNova, Inc. He also serves as the Executive Chairman of Antyra, Inc., a private company located in Edison, NJ From October 1991 through December 1996, Dr. Prendergast was a Managing Director of The Castle Group Ltd. Dr. Prendergast received his M.Sc. and Ph.D. from the University of New South Wales, Sydney, Australia and a C.S.S. in Administration and Management from Harvard University. In November 2003, Dr. Prendergast was named Chairman of the Board of the company.
Francois R. Martelet, MD., was elected to the board of directors of the company, effective July 20, 2007, and was appointed as Chief Executive Officer and President of the company as of December 1, 2007. Throughout 2007, Dr. Martelet provided consulting services to clients in the life sciences and biotechnology industry. Dr. Martelet served as Vice-President and Global Franchise Head, Oncology at Merck & Co. from July 2005 through December 2006. From July 2003 through July 2005, Dr. Martelet was the Regional Pharma Head, Central & Eastern Europe, Middle East and Africa for Novartis Pharma, AG. Prior to that, Dr. Martelet served in various other senior officer positions within various units of Novartis Pharmaceutical, including leading the Oncology Business Units in Asia, Latin America, Central and Europe, the Middle East and Africa. Prior to joining Novartis, Dr. Martelet served in various oncology-related capacities with Schering-Plough International, Eli Lilly Corporation and F. Hoffman-la Roche, AG. Dr. Martelet received a Doctorate in Medicine with distinction and a Pharmaceutical Marketing Master’s Degree in Business from Dijon University, France. He also holds a degree in Legal Medicine from R. Descartes University School of Medicine, Paris.
Richard P. Rainey, C.P.A., is currently the Principal Accounting Officer of the company. In February 2008, Mr. Rainey entered into a new employment agreement with the company, effective as of December 1, 2007, under which he agreed to remain with the company as our Principal Accounting Officer until May 31, 2008. We do not anticipate that Mr. Rainey will continue in his current position with the company beyond May 31, 2008. Since joining the company in September 1998, Mr. Rainey has served in various positions, including Chief Executive Officer, President, and Chief Financial Officer until December 1, 2007, when he became Principal Accounting Officer. Mr. Rainey has also served as Vice President for Finance and Administration and Controller and as a director of the company from May 2007 until January 23, 2008. Prior to joining the company, Mr. Rainey was a partner with Rainey & Rainey, a certified public accounting firm that he founded in 1993. During that period, Rainey & Rainey provided accounting and consulting services to corporations with an emphasis in health care. From 1988 to 1993, Mr. Rainey was an associate with Ernst & Young, LLP specializing in auditing and consulting. Mr. Rainey received his B.S. in Accounting from Pennsylvania State University in 1988.
David Berd, M.D., joined the company as Chief Medical Officer in November 2004. He has been Professor of Medicine at Thomas Jefferson University since 1984. Dr. Berd is the inventor of the AC Vaccine technology, and conducted all the clinical trials of the vaccine completed to date. He is the author of numerous published papers on the basic science and clinical testing of the vaccine. Dr. Berd is a board-certified medical oncologist, and received training at the University of Pennsylvania and Yale University School of Medicine.
Edson D. de Castro has been a director of the company since October 1993. Since 1990, Mr. de Castro has been consulting for companies and participating as a member of certain Boards of Directors. Mr. de Castro was one of five co-founders of Data General Corporation in 1968 for which, from 1968 to 1989, he served as its President and Chief Executive Officer, and from 1989 to 1990, he served as its Chairman of the board of directors. From 1995 to 1997, Mr. de Castro was the Chief Executive Officer and Chairman of the board of directors of Xenometrix, Inc. Mr. de Castro was a founder and Executive Committee Member of the Massachusetts High Tech Council. Mr. de Castro is an Overseer of Boston University. Mr. de Castro received his B.S. in Electrical Engineering from the University of Lowell in 1960.
Andrew W. Dahl, Sc.D., has been a director of the company since September 1999. Since May 2007, Dr. Dahl has served as Chief Innovation Executive of Fairview Health Services, a $2.5 Billion nonprofit health organization, that is a clinical arm of the University of Minnesota. From March 2005 to March 2007, Dr. Dahl served as the Vice President of Consumer Driven Health and Human Resources of Alegent Health, a nonprofit, multi-hospital and health system headquartered in Omaha, Nebraska. He served as President and CEO of Evolution Health, LLC., from July 2000 through February 2005. From July 1994 through December 1999, Dr. Dahl served as the President and Chief Executive Officer of HealthNet, Inc. From July 1990 through March 1994, Dr. Dahl served as President and Chief Executive Officer of IVF America, Inc. (now known as IntegraMed), where he was instrumental in taking the corporation public. Dr. Dahl also served as Executive Vice President and Chief Operating Officer of St. John Health and Hospital Corporation in Detroit, a university-affiliated medical center, and was Vice President for Development of the Hospital Corporation of America, Management Company. Dr. Dahl received his Sc.D. from The Johns Hopkins University and a M.P.A. from Cornell University. Dr. Dahl is also a fellow in the American College of Health Care Executives.
Carl Spana, Ph.D., has been a director of the company since September 1995 and was our Interim President from August 1995 to June 15, 1996. Dr. Spana is a co-founder of Palatin Technologies, Inc. and has been its president and chief executive officer since June 2000. He has been a director of Palatin since June 1996 and has been a director of RhoMed Incorporated since July 1995. Dr. Spana has served Palatin in other executive capacities prior to June 2000. Dr. Spana was vice president of Paramount Capital Investments, LLC, a biotechnology and biopharmaceutical merchant-banking firm, and of The Castle Group Ltd., a medical venture capital firm. Through his work at Paramount Capital Investments and Castle Group, Dr. Spana co-founded and acquired several private biotechnology firms. From July 1991 to June 1993, Dr. Spana was a Research Associate at Bristol-Myers Squibb, where he was involved in scientific research in the field of immunology. Dr. Spana received his Ph.D. in molecular biology from The Johns Hopkins University and his B.S. in biochemistry from Rutgers University.
Audit Committee, Financial Expert and Code of Ethics
Our Audit Committee consists of our independent directors, Dr. Dahl, Mr. de Castro and Dr. Spana. Our board of directors has determined that Mr. de Castro and Dr. Spana qualify as “audit committee financial experts,” as defined by the rules of the Securities and Exchange Commission. Mr. de Castro and Dr. Spana, Dr. Dahl are independent within the meaning of NASDAQ Rule 4200(a)(15), which is the independence test utilized by the Board even though our common stock is no longer listed on NASDAQ.
Our Compensation Committee consists of Mr. de Castro, Dr. Dahl and Dr. Spana.
We adopted a Code of Ethics at a meeting of the board of directors held on June 14, 2005, which applies to our principal executive officer and principal financial officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock. The Reporting Persons are required by regulations of the SEC to furnish us with copies of all such filings. Specific due dates for these reports have been established and we are required to identify those persons who failed to timely file these reports. Based on our review of the copies of filings received by it with respect to the fiscal year ended December 31, 2007, and representations from certain Reporting Persons, we believe that all Reporting Persons complied with the Section 16(a) filing requirements in the year ended December 31, 2007, except for those noted below.
Dr. Francois Martelet, our current President and Chief Executive Officer, was appointed as a director of the company on July 20, 2007, and was granted certain stock options on the date of his appointment. A Form 3 for Dr. Martelet was filed on July 31, 2007, and all subsequent reports required to be filed by Dr. Martelet on Form 4 have been filed on a timely basis.
ITEM 11.
ITEM 11.
Executive Compensation
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned by the persons serving as our chairman of the board, chief executive officer and the other named key employees (who were the only other employees who made in excess of $100,000 in 2007) (the “Named Officers”) for the last three fiscal years. We have no long-term incentive plans.
Our Chairman of the Board, Dr. John Prendergast, is not an employee of the company. He has served as an independent director of the company since 1996. Due to our reduction in the executive staff in 2002, Dr. Prendergast, at the request of the board of directors, has assisted management in certain strategic initiatives and related matters since that time. The board of directors continues to view Dr. Prendergast as an independent director, but his compensation has significantly exceeded the customary fees for outside directors due to the services provided by Dr. Prendergast at the request of the Board. All extraordinary consulting fees paid to Dr. Prendergast have been approved by the other independent members of the Board. Effective December 1, 2003, the Board approved monthly compensation to Dr. Prendergast of $10,500, plus reimbursement of out-of-pocket expenses for consulting services provided by Dr. Prendergast to us, which will consist of not less than five days of service per calendar month.
Summary Compensation Table
Annual Compensation
Outstanding Equity Awards at Fiscal Year-End
Options expire seven years from the date of grant and vest yearly over a four-year period of continuing service as an employee, commencing December 1, 2008.
Options expire ten years from the date of grant and vest yearly over a four-year period of continuing service as an employee, commencing on the date of grant.
Options expire seven years from the date of grant and vest yearly over a four-year period of continuing service as an employee, commencing on the date of grant.
Compensation of Directors
Director Compensation
In 2007, we had two in-person Board meetings, one in-person committee meeting, and eleven telephonic Board or committee meetings.
Effective January 1, 2006, the Compensation Committee of the Board of Directors approved the following cash compensation for non-employee directors, which compensation will not be paid to Dr. Prendergast for so long as he is separately compensated for the additional services he is providing to the company as our Chairman of the Board:
Non-Employee Director Compensation
Cash Compensation
In conjunction with the addition of Dr. Martelet to the Board of Directors, he was issued options to purchase 300,000 shares of common stock. At that time, the other members of the Board of Directors determined that options to purchase 300,000 shares of common stock was a fair annual grant to the other independent members of the Board, as described above.
See “Executive Compensation” above for a description of certain compensation paid to Dr. Prendergast 2006 and 2007 and stock options awarded to Dr. Prendergast for additional services provided by Dr. Prendergast to us, at the request of our board of directors.
Employment Agreements
Dr. Francois R. Martelet. Pursuant to the terms of Dr. Martelet’s employment agreement, as amended, he will serve as our President and Chief Executive Officer for a term commencing December 1, 2007, and ending on December 1, 2010. If Dr. Martelet’s employment is terminated for any reason, he will also be required to resign from his current position as member of the Board of Directors.
The terms of the employment agreement provide that Dr. Martelet will receive an annual base salary of $450,000, subject to yearly review for increase. Additionally, Dr. Martelet is entitled to participate in our annual discretionary bonus program. Under the discretionary bonus program, Dr. Martelet is eligible to receive up to 50% of his then current base salary based on milestones to be mutually agreed on between the Compensation Committee and Dr. Martelet. Dr. Martelet is guaranteed a minimum bonus of 30% of the base salary for his first year of employment. Dr. Martelet is also eligible for cash performance bonuses upon attainment of certain pre-determined milestones based on market capitalization met within the first 42 months of employment.
In conjunction with Dr. Martelet’s initial employment, the Board of Directors awarded Dr. Martelet options to purchase common stock in an amount equal to 5% of the outstanding shares of common stock of the company (“Equity Grant A”). Dr. Martelet was awarded options to purchase 1,000,000 shares of common stock under the company’s 2006 Equity Incentive Plan and inducement stock options to purchase 6,130,288 shares of common stock outside of the 2006 Equity Incentive Plan. The options vest in four equal annual installments on each of the first four anniversaries of the effective date of the employment agreement, have an option exercise price per share of $0.09, and expire on December 1, 2014.
If at any time prior to December 1, 2008, our valuation reaches or exceeds $75,000,000 (as calculated in accordance with the employment agreement) for a period of 30 consecutive days, we will grant to Dr. Martelet additional equity grants pursuant to the equity plan then in effect (“Equity Grant B”). Equity Grant B will be issued as a combination of stock options and restricted stock units pursuant to the same terms and conditions as set forth above for the initial stock option grant, except that options will be granted at the fair market value of the common stock on the effective date of Equity Grant B. The amount of shares comprising Equity Grant B will be determined using the following formula; provided however, that if it the formula calculates Equity Grant B to be equal to 0 or a negative number of shares, the number of shares to be issued as Equity Grant B shall be determined by the compensation committee of the Board: Equity Grant B = (0.035 x common outstanding shares) - 7,130,288 options under Equity Grant A. For purposes of this formula, common outstanding shares is defined as the number of shares of common stock outstanding as of the date of determination plus the number of shares of common stock as to which any shares of preferred stock are then convertible.
Dr. Martelet is also entitled to additional stock options and restricted stock grants at the sole discretion of the Board of Directors.
The employment agreement provides for the accelerated vesting of the options (both Equity Grant A and Equity Grant B) if there is a change in control of the company or he is terminated for certain reasons specified in the employment agreement.
Pursuant to the employment agreement, Dr. Martelet’s employment will terminate upon the occurrence of any of the following: (i) the expiration of the employment period, unless the company and Dr. Martelet agree to extend the term or otherwise continue Dr. Martelet’s employment on mutually agreeable terms, (ii) at the election of the company for cause, immediately upon written notice by the company to Dr. Martelet, which notice of termination will have been approved by a majority of the Board, (iii) immediately upon death or disability, (iv) at the election of Dr. Martelet, for good reason, immediately upon written notice of not less than 60 days, (v) at our election, upon or within 12 months following a change in control, or at the election of Dr. Martelet for good reason upon or within 12 months following a change in control, immediately upon written notice of termination, or (vi) at the election of the company or Dr. Martelet, upon written notice of termination.
If we elect to terminate Dr. Martelet’s employment, other than for cause, or within 60 days prior to the expiration of the employment agreement, the company and Dr. Martelet fail to agree to extend the employment agreement or otherwise reach a mutually acceptable agreement to continue Dr. Martelet’s employment, we will pay to Dr. Martelet the salary in effect on the date of termination for a 20 month period following the date of termination, plus medical and dental benefits and any pro rata portion of any non-discretionary bonus.
If we terminate Dr. Martelet’s employment for cause or Dr. Martelet elects to terminate employment, other than for good reason, no severance or benefits will be paid, and Dr. Martelet will be entitled only to receive payment of earned but unpaid salary, and accrued vacation, as of the date of termination.
If Dr. Martelet terminates employment for good reason, other than following a change in control, we will pay Dr. Martelet’s then current salary for a 20 month period following the date of termination, plus medical and dental benefits and the pro rata portion of any non-discretionary bonus earned.
If we terminate the employment relationship upon or following a change in control, or if Dr. Martelet terminates employment for good reason upon or following a change in control, we will pay the then current annual salary in a lump sum amount, calculated at two times the annual salary, plus medical and dental care benefits and any pro rata portion of any non-discretionary bonus.
If, prior to the expiration of the employment period, Dr. Martelet’s employment is terminated by death or disability, we will pay to Dr. Martelet, the then current base salary for a 20 month period in the case of death, and a six month period in the case of disability, following the date of termination, plus medical and dental benefits and any pro rata portion of any non-discretionary bonus.
Dr. Martelet has agreed that during the employment period and after the termination of employment, for any reason, Dr. Martelet will not render services of any nature, directly or indirectly, to any competing organization in connection with any competing product within any geographical territory as the company and the competing organization are or would be in actual competition, for a period of 20 months, commencing on the date of termination. Additionally, Dr. Martelet has agreed that he will not, during his employment and for a period of 20 months commencing on the date of termination, directly or indirectly employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment, any person whom he knows to be an employee of the company or any parent, subsidiary or affiliate of the company.
Richard P. Rainey. On January 23, 2008, we entered into and executed a new employment agreement with Mr. Rainey, effective as of December 1, 2007, which sets forth the terms of Mr. Rainey’s continued employment with us through May 31, 2008. The new agreement supersedes the previous employment agreement between us and Mr. Rainey dated as of April 1, 2004, as amended by a letter agreement dated October 2, 2007, except as set forth in the new agreement. Upon execution of the new agreement, Mr. Rainey received a bonus payment of $350,000 for prior services rendered.
The new agreement provides that Mr. Rainey will continue in employment with the company until May 31, 2008, in the capacity of Principal Accounting Officer. Under the terms of the new agreement, Mr. Rainey receives a base salary of $275,000 per year. The new agreement also provides that Mr. Rainey will receive a severance payment of $350,000, payable in 12 monthly installments, if (i) Mr. Rainey’s employment is terminated without Cause, as defined below, (ii) upon Mr. Rainey’s death or disability, (iii) after Achievement of the Milestones, as defined below, (iv) due to Mr. Rainey’s resignation for Good Reason, as defined below, or (v) upon the expiration of the employment term on May 31, 2008. The new agreement also provides that the exercise date for all stock options held by Mr. Rainey is extended 18 months from the termination date of Mr. Rainey’s employment with us and that all such stock options will thereupon be accelerated and fully vested as of the termination date, if the agreement is terminated in a manner that triggers the severance payment described in the preceding sentence. We may terminate Mr. Rainey for Cause or without Cause, Mr. Rainey may terminate his employment for Good Reason, or no reason, and Mr. Rainey’s employment will terminate at the end of the term of the employment term on May 31, 2008, unless earlier terminated.
For purposes of the agreement, “Cause” for termination means (a) Mr. Rainey’s material breach of, or habitual neglect or failure to perform the material duties which he is required to perform under the terms of the agreement; the willful or intentional failure to follow the reasonable directives or policies established by us; or engaging in conduct that is materially detrimental to our interests such that we sustain a material loss or injury as a result thereof, provided that the breach or failure of performance by the Mr. Rainey has not been cured by Mr. Rainey within 30 days after he shall have received written notice from us stating with reasonable specificity the nature of such conduct; (b) Mr. Rainey’s conviction or entry of nolo contendere to any felony or a crime involving moral turpitude, fraud or embezzlement of our property; or (c) Mr. Rainey’s material breach of his duties under the agreement. For purposes of the agreement, “Good Reason” means, without Mr. Rainey’s written consent, (a) the assignment to Mr. Rainey of duties inconsistent in any material respect with the duties of a Principal Accounting Officer; or (b) a material reduction in his base salary or other benefits. For purposes of the agreement, “Achievement of the Milestones,” means the filing by the company of its Annual Report on Form 10-K for the year ended December 31, 2007, and the filing and effectiveness of a registration for a primary offering of securities by us, in each instance, with the participation of Mr. Rainey in his capacity as Principal Accounting Officer.
The employment agreement also contains a nondisclosure agreement, a 12-month covenant not to compete, and a 12- month non-solicitation agreement.
Dr. David Berd. On March 11, 2008, we executed a new employment agreement with Dr. Berd, effective as of November 1, 2007, which supersedes the prior employment letter agreement between the company and Dr. Berd. Under the new employment agreement, Dr. Berd continues to serve as the Chief Medical Officer of the company, has a base salary of $255,000, and is eligible to receive a discretionary annual incentive bonus (targeted to be 35% of base salary) upon achieving performance standards to be established by the company with Dr. Berd.
Upon termination of Dr. Berd’s employment for any reason other than, (i) due to Dr. Berd’s death or to his disability, (ii) by the company for “just cause,” or (iii) by Dr. Berd for “good reason,” then the company is required to pay Dr. Berd, as his sole damages for his termination, his annual base salary for the next 18 months. Such amount will not be set-off against amounts earned from alternative employment. In addition, any stock options granted to Dr. Berd will continue to vest during that 18 month period. If, (i) Dr. Berd’s employment is terminated by the company with “just cause,” (ii) Dr. Berd terminates his employment other than for “good reason,” or (iii) Dr. Berd’s employment is terminated due to death or disability, we are required to pay Dr. Berd, or his estate, his base salary accrued but unpaid as of the date of termination. The employment agreement also contains a nondisclosure agreement, a two-year covenant not to compete, and an 18-month non-solicitation agreement.
ITEM 12.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 31, 2007, certain information regarding the beneficial ownership of the common stock (i) by each person known by us to be the beneficial owner of more than five percent of the outstanding shares of the common stock, (ii) by each of our Named Executive Officers (as defined herein) and directors and (iii) by all our executive officers and directors as a group.
*Represents less than 1%.
(1)
The percentage of common stock beneficially owned is determined by adding the number of shares of common stock outstanding 141,574,997 as of December 31, 2007, to the number of shares issuable upon conversion of the Series C preferred stock, 1,030,756 as of December 31, 2007, plus, for each beneficial owner or group, any shares of common stock that owner or group has the right to acquire within 60 days after December 31, 2007, pursuant to options or warrants.
(2)
The address of the named individuals is c/o AVAX Technologies, Inc., 2000 Hamilton Street, Suite 204, Philadelphia, Pennsylvania 19130.
(3)
Includes 1,117,500 shares of common stock that Mr. Rainey may acquire within 60 days upon exercise of options held by Mr. Rainey and also includes 1,193,504 shares and 1,184,600 warrants owned by a partnership in which Mr. Rainey holds a 50% interest.
(4)
Represents shares of common stock that Mr. de Castro may acquire within 60 days upon the exercise of options held by Mr. de Castro.
(5)
Includes 185,000 shares of common stock that Dr. Dahl may acquire within 60 days upon the exercise of options held by Dr. Dahl and also includes 160,000 shares and 160,000 vested warrants owned by Dr. Dahl.
(6)
Includes 574,063 shares of common stock that Dr. Prendergast may acquire within 60 days upon exercise of options held by Dr. Prendergast and also includes 661,748 shares and 592,300 warrants owned by Dr. Prendergast.
(7)
Includes 322,500 shares of common stock that Dr. Spana may acquire within 60 days upon the exercise of options held by Dr. Spana and also includes 224,917 shares and 160,000 warrants owned by Dr. Spana.
(8)
Includes 628,125 shares of common stock that Dr. Berd may acquire within 60 days upon the exercise of options held by Dr. Berd.
(9)
Includes 8,000,000 warrants to purchase common stock owned by Carmignac Gestion
(10)
Includes 6,067,600 warrants to purchase common stock owned by Park Place Columbia LTD.
(11)
Includes 2,205,908 warrants to purchase common stock owned by Aqua RIMCO LTD.
(12)
Includes 24,800,000 warrants to purchase common stock owned by Firebird Global Master Fund, Ltd.
(13)
Includes 2,205,882 warrants to purchase common stock owned by Yoshinori Shirono.
(14)
Includes 14,200,000 warrants to purchase common stock owned by BioCentive Limited.
(15)
Includes 13,796,690 warrants to purchase common stock owned by JFE Hottinger & Affiliates.
Equity Compensation Plan Information
The following table sets forth as of December 31, 2007, (a) the number of securities to be issued upon exercise of outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)).
The warrants and options issued without stockholder approval include: (1) warrants to purchase 288,450 shares of common stock at an exercise price of $0.143 per share issued to a broker in connection with the company’s 2003 bridge financing, which expire on December 1, 2008; (2) warrants to purchase 566,667 shares of common stock at an exercise price of $0.33 per share issued to a broker in connection with the company’s 2004 private placement of securities, which expire on May 10, 2009; (3) warrants to purchase 2,287,293 shares of common stock at an exercise price of $0.33 per share issued to two brokers in connection with the company’s 2005 private placement of securities, which expire on May 10, 2009; (4) warrants to purchase 300,000 shares of common stock at an exercise price of $0.14 per share issued to two individuals for certain financial advisory services, which expire on December 16, 2009; (5) warrants to purchase 270,000 shares of common stock at an exercise price of $0.35 per share issued to two individuals for advisory services, which expire on October 31, 2012; (6) warrants to purchase 125,000 shares of common stock at an exercise price of $8.24 per share issued to a University pursuant to a license agreement, which expire on October 31, 2011; and (7) warrants to purchase 6,270,400 shares of common stock at an exercise price of $0.15 per share issued to three brokers in connection with the company’s 2007 private placement of securities.
The warrants and options issued without stockholder approval also include 100,000 options to acquire common stock issued to current and former directors outside of the company’s stock option plans, which options were granted in conjunction with services (including extraordinary levels of services) provided by those directors to the company. Those options expire on November 2, 2008, and have option exercise prices of $0.89 per share.
The warrants and options issued without stockholder approval also include 6,130,288 options issued to Dr. Francois Martelet, our current President and CEO, which have an exercise price of $0.09 and expire on December 1, 2014. These options were granted to Dr. Martelet in conjunction with his appointment to President and CEO of the company.
ITEM 13.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
On April 13, 2007, we completed a private financing in the aggregate principal amount of $10,007,500 at a price of $0.125 per share with various institution and individual investors in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933. We issued 80,060,000 shares of our common stock and associated warrants to purchase an additional 80,060,000 shares of common stock at an exercise price of $0.15 per share.
A partnership in which Mr. Rainey, our then President and CEO, is a 50% partner and Mr. Rainey’s brother is the other 50% partner, purchased $50,000 of common stock and related warrants to purchase common stock in the April 2007 offering. Mr. Rainey also, individually, purchased an additional $50,000 of common stock and associated warrants to purchase common stock in the private placement. John K.A. Prendergast, Carl Spana and Andrew Dahl, directors of the company also purchased $50,000, $50,000, $20,000 and $20,000, respectively, of common stock and associated warrants to purchase common stock, in this offering. The board of directors approved the participation of Dr. Prendergast, Mr. Spana, Dr. Dahl and Mr. Rainey in the private placement.
ITEM 14.
ITEM 14.
Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed to the Company for fiscal years ended December 31, 2006 and 2007, by the Company’s principal accounting firms:
(1)
Includes services rendered for the audit of the Company’s annual financial statements, review of financial statements included in quarterly reports on Form 10-QSB and review of registration statements filed by the Company.
The Audit Committee has adopted a policy (the “Pre-Approval Policy”) under which audit and non-audit services to be rendered by our independent public accountants are pre-approved by the Audit Committee. Pursuant to the Pre-Approval Policy, the Audit Committee pre-approves audit and non-audit services to be provided by the independent auditors, at specified dollar levels, which dollar levels are reviewed by the Audit Committee periodically, and no less often than annually. Additionally, the Audit Committee may provide explicit prior approval of specific engagements not within the scope of a previous pre-approval resolution. The services performed by our independent auditor in 2006 were all audit-related and pre-approved by the Audit Committee. The Pre-Approval Policy also specifies certain services that may not be provided by our independent auditors in any circumstance, which is consistent with SEC rules and regulations. The Pre-Approval Policy also includes an exception from the pre-approval requirement for certain de minimus non-audit engagements that are not otherwise prohibited by the Policy. Engagements in reliance upon that de minimus exception must be promptly brought to the attention of Audit Committee and approved by the Audit Committee or one or more designated representatives.
PART IV
ITEM 15.
ITEM 15.
Exhibits, Financial Statement Schedules
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Name & Title
Date
/s/ Francois R. Martelet, M.D.
Francois R. Martelet, M.D.
April 15, 2008
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Richard P. Rainey
Richard P. Rainey
April 15, 2008
Principal Financial Officer
Principal Accounting Officer
/s/ John K.A. Prendergast
John K. A. Prendergast, Ph.D.
April 15, 2008
Chairman of the Board and Director
/s/ Andrew Dahl
Andrew Dahl
April 15, 2008
Director
/s/ Edson D. de Castro
Edson D. de Castro
April 15, 2008
Director
/s/ Carl Spana
Carl Spana, Ph.D.
April 15, 2008
Director
EXHIBIT INDEX
*
Filed herewith.
Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-KSB for year ended December 31, 2001.
Incorporated by reference and previously filed as an exhibit to the Quarterly Report on Form 10-QSB for the first quarter of the year ended December 31, 2004.
Incorporated by reference and previously filed as an exhibit to the Registration Statement on Form S-3 (File No. 333-09349) filed on August 1, 1996.
Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 1998.
Incorporated by reference and previously filed as an exhibit to Amendment No. 9 to the Registration Statement on Form S-3 filed on July 3, 1997.
Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for year ended December 31, 2000.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on
December 9, 2003.
Incorporated by reference and previously filed as an exhibit to the Registration Statement on Form SB-2 (File No. 333-118334) filed on August 18, 2004.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on June 2, 2004.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on March 25, 2008.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on April 7, 2005.
Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for year ended December 31, 2000.
Incorporated by reference and previously filed as an exhibit to the Proxy Statement on Schedule 14A as filed with the SEC on June 28, 2006.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on April 19, 2007.
Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K/A, Amendment No. 1 filed on February 1, 2008.
Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 2006.
Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for year ended December 31, 2005.
Consolidated Financial Statements
AVAX Technologies, Inc.
(a development stage company)
Years ended December 31, 2007 and
and the period from January 12, 1990
(Incorporation) to December 31, 2007
With Report of Independent Registered Public Accounting Firm
AVAX Technologies, Inc.
(a development stage company)
Consolidated Financial Statements
Years ended December 31, 2007 and 2006 and for the period from January 12, 1990
(Incorporation) to December 31, 2007
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2007 and 2006 and for the period from January 12, 1990 (incorporation) to December 31, 2007
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2007 and 2006 and for the period from January 12, 1990 (incorporation) to December 31, 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006 and for the period from January 12, 1990 (incorporation) to December 31, 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AVAX Technologies, Inc.
We have audited the accompanying consolidated balance sheets of AVAX Technologies, Inc. (a development stage company) and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2007 and for the period from January 12, 1990 (incorporation) to December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 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 consolidated financial position of AVAX Technologies, Inc. and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended and for the period from January 12, 1990 (incorporation) to December 31, 2007 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses from operations and may not have adequate capital to fund its operations through 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, effective January 1, 2006, the Company changed its method of accounting for stock-based compensation in accordance with the Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment.”
/s/ Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
April 15, 2008
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Balance Sheet
See accompanying notes.
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Operations and Comprehensive Loss
See accompanying notes.
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit)
[TABLE CONTINUES]
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit) (continued)
[TABLE CONTINUES]
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit) (continued)
[TABLE CONTINUES]
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit) (continued)
[TABLE CONTINUES]
See accompanying notes.
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows (continued)
See accompanying notes.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
1.
Description of Business and Significant Accounting Policies
Description of Business
AVAX Technologies, Inc. and its subsidiaries (the Company) is a development stage biopharmaceutical company.
In November 1995, the Company sold its leading product under development, an over-the-counter nutritional, dietary, medicinal and/or elixorative food supplement or drug and all of the related patents and other intellectual property. The agreement was for $2.4 million in shares of common stock of Interneuron Pharmaceuticals, Inc. (IPI), a public company, the parent of the purchaser of the Product (the Stock). Certain common stockholders of the Company were also common stockholders of IPI. Pursuant to the terms of the agreement, the purchase price, payable in two equal installments in December 1996 and 1997, was fixed, and the number of shares of the Stock would vary depending on the quoted market price of the Stock at such time. Because the Stock was receivable in two equal annual installments, the gain from the sale of the Product, $1,951,000, was calculated by discounting the value of the Stock receivable using a discount rate of 15%.
Also in November 1995, the Company entered into a license agreement with Thomas Jefferson University (TJU) to develop, commercially manufacture and sell products embodying immunotherapeutic vaccines for the treatment of malignant melanoma and other cancers (the Invention) (see Note 2).
In December 1996, the Company entered into a license agreement with Rutgers University (Rutgers) to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer and infectious diseases. During 2004 the Company and Rutgers agreed to cancel the license agreement and all of the Company’s obligations associated with the license agreement (see Note 2).
In February 1997, the Company entered into a license agreement with Texas A&M to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer (the Texas A&M Compounds) (see Note 2).
In November 1999, the Company entered into a definitive joint venture agreement with Australia Vaccine Technologies (AVT) (formerly Neptunus International Holdings Limited), a pharmaceutical group in Australia, under the subsidiary name, AVAX Holdings Australia Pty Limited (AVAX Holdings). Under the joint venture agreement, AVAX Holdings, through its affiliated entities AVAX Australia Pty Limited and AVAX Australia Manufacturing Pty Limited (the Joint Venture Companies), was organized for the purpose of manufacturing and marketing M-Vax, an immunotherapy for the post-surgical treatment of Stage 3 and 4 melanoma, in Australia and New Zealand. In January 2002, the Joint Venture Companies repurchased 90% of AVT’s interest in the two joint venture companies resulting in AVAX owning a 95% interest in the net equity of both joint venture companies. The Company was seeking but was unable to obtain a timely governmental reimbursement for the costs of treatment with the M-Vax in Australia, and determined to discontinue operations in Australia in order to focus the cash resources of the Company on its U.S. and European operations. In September 2002, the Company announced that it would be discontinuing its operations in Australia and in December 2002 the Company completed the liquidation of its Australian subsidiary.
In August 2000, the Company completed its acquisition of GPH, S.A. (Holdings) and Genopoietic S.A. (Genopoietic) each a French societe anonyme based in Paris, France with its principal operating facility in Lyon, France. Holdings and Genopoietic were organized in 1993 to develop gene therapy applications and market gene therapy treatments for cancer. The Company has designated the Lyon, France operations facility as its primary source facility for the production of vaccines to be used in clinical trials. In addition, the Company currently performs contract manufacturing and research activities at its facilities located in Lyon. The Company’s December 31, 2007 consolidated balance sheet includes approximately $122,239 in net assets related to these subsidiaries.
The Company’s business is subject to significant risks consistent with biotechnology companies that are developing products for human therapeutic use. These risks include, but are not limited to, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval, and competition with other biotechnology and pharmaceutical companies. The Company plans to continue to finance its operations with a combination of equity and debt financing and, in the longer term, revenues from product sales, if any. However, there can be no assurance that it will successfully develop any product or, if it does, that the product will generate any or sufficient revenues.
Basis of Presentation
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the year ended December 31, 2007, the Company incurred a net loss of $6,413,648 and a use of cash in operating activities of $4,731,897. The Company’s cash requirements were satisfied through a private placement of common stock in April 2007 (see Note 4), maintaining balances in accounts payable and accrued expenses on terms in excess of those afforded in commercial practice and customer agreements and through the use of available cash. However, the Company does not have sufficient resources to maintain its existing plan of operations throughout 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management anticipates that additional debt or equity financing will be required to fund ongoing operations in 2008. The Company is currently seeking to raise additional capital or secure revenue sources to fund current operations. However, there is no assurance that the Company will successfully obtain the required capital or revenues or, if obtained, the amounts will be sufficient to fund ongoing operations in 2008. The inability to secure additional capital could have a material adverse effect on the Company, including the possibility that the Company could have to cease operations. These financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying amounts or the amount in classification of liabilities that may be required, should the Company be unable to continue as a going concern.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AVAX Technologies, Inc., and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Foreign Currency Translation
Holdings and Genopoietic use the Euro as their functional currency as required by the European Union. The Australian Joint Venture Companies and AVAX Holdings used the Australian Dollar as their functional currency prior to the discontinuance of operations discussed above.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, the financial statements of these entities have been translated into United States dollars, the functional currency of the Company and its other wholly-owned subsidiaries and the reporting currency herein, for purposes of consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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.
Revenue Recognition
The Company’s revenues are related to the provision of contract services and the sale of its product, the AC Vaccine Technology, for the treatment of melanoma. Contract service revenue is recognized in installments based upon the contractual agreement entered into with clients (see Note 3). Product revenues represent fees received or payable to the Company related to the manufacture and sale of the vaccine. Product revenue is recognized when the vaccine is received by the hospital administering the vaccine.
The Company records as deferred revenue amounts received in advance of the provision of services in accordance with contracts or grants. Deferred revenue consisted of $250,000 received pursuant to a clinical development and manufacturing agreement for which the activities needed to be completed to earn the funds had not been completed as of December 31, 2007. Pursuant to the agreement, if the companies manufacturing facility in Philadelphia, PA is not able to produce products pursuant to the agreement by May 31, 2008 then $125,000 of the funds received will default to the collaboration partner. If the facility is not able to produce products pursuant to the agreement by August 31, 2008 then the remaining $125,000 will default and be payable back to the collaboration partner.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. There was no valuation allowance at December 31, 2007. The Company generally does not charge interest on accounts receivable.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk are principally cash and accounts receivable. Cash consists of checking accounts, money market accounts and a certificate of deposit. The Company places its cash with its principal bank that is a high credit quality financial institution. Cash deposits generally are in excess of the FDIC insurance limits. Credit limits, ongoing credit evaluations, and account monitoring procedures are utilized to minimize the risk of loss from accounts receivable. Collateral is generally not required.
Fair Value of Financial Instruments
The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature.
Inventories
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. The Company’s inventories include raw materials and supplies used in research and development activities.
Accrued Expenses
The Company provides a provision for accrued expenses based upon its contractual obligation, as calculated by the Company, for all claims made for payment to the Company.
Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of furniture and equipment, which range from three to ten years. Depreciation for the Company’s manufacturing facility and related equipment are computed using the straight-line method over estimated useful lives of 5 to 10 years. Leasehold improvements related to the building are being amortized using the straight-line method over the actual life of the lease.
Goodwill
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. This accounting standard requires that goodwill and indefinite lived assets no longer be amortized but instead be tested at least annually for impairment and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount. The Company performed its annual goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was reasonable.
Prior to the adoption of SFAS No. 142, the company had recorded cumulative amortization of $113,032. If SFAS No. 142 had been applied to earlier periods the adjusted loss from continuing operations would be $84,137,953 and the adjusted net loss would be $84,141,798.
Research and Development Costs
Research and development costs, including payments related to research and license agreements, are expensed when incurred. Contractual research expenses are recorded pursuant to the provisions of the contract under which the obligations originate. Research and development costs include all costs incurred related to the research and development, including manufacturing costs incurred, related to the Company’s research programs. The Company is required to produce its products in compliance with current Good Manufacturing Practices (“cGMP”), which requires a minimum level of staffing, personnel and facilities testing and maintenance. Based upon its current staffing level required to be in compliance with cGMP, the Company has excess capacity. Utilizing this excess capacity, revenue is generated through contract manufacturing engagements (see Note 3). Costs for production of products will be capitalized and charged to cost of goods sold only after the Company has received approval to market the drug by a Regulatory Authority.
Stock-Based Compensation
Effective January 1, 2006, the Company has adopted SFAS 123R, “Share-Based Payment.” SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, measured by the fair value of the equity or liability instruments issued, adjusted for estimated forfeitures. We transitioned to SFAS 123R using the modified-prospective method, under which prior periods have not been revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost previously estimated for our SFAS 123 pro forma disclosures. Recognized stock-based compensation expense for the year ended December 31, 2007 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees,” and related interpretations, to account for its fixed-plan stock options to employees. Under this method, compensation cost was recorded only if the market price of the underlying stock on the date of grant exceeded the exercise price. SFAS 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS 123, the Company elected to continue to apply the intrinsic-value-based method of accounting described above, and adopted only the disclosure requirements of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” The fair-value-based method used to determine historical pro forma amounts under SFAS 123 was similar in most respects to the method used to determine stock-based compensation expense under SFAS 123R. However, in its pro forma disclosures, the Company accounted for option forfeitures as they occurred, rather than based on estimates of future forfeitures.
The Company maintains three employee stock option plans, a director stock option plan and has issued non-qualified stock options to an executive officer and a director outside of the existing stock option plans, which non-plan option grants have been approved by the Board of Directors and the stockholders of the Company. These plans are more fully discussed in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2007. In addition, the Company issues warrants to consultants at the discretion of the Board of Directors of the Company. The Company accounts for warrants granted to consultants in accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The Company determines the value of stock warrants utilizing the Black-Scholes option-pricing model.
Compensation costs for fixed awards with pro rata vesting are allocated to periods on the straight-line basis. The estimated weighted average fair value of options granted was calculated based on the following assumptions:
For the twelve months ended December 31, 2007, compensation expense of $105,127 was charged to administrative expenses and $94,021 was charged to research and development expenses related to stock options outstanding and not vested. As of December 31, 2007, total compensation cost related to non-vested stock options not yet recognized was $805,057, is expected to be allocated to expenses over a weighted-average period of 18 months.
The fair value of option grants is estimated at the date of grant using the Black-Scholes model.
The following table shows the options and warrants outstanding by strike price with the average expected remaining term of the instruments, in years, as of December 31, 2007.
Earnings Per Share
Net loss per share is based on net loss divided by the weighted average number of shares of common stock outstanding during the respective periods. Diluted earnings per share information is not presented, as the effects of stock options, warrants and other convertible securities would be anti-dilutive for the periods presented.
Recently Issued Accounting Standards
On January 1, 2007, we adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position. At the adoption date and as of December 31, 2007, we did not have any unrecognized tax benefits and no adjustments to liabilities or results of operations were required.
In September 2006, the FASB issued SFAS No. 157,” Fair Value Measurements”. FAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this pronouncement does not require any new fair value measurements. We are required to adopt FAS No. 157 beginning January 1, 2008. The Company has evaluated the impact of adopting FAS 175 on our consolidated financial statements and does not expect any impact on its results of operations or financial position.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115”. FAS No. 159 permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. FAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. The Company has evaluated the impact of adopting FAS 159 on the Company’s consolidated financial statements and does not expect any impact on its results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, with limited exceptions, this pronouncement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. As the Company does not have any defined benefit pension plans or other postretirement plans, the adoption of this standard did not have any impact on its financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” or Issue 07-3, which addresses the accounting for nonrefundable advance payments. The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If an entity’s expectations change such that it does not expect it will need the goods to be delivered or the services to be rendered, capitalized nonrefundable advance payments should be charged to expense. Issue 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. The Company has evaluated the impact of adopting Issue 07-3 on its consolidated financial statements and does not expect any impact on its results of operations or financial position.
In December 2007, the FASB ratified the final consensuses in Emerging Issues Task Force Issue No. 07-1, “Accounting for Collaborative Arrangements,” or Issue 07-1, which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. Issue 07-1 is effective for us beginning January 1, 2009. The Company has evaluated the impact of adopting Issue 07-1 on its consolidated financial statements and does not expect any impact on its results of operations or financial position.
2.
License and Research Agreements
In November 1995, the Company entered into an agreement with TJU for the exclusive worldwide license to develop, manufacture and sell the Invention (see Note 1). In consideration for the license agreement, the Company paid cash of $10,000 and issued an aggregate of 458,243 shares of common stock to TJU and the scientific founder (the Scientist).
Under the terms of the license agreement the Company is obligated to (i) pay certain milestone payments as follows: $10,000 upon initiation of the first clinical trial that is approved by the Food and Drug Administration (“FDA”) or comparable international agency, $10,000 upon the first filing of a New Drug Application (“NDA”) with the FDA or comparable international agency, and $25,000 upon receipt by the Company of approval from the FDA or comparable international agency to market products, (ii) enter into a research agreement to fund a study to be performed by TJU for the development of the technology related to the Invention (the Study) at approximately $220,000 per annum for the first three years, and (iii) following the third year, spend an aggregate of $500,000 per year (which includes costs incurred pursuant to the research agreement plus other internal and external costs) on the development of the Invention until commercialized in the United States. If following the third year, the Company files for United States marketing approval through a Company sponsored NDA, the Company may elect to spend less than $500,000 per year on the development of the Invention during the period of time the NDA is under review by the FDA. During 2000, a payment of $25,000 was made to TJU pursuant to the license agreement. In addition, the Company is obligated to pay royalties on its worldwide net revenue derived from the Invention and a percentage of all revenues received from sub-licensees of the Invention.
The research agreement with TJU mentioned above was to continue until completion of the study, although it is terminable, upon notice by either party to the other, at any time. The Company has maintained the appropriate level of spending on the development of the invention in accordance with the license agreement.
In February 1997, the Company licensed from The Texas A&M University System an issued U.S. patent and certain U.S. and foreign patent applications relating to a series of novel cancer-fighting anti-estrogen compounds that may be especially effective against hormone-dependent tumors. The development of the anti-estrogren compounds is no longer a part of the Company’s plan of operation. The Company has been notified by Texas A&M that Texas A&M considers the Company to be in violation of the license agreement and that the Company’s rights under the license agreement have been revoked. The Company disputes the contention by Texas A&M and the Company is attempting to return the technology to the University. Texas A&M has filed a lawsuit against the company seeking reimbursement from AVAX for certain patent expenses incurred by the University from AVAX. Although the disputed amount is fully accrued in the attached financial statements, the Company continues to dispute certain amounts that are claimed by the University.
3.
Equity Transactions
Common and Preferred Stock
In May 1996, the Company’s authorized capital was increased to 50,000,000 shares of common stock, par value $.004, and 5,000,000 shares (of which 2,500,000 shares were designated as Series A preferred stock, 300,000 shares were designated as Series B preferred stock and 120,000 shares were designated as Series C preferred stock) of preferred stock, par value $.01. In June 1998, the Company’s authorized common stock, par value $.004, was decreased to 30,000,000 shares. In January 2004, the Company’s authorized common stock, par value $.004, was increased to 150,000,000 shares. In January 2007, the Company’s authorized common stock, par value $.004, was increased to 500,000,000 shares. As of June 2006, no shares of the Series B preferred stock were issued or outstanding, and the Certificate of Designation for the Series B preferred stock was cancelled.
At the second closing of the private placement on June 11, 1996, the 1,287,500 shares of Series A preferred stock were automatically converted to 321,875 shares of common stock. Notwithstanding such conversion, holders of the Series A preferred stock have received pro rata 95.85% of shares of common stock of IPI associated with the sale of the Product (see Note 1).
In March 2000, the Company announced the conversion of all outstanding shares of Series B Convertible preferred stock into fully paid nonassessable shares of common stock. As of the conversion date there were 66,093 shares of Series B Convertible Preferred Stock outstanding that were convertible into 1,724,152 shares of Common Stock.
On March 1, 1999, the Company authorized and consummated an offering of Series C Convertible Preferred Stock (the “Series C Offering”) pursuant to which the Company raised aggregate gross proceeds of approximately $10,130,000. In the Series C Offering, the Company sold an aggregate of 101,300 shares of Series C Preferred Stock combined with Class A Warrants to purchase an aggregate of 311,692 shares of Common Stock at an exercise price of $4.00 per share and Class B Warrants to purchase an aggregate of 311,692 shares of Common Stock at an exercise price of $4.50 per share. During 2000 2,462 of these Class A and Class B warrants were exercised. The Series C Preferred Stock, the Class A Warrants and the Class B Warrants were sold as a unit in the Series C Offering. The Class A Warrants and Class B Warrants were exercisable until March 1, 2004.
The Series C preferred stockholders are entitled to voting rights equivalent to the number of common shares into which their preferred shares are convertible. The Series C preferred stockholders are also entitled to receive, in preference to the holders of common stock, an amount per preferred share of $100 plus any declared but unpaid dividends.
Pursuant to the terms of the private placement, each share of Series C preferred stock was convertible at any time, in whole or in part, at the discretion of the holders, into common stock at $3.25 per share.
In connection with the private placement, the Company paid $845,261 in finder’s fees and non-accountable expenses. Of this amount $709,100 was paid to Paramount in the form of a finders fee.
During 2000 holders of 14,550 shares the Series C Preferred stock converted these shares into 650,931 fully paid nonassessable shares of common stock. During 2001 holders of 50,000 shares of the Series C Preferred stock converted these shares into 1,538,450 fully paid nonassessable shares of common stock. During 2007 holders of 3,250 shares of the Series C Preferred stock converted those shares into 99,999 fully paid non-assessable shares of common stock. The 33,500 shares of Series C preferred stock, outstanding at December 31, 2007, is convertible into 1,030,756 shares of common stock excluding the effect of any fractional shares.
In March 2000, the Company completed a $25,137,000 private placement with institutional investors. The Company sold an aggregate of 2,259,494 newly issued shares of common stock, and issued warrants to purchase an additional 225,951 shares of common stock at an exercise price of $12.79 per share, for an aggregate warrant exercise price of $2,890,817. The warrants expired on March 10, 2005.
In connection with services rendered in connection with the private placement, the Company paid the placement agent a cash fee of approximately $747,000. Other share issuance expenses amounted to approximately $54,000.
Pursuant to a prior agreement, Paramount was paid a fee due to the participation in the private placement of certain investors previously introduced to the Company by Paramount. As a result of this agreement, the Company paid Paramount a cash fee of approximately $140,000.
On August 24, 2000, the Company completed its acquisition of GPH, S.A. (“Holdings”) and Genopoietic S.A. (“Genopoietic”), each a French societe anonyme based in Paris, France. In this transaction, 100% of the outstanding shares of both Holdings, which is the majority shareholder of Genopoietic, and Genopoietic have been contributed to the Company by the shareholders of those two entities in exchange for an aggregate of 800,000 shares of the Company’s common stock valued at $7,600,000 as of the acquisition date and $5,000 in notes payable. Of the 800,000 shares issued to Professors David R. Klatzmann and Jean-Loup Salzmann (the primary shareholders), 659,756 shares have been placed in escrow to secure their indemnification obligations under the Contribution Agreement. In addition, the Company incurred $621,397 in acquisition costs, which were capitalized as part of the purchase price and allocated to the net assets acquired.
The Company has notified Professors Klatzmann and Salzmann that they are in default of their obligations under the Contribution Agreement and has put them on notice that the escrow shares are being cancelled and will revert back to the Company as treasury shares. As of the date of the financial statements, the shares have not been formally cancelled.
On May 21, 2004, the Company closed the private placement of 10,166,167 shares of the Company’s common stock plus warrants to purchase 1,525,000 shares of common stock at $0.35 per share (Series A Warrants) and warrants to purchase 1,525,000 shares of common stock at $0.39 per share (Series B Warrants). Net proceeds to the Company, after offering costs, amounted to approximately $2,893,000.
On May 21, 2004, in compliance with the Note Purchase Agreements entered into in December, 2003, the Company converted the principal ($950,000) and interest ($23,275) on the bridge notes into common stock at an exercise price of $0.13 per share resulting in the issuance of 7,486,430 shares of the Company’s common stock.
On April 5, 2005, the Company closed a private placement of 25,343,430 shares of common stock at a purchase price of $0.34 per share with 12 accredited or institutional investors. The Company received gross proceeds of approximately $8,616,000. In connection with the private placement, the Company also issued to the investors warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.41 per share, and warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.48 per share. Net proceeds to the Company, after offering costs, amounted to approximately $7,986,000.
On April 13, 2007, the Company closed a private placement of 80,060,000 shares of common stock at a purchase price of $0.125 per share with 25 accredited and institutional investors. In connection with the private placement, the Company also issued to the investors warrants to purchase 80,060,000 shares of common stock at a warrant exercise price of $0.15 per share. All warrants issued in this private placement expire on April 13, 2012. Net proceeds to the Company, after offering costs, amounted to approximately $9,318,000.
Stock Options - 1992 Stock Option Plan
In April 1992, the Board of Directors approved the 1992 Stock Option Plan (the “1992 Plan”), which, as amended, authorized up to 437,500 shares of common stock for granting both incentive and nonqualified stock options to employees, directors, consultants and members of the scientific advisory board of the Company. The 1992 Plan was amended in June 1999, to increase the number of shares issuable to 1,500,000. The 1992 Plan was further amended in June 2000, to increase the number of shares issuable to 2,500,000. The Board of Directors determines the exercise price and vesting period of the options at the date of grant. Options may be granted up to 10 years after the 1992 Plan’s adoption date and generally expire 7 years from the date of grant.
The following summarizes activity in the 1992 Plan:
Stock Options - 2001 Stock Option Plan
In November 2001 the Board of Directors approved the 2001 Stock Option Plan (the “2001 Plan”), authorizing up to 2,500,000 shares of common stock for granting both incentive and nonqualified stock options to employees, directors, consultants and members of the scientific advisory board of the Company. The Board of Directors determines the exercise price and vesting period of the options at the date of grant. Options may be granted up to 10 years after the 2001 Plan’s adoption date and generally expire 10 years from the date of grant. With the adoption of the 2006 Equity Incentive Plan described below, the 2001 Plan was frozen.
The following summarizes activity in the 2001 Plan:
Director Option Plan
In June 2000, the Company adopted the 2000 Director Stock Option plan and authorized the plan to issue up to 480,000 shares of common stock as compensation to the outside directors of the Company for services to be received from the Directors. During 2000, each of the Company’s six outside directors received options to purchase 40,000 shares of common stock, which vest quarterly at the rate 2,500 shares, with the first vesting period being January 1, 2000. Pursuant to the plan documents an additional 40,000 options per director were issued as of January 1, 2004, vesting over a four-year period. The following summarizes activity in the Director Option Plan:
Stock Options - 2006 Equity Incentive Plan
On June 12, 2006, the Board of Directors approved the 2006 Equity Incentive Plan (the “2006 Plan”), authorizing up to 10,000,000 shares of common stock for granting both incentive and nonqualified stock options to employees, directors, consultants and members of the scientific advisory board of the Company. The Board of Directors determines the exercise price and vesting period of the options at the date of grant. Options may be granted up to 10 years after the 2006 Plan’s adoption date and generally expire 10 years from the date of grant. The 2006 Plan replaces the 2001 Plan and the Directors Option Plan as of the date of enactment of the 2006 Plan. The following summarized the activity in the 2006 Plan:
Stock Options - Other
The Company, with the authorization of the board of directors, issues nonqualified stock options to employees, directors, advisors, consultants and members of the scientific advisory board of the Company. The Board of Directors determines the exercise price, expiration date and vesting period of the options at the date of grant. The following summarizes other stock option grants:
Warrants
The Company, with the authorization of the board of directors issues warrants for the purchase of common stock in conjunction with equity and debt offerings as well as to consultants that assist the company in various financial or commercial transactions. The Board of Directors determines the exercise price, expiration date and vesting period of the options at the date of grant.
The following summarizes warrant grants:
Authorized but unissued shares of common stock were reserved for issuance at December 31, 2007 as follows:
A summary of applicable stock option and warrant activity and related information for the years ended December 31, 2007 and 2006 is as follows:
Exercise prices for options and warrants outstanding range from $0.09 to $8.24. The option and warrant contracts expire at various times through July 2017. The weighted-average grant date fair value of options granted during the years 2007 and 2006 were $0.10 and $0.18, respectively.
4.
ANVAR Advances
The Company’s French subsidiary receives financial support from a French governmental agency (ANVAR). These advances, which are subject to conditions specifying that non-compliance with such conditions could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of amounts received to date. If certain products are commercialized, the December 31, 2007 balance of $400,691 (1,800,000 French Francs) is repayable based on an annual royalty equal to 47% of the revenue related to the project. As such, the total amount of advances received was recorded as a liability in the accompanying consolidated balance sheet. In case of failure or partial success, as defined in the agreement, $89,040 (400,000 French Francs) is payable. The due date for the obligation has past but the grantor agency has not demanded repayment of the obligation. Due to the uncertainty regarding the amount that to will be required to be repaid to ANVAR, the Company maintains the full amount of the obligation as a current liability.
5.
Income Taxes
At December 31, 2007, the Company has net operating loss carry-forwards of approximately $82,199,000 for income tax purposes. U. S. and state tax losses of approximately $72,202,000 expire in varying amounts between 2007 and 2027, if not utilized. Foreign losses of approximately $9,997,000 continue indefinitely and may be applied against future income.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities for federal income tax purposes are as follows:
The valuation allowance at December 31, 2005 was $27,793,000.
Under Section 382 of the Tax Reform Act of 1986, the Company’s net operating loss carryforward could be subject to an annual limitation if it should be determined that a change in ownership of more than 50% of the value of the Company’s stock occurred over a three-year period.
The following summary reconciles the income tax benefit at the federal statutory rate with the actual income tax provision (benefit):
6.
Commitments and Contingencies
Leases
In December 1997, the Company entered into a 10-year lease agreement for manufacturing facility space in Philadelphia. The first month’s rent was payable upon signing of the lease along with a security deposit equivalent to two months rental. This lease is secured by a one-year irrevocable standby letter of credit whereby the lessor is the named beneficiary that expired with the culmination of the first lease term of ten years on January 31, 2008. The company executed a first lease amendment in accordance with the existing lease agreement to extend the term of the lease by a period of five years from February 1, 2008 through January 31, 2013.
In July 2000, the Company entered into a 9-year lease agreement for manufacturing and research space in Lyon, France that expires in July 2009.
Rent expense under these agreements was approximately $405,811 and $343,043 for the years ended December 31, 2007 and 2006, respectively. Future minimum rental payments required under non-cancelable operating leases with initial or recurring terms of more than one year as of December 31, 2007 are $452,567 in 2008, $326,033 in 2009, $199,500 in 2010, 2011 and 2012 and $16,625 in 2013. With the expiration of the lease in Lyon in July 2009 it is anticipated that the Company will have need to obtain an extension of the lease or find alternative facilities within which to conduct its activities.
Other
The Company was recently sued by the Texas A&M University System in Texas. The lawsuit alleges that the Company is in breach of its license agreement by failing to reimburse the University for certain patent expenses incurred by the University with respect to the patent and patent applications.
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Management believes, in consultation with counsel, that the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s financial position.
7.
Property, Plant and Equipment
The following shows the composition of the assets included in property, plant and equipment at December 31, 2007 and 2006:
Depreciation expense was $301,005 and $290,434 for the years ended December 31, 2007 and 2006, respectively.
8.
Employee Benefit Plan
During 1996, the Company established a discretionary 401(k) plan for all U.S. employees over the age of 21. Employee contributions are subject to normal 401(k) plan limitations. The Company was not required to make a contribution in 2007 or 2006.
9.
Related Party Transactions
During 2007 and 2006 the Company paid additional cash compensation of $126,000 per year to one of its Board Members who took a more active role in assisting existing management of the Company. It is anticipated that this role will continue until such time as additional management personnel are hired. The compensation was voted upon and approved by the Compensation Committee of the Board of Directors.
The Company receives administrative support services in the form of office space and administrative services from a partnership in which Richard Rainey, Principal Accounting Officer, is a partner. The Company is not charged for these services and does not record any expenses associated with the services due to the limited value of these services.
10.
Subsequent Events
On January 23, 2008, the Company and Mr. Rainey executed a new employment agreement, effective as of December 1, 2007, which sets forth the terms of Mr. Rainey’s continued employment with the Company through May 31, 2008. The new employment agreement supersedes the previous employment agreement between the company and Mr. Rainey dated as of April 1, 2004, as amended by a letter agreement dated October 2, 2007, except as set forth in the new agreement. Upon execution of the new agreement, Mr. Rainey received a bonus payment of $350,000 for prior services rendered. The new agreement provides that Mr. Rainey will continue in employment with the company until May 31, 2008, in the capacity of Principal Accounting Officer, and receive a base salary of $275,000 per year.