-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MK0pQ3GKkvGRFallrGNZGdiZ7D5o7TMJ0Ijh1LZm3de4qOpd9xFn4RE2vtlJaeB/ 8XKesCofa2B9EZarTTOe2w== 0000950135-99-001773.txt : 19990403 0000950135-99-001773.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950135-99-001773 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORAVAX INC /DE/ CENTRAL INDEX KEY: 0000900122 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043085209 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-26034 FILM NUMBER: 99583479 BUSINESS ADDRESS: STREET 1: 38 SIDNEY ST 4TH FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6175266000 10-Q/A 1 ORAVAX, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-26034 ORAVAX, INC. (Exact Name of Registrant as Specified In Its Charter) DELAWARE 04-3085209 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS 02139 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1339 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: NOT APPLICABLE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF COMMON STOCK, AS OF LATEST PRACTICABLE DATE. CLASS OUTSTANDING AS OF MAY 1, 1998 ----- ----------------------------- COMMON STOCK, $.001 PAR VALUE 10,829,112 ================================================================================ 2 ORAVAX, INC FORM 10-Q/A FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
PAGE ---- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of March 31, 1998 4 and December 31, 1997..................................... Condensed Consolidated Statements of Operations for the 5 three months ended March 31, 1998 and 1997................ Condensed Consolidated Statements of Cash Flows for the 6 three months ended March 31, 1998 and 1997................ Notes to Condensed Consolidated Financial Statements........ 7 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations....................... PART II. OTHER INFORMATION................................. 14 Signatures.................................................. 14
2 3 RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES IN CERTAIN INFORMATION The undersigned registrant hereby amends in its entirety Part 1 of its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. During the course of discussions with the staff of the Securities and Exchange Commission (the "Commission"), certain issues were raised regarding the presentation of the Convertible Preferred Stock and the calculation of the conversion discount attributable to the private placement financing that occurred in December 1997. The Company originally calculated the value of the discount as $846,788, which was recorded as a deferred financing cost and an addition to paid-in capital at December 31, 1997 and was to be amortized over the eighteen month discount period. In the Second Quarter of 1998, the Company changed the amortization period from eighteen to twelve months to reflect the volume of conversions of the preferred stock to common stock. During fiscal 1999, after consideration of the issues raised by the staff of the Commission and a re- examination of the facts surrounding the assumptions used in the calculation, the Company recalculated the amount of the discount as $1,675,800, eliminated the deferred financing costs at December 31, 1997 and revised its amortization schedule to recognize the discount as a return to preferred shareholders over the original eighteen month discount period on which the shareholders could realize the discount by accreting preferred dividends as a credit to additional paid-in capital and a charge to retained earnings in each reporting period. The Company originally presented the Convertible Preferred Stock as a component of stockholders' equity at December 31, 1997. Upon further review of the Preferred Stock Purchase Agreement and based on discussions with the Commission, the Company has determined that $2,464,186 of the total issuance has mandatory redemption features at December 31, 1997 and, therefore, should not be included in stockholders' equity at December 31, 1997. The amount was determined based on the number of common shares into which the preferred stock was convertible at December 31, 1997 that were subject to shareholders approval which was voted on March 10, 1998. 3 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ORAVAX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ ASSETS Cash and cash equivalents................................... $ 6,731 $10,274 Short-term investments...................................... 1,549 1,448 Receivable from Joint Venture............................... 530 -- Prepaid and other current assets............................ 126 1,529 ------- ------- Total current assets........................................ 8,936 13,251 Property and equipment, net................................. 3,043 3,524 Investment in joint venture................................. (709) (535) Other assets................................................ 257 257 ------- ------- Total assets................................................ $11,527 $16,497 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 1,302 $ 935 Accrued expenses............................................ 2,623 3,659 Deferred joint venture revenue.............................. 31 91 Obligation under capital leases............................. 1,018 1,316 Obligation under installment debt........................... 260 260 ------- ------- Total current liabilities................................... 5,234 6,261 Obligation under capital leases, excluding current portion................................................... 338 416 Installment debt, excluding current portion................. 917 882 ------- ------- Total liabilities........................................... 6,489 7,559 Mandatory redeemable preferred stock, $.001 par value ; 2,772 shares authorized and outstanding in 1997........... -- 2,464 Stockholders' equity : Preferred stock, $.001 par value; 2,000,000 shares authorized in 1998 and 1997; none issued or outstanding........................................... -- -- Convertible preferred stock, $.001 par value; 9,000 shares authorized in 1998 and 1997; 6,150 and 6,300 shares issued and outstanding in 1998 and 1997 (liquidation preference $6,300)....................... 5,545 3,137 Common stock, $.001 par value; 25,000,000 shares authorized in 1998 and 1997; 10,410,482 and 10,371,543 shares issued and outstanding in 1998 and 1997........ 10 10 Additional paid-in capital.................................. 74,501 74,115 Deferred compensation....................................... (79) (94) Accumulated deficit......................................... (74,939) (70,694) ------- ------- Total stockholders' equity.................................. 5,038 6,474 ------- ------- Total liabilities and stockholders' equity.................. $11,527 $16,497 ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 ORAVAX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 ---- ---- Revenue: Collaborative research and development -- related party................................................. $ 1,909 $ 1,862 Government grants and other............................ 217 121 Interest............................................... 130 235 ----------- ---------- 2,256 2,218 ----------- ---------- Expenses: Research and development............................... 3,782 3,691 General and administrative............................. 857 990 Interest............................................... 76 123 ----------- ---------- 4,715 4,804 ----------- ---------- Loss from operations........................................ (2,459) (2,586) Equity in operations of joint venture....................... (1,492) (1,657) ----------- ---------- Net loss from operations.................................... $ (3,951) $ (4,243) =========== ========== Convertible Preferred Stock dividend........................ 94 -- Accretion to conversion discount of Convertible Preferred Stock..................................................... 200 -- Net loss to common shareholders............................. $ (4,245) $ (4,243) =========== ========== Net loss per basic and diluted common share................. $ (0.41) $ (0.43) Weighted average number of basic and diluted shares outstanding............................................... 10,389,744 9,977,318
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 ORAVAX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS
THREE MONTHS ENDED MARCH 31, ------------------ 1998 1997 ---- ---- Cash flows from operating activities: Net loss from operations............................... $(3,951) $(4,243) Adjustments to reconcile net loss from operations to net cash used in operating activities: Depreciation and amortization.......................... 509 553 Equity in operations of joint venture.................. 1,492 1,657 Amortization of debt discount.......................... 35 41 Non-cash compensation.................................. 15 18 Changes in operating assets and liabilities: Receivable from joint venture..................... (1,849) (1,261) Prepaid expenses and other current assets......... 4 (36) Other assets...................................... -- 28 Accounts payable and accrued expenses............. (669) (792) Deferred revenue -- related party................. (60) (61) ------- ------- Net cash used in operating activities....................... (4,474) (4,096) ------- ------- Cash flows from investing activities: Net purchases of short-term investments................ (101) (1,497) Expenditures for property and equipment................ (28) (113) Investment in joint venture............................ -- (1,236) ------- ------- Net cash used in investing activities....................... (129) (2,846) ------- ------- Cash flows from financing activities: Proceeds from Common Stock issuances................... 36 20 Proceeds from Convertible Preferred Stock issuances.... 1,400 -- Principal payments under capital lease obligations..... (376) (377) ------- ------- Net cash provided by (used in) financing activities......... 1,060 (357) ------- ------- Net decrease in cash and cash equivalents................... (3,543) (7,299) Cash and cash equivalents at beginning of period............ 10,274 14,916 ------- ------- Cash and cash equivalents at end of period.................. $ 6,731 $ 7,617 ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. 6 7 ORAVAX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED. 1. NATURE OF BUSINESS OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in 1990 and has its principal offices and laboratories at 38 Sidney Street, Cambridge, Massachusetts and manufacturing facilities in Canton, Massachusetts. OraVax's mission is the discovery, development and commercialization of biologic products for the prevention or treatment of human infectious diseases. The Company's products are vaccines that stimulate the body's own immunity to provide long term protection against disease, as well as antibody products that provide immediate passive immunity to treat existing infections or to protect against acute disease risk. The Company employs both classical biologic product methods and innovative technologies to produce therapeutics and preventatives that meet the challenges of each infection and disease process. The ultimate success of the Company is dependent upon its ability to raise capital through equity financings, direct financings, corporate partnerships, sale of product and interest income on invested capital. The Company's capital requirements may change depending upon numerous factors, including progress of the Company's research, development and clinical programs, time required to obtain regulatory approvals, resources the Company devotes to self-funded projects, proprietary manufacturing methods and advanced technologies and demand for the Company's products, if and when approved. While management believes that additional capital will be available to fund operations, there can be no assurance that additional funds will be available when required, on terms acceptable to the Company. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, manufacturing limitations, third party reimbursements, collaborative arrangements, and compliance with government regulations. 2. BASIS OF PRESENTATION The consolidated balance sheet as of March 31, 1998, and the consolidated statements of operations and cash flows for the three months ended March 31, 1998 and 1997 are unaudited, have been prepared on a basis substantially consistent with the audited financial statements, and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The preparation of interim financial statements in conformity with generally accepted accounting principles requires the use of management's estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. The results for the three months ended March 31, 1998 are not necessarily indicative of results for the entire year, although the Company expects to incur a significant loss for the year ending December 31, 1998. These interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company's annual report filed on Form 10-K for the year ended December 31, 1997. The accompanying condensed consolidated financial statements as of March 31, 1998 have been restated to reflect a change in the original accounting for the 6% Convertible Preferred Stock and the related discount attributable to the private placement financing that occurred in December 1997, as a result of discussions with the staff of the Securities and Exchange Commission (the "Commission"). The Company originally calculated the value of the discount as $846,788, which was recorded as a deferred financing cost and an addition to paid-in capital at December 31, 1997 and was to be amortized over the eighteen month discount period. In the Second Quarter of 1998, the Company changed the amortization period from eighteen to twelve months to reflect the volume of conversions of the preferred stock to common stock. During fiscal 1999, after consideration of the issues raised by the staff of the Commission and a re- 7 8 examination of the facts surrounding the assumptions used in the calculation, the Company recalculated the amount of the discount as $1,675,800, eliminated the deferred financing costs at December 31, 1997 and revised its amortization schedule to recognize the discount as a return to preferred shareholders over the original eighteen month discount period on which the shareholders could realize the discount by accreting preferred dividends as a credit to additional paid-in capital and a charge to retained earnings in each reporting period. As a result, the additional amount of the discount recognized in the quarter ended March 31, 1998 was $59,000. The Company originally presented the Convertible Preferred Stock as a component of stockholders' equity at December 31, 1997. Upon further review of the Preferred Stock Purchase Agreement and based on discussions with the Commission, the Company has determined that $2,464,186 of the total issuance has mandatory redemption features at December 31, 1997 and, therefore, should not be included in stockholders' equity at December 31, 1997. The amount was determined based on the number of common shares into which the preferred stock was convertible at December 31, 1997 that were subject to shareholders approval which was voted on March 10, 1998. The March 31, 1998 balance sheet reflects the return from mezzanine to stockholders' equity of the preferred stock released from mandatory redemption by virtue of the common shareholder vote. the table below details the previously reported financial position as of December 31, 1997 and March 31, 1998 and the effect of the restatement:
DECEMBER 31, 1997 MARCH 31, 1998 ----------------- -------------- Total assets -- previously reported............ $17,344 $12,233 Adjustment related to recalculation of preferred stock discount..................... (847) (706) ------- ------- As adjusted.................................... $16,497 $11,527 ------- ------- Total stockholders' equity -- previously reported..................................... $ 9,785 $ 5,744 ------- ------- Adjustment related to presentation of preferred stock that is redeemable..................... (2,464) Adjustment related to recalculation of preferred stock discount..................... (847) (706) ------- ------- As adjusted.................................... $ 6,474 $ 5,038 ------- -------
The table below details the previously reported net loss to common shareholders for the three month period ended March 31, 1998 and the effect of the restatement:
THREE MONTHS ENDED MARCH 31, 1998 ------------------ Total net loss to common shareholders -- previously reported................................................. $(4,186) Adjustment related to recalculation of preferred stock discount................................................. (59) ------- As adjusted................................................ $(4,245) ------- Net loss per common share -- previously reported........... $ (0.40) ------- As adjusted................................................ $ (0.41) -------
3. COMPUTATION OF NET LOSS PER COMMON SHARE For the year ended December 31, 1997, the Company adopted Statement of Accounting Standards No. 128 ("FAS 128"), which requires the presentation of Basic and Dilutive earnings per share, which replaces primary and fully diluted earnings per share. Earnings per share have been restated for all periods presented to reflect the adoption of FAS 128. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents. Common stock equivalent shares consist of Convertible Preferred Stock and stock options. The dilutive computations do not include common stock equivalents for stock options of 1,121,043 and 1,107,006 at March 31, 1998 and March 31, 1997, respectively, and Convertible Preferred Stock convertible to 4,206,555 shares of Common Stock at March 31, 1998, as there inclusion would be antidilutive. 8 9 4. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For example, other comprehensive earnings may include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. For the three months ended March 31, 1998 and 1997 comprehensive income was the same as net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in 1990, the Company has been engaged in the discovery and development of vaccines and injected antibody products to prevent or treat human infectious diseases. OraVax is currently pursuing four proprietary product development programs which target diseases that have high rates of incidence, compelling pharmaco-economic profiles, and against which no adequate therapeutic or preventative antibody products or vaccines are currently available. The diseases targeted by these products include, 1) peptic ulcers, gastritis and stomach cancer, 2) viral pneumonia in children, 3) antibiotic-associated colitis, and 4) a group of related viral diseases including Yellow Fever, Japanese encephalitis, dengue, tick borne encephalitis and hepatitis C. The Company's product candidates are designed to generate either mucosal or systemic immunity, as appropriate to each disease target. The Company has developed a portfolio of biologic production technologies appropriate to the biology of each infectious agent. The Company's principal product candidates are the following:
PRODUCT CANDIDATE INDICATION TECHNOLOGY STATUS ----------------- ---------- ---------- ------ Helicobacter pylori Prevention and Recombinant protein Phase II trials (H. pylori) vaccines treatment of peptic vaccine ulcers, gastritis and stomach cancer HNK20 antibody Prevention of Monoclonal IgA Phase III trials pneumonia caused by nosedrop antibody respiratory syncytial virus in high risk children CdVax vaccine and CdIG Prevention and Toxoid vaccine and Toxoid IND 1998 immune-globulin treatment of Hyper-immune globulin antibiotic-associated colitis ChimeriVax(TM)Japanese Prevention of Chimeric live IND 1998 encephalitis infection by the attentuated viral (follow-on products Japanese encephalitis vaccine include dengue, and other flavi hepatitis C, TBE) viruses Arilvax(R) YF vaccine Prevention of Single-dose live OraVax to facilitate (a product of Evans infection by the attentuated viral US registration Medical, Limited) Yellow Fever virus vaccine (already marketed in the UK and Europe) Phase III
In addition to its proprietary products, OraVax has been indentified as the anticipated manufacturer of certain live virus and bacterial vaccines for the US Department of Defense, through a program known as the Joint Vaccine Acquisition program (JVAP). The Company is currently negotiating its position with DynPort, the prime contractor. The vaccines included are those against smallpox, tularemia and other potential vaccines identified by the JVAP. While these diseases are found in nature, the objective of the program is to provide the US military with vaccines needed to protect against the potential use of these microbes as biologic warfare 9 10 agents. Candidate vaccines developed by the Department of Defense would be transferred to OraVax for advanced development and completion of the FDA approval process for routine manufacture at OraVax's Canton, Massachusetts manufacturing facility. To date, the Company has not received any revenues from the sale of products and does not expect to receive any such revenues until late 1999. The first product revenues are anticipated from sales of the Yellow Fever vaccine, under the Company's partnership with Evans Medical Limited. The Company's losses incurred since inception resulted principally from expenditures under its research and development programs and the Company expects to incur significant operating losses over the next several years due primarily to expanded research and development efforts, preclinical testing and clinical trials of its product candidates, the acquisition of additional technologies, the establishment of manufacturing capability and the performance of commercialization activities. Results of operations may vary significantly from quarter to quarter depending on, among other factors, the progress of the Company's research and development efforts, the receipt, if any, of milestone payments, the timing of certain expenses and the establishment of collaborative research agreements. RESULTS OF OPERATIONS Three Months Ended March 31, 1998 Compared with Three Months Ended March 31, 1997 The Company's total revenues increased to $2,256,000 in the three months ended March 31, 1998 from $2,218,000 in the three months ended March 31, 1997. In the three months ended March 31, 1998, the Company's revenues consisted of $1,909,000 of collaborative research revenues earned under the Company's collaboration (the "Joint Venture") with Pasteur Merieux Connaught ("PMC"), $217,000 from government grants and other, and $130,000 in interest earned on invested funds. In the three months ended March 31, 1997, the Company's revenues consisted of $1,862,000 of collaborative research revenues earned under the Joint Venture, $121,000 from government grants and $235,000 in interest earned on invested funds. The increased revenue was attributable to an increase in 1998 budgeted research and development activities of the Joint Venture with PMC and an increase in grant revenue resulting from the October 1997 award of a C.difficile Phase II Small Business Innovation Research (SBIR) grant from the National Institute of Health (NIH) offset by a decrease in interest income as a result of declining cash investments. The Company's total costs and expenses decreased to $4,715,000 in the three months ended March 31, 1998 from $4,804,000 in the three months ended March 31, 1997. Research and development expenses increased 2% to $3,782,000 in the three months ended March 31, 1998 from $3,691,000 in the three months ended March 31, 1997. Significant contributors to the Company's research and development expenditures in the first quarter of 1998, versus the first quarter of 1997, included the conduct of three small-scale Phase II clinical studies under its H.pylori program and advanced activities under its Japanese encephalitis program, including the investment in other aspects of the Chimerivax family of vaccine opportunities. These expenditures were offset by a decrease in costs resulting from expenses that were incurred in the first quarter of 1997 that were not incurred in the first quarter of 1998, and from aggressive cost control. The 13% decrease in general and administrative expenses to $857,000 in the three months ended March 31, 1998 from $990,000 in the three months ended March 31, 1997 is principally due to a decrease in expenses associated with the Company's workforce reduction in the second quarter of 1997. Interest expense decreased to $76,000 in the three months ended March 31, 1998 from $123,000 in the three months ended March 31, 1997. The Company accounts for its investment in the Joint Venture Partnerships under the equity method of accounting. Accordingly, the Company recorded its $1,492,000 and $1,657,000 share of the Joint Venture Partnerships' losses in the first quarter of 1998 and 1997, respectively. The decreased loss is principally due to third party obligations, incurred by the Joint Venture Partnerships' in the first quarter of 1997 as compared to the same period in 1998, which were offset by an increase in the 1998 budgeted research and development activities of both OraVax and PMC. The Company incurred a net loss from operations of $3,951,000 in the three months ended March 31, 1998 compared to a net loss from operations of $4,243,000 in the three months ended March 31, 1997. 10 11 In the first quarter of 1998, the Company began recognizing the annual cumulative 6% dividend that accrues in stock and the amortization of the conversion discount related to the December 1997 Convertible Preferred Stock financing. The Company incurred a net loss to common shareholders of $4,245,000 in the three months ended March 31, 1998 compared to a net loss to common shareholders of $4,243,000 in the three months ended March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's aggregate cash and investments were $8,280,000 at March 31, 1998, a decrease of $3,442,000 since December 31, 1997. Cash used by operations during the three months ended March 31, 1998, principally to support research and development, was $4,474,000. In early 1998, the Company received the $1,400,000 remainder of cash proceeds from the December 1997 Convertible Preferred Stock financing. In addition, the Company repaid $376,000 of its capital lease obligations during the period. Since inception, the Company's cash expenditures have exceeded its revenues. Operations have been funded principally through public and private placements of equity securities, equipment lease financing, revenues from the Company's Joint Venture with PMC, government grants and interest income. The Company's future capital requirements will depend on many factors, including, but not limited to, the progress of its research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the funding of the Company's share of the expenses of collaborative arrangements, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements, and the acquisition of additional facilities and capital equipment. The Company plans to finance these cash needs in the near term principally through its existing cash reserves, together with interest earned thereon, and revenues from the Joint Venture with PMC and previously awarded government grants. Also, the anticipated near term revenues from the development and manufacturing of selected live virus and bacterial vaccines for the US Department of Defense, through a program known as the Joint Vaccine Acquisition Program (JVAP), would provide funds to finance the Company's activities under JVAP. JVAP was developed to ensure that the US military will have access to a supply of FDA-approved vaccines effective against the consequences of biological warfare agents. The Company believes, based upon its current operating plan, that, in addition to its available cash balances and known revenues, it will need additional financing in the second half of 1998 in order to fund the Company's operations. The Company will require additional funds to conduct, if planned, a Phase III trial of its HNK20 product candidate and for HNK20 manufacturing start up. Moreover, changes in the Company's research and development plans or other events affecting the Company's operations may result in accelerated or unexpected expenditures. In addition, the Company will need substantial additional capital to fund its operations for the manufacturing and marketing of any of its successful product candidates. The Company is actively pursuing additional funding through public or private equity financings, direct financings, formation of new corporate partnerships and the award of new government grants. If additional funds are raised by issuing equity securities, further dilution to existing stockholders may result and future investors may be granted rights superior to those of existing stockholders. There can be no assurance, however, that additional financing will be available from any of these sources, or if available, will be available on terms satisfactory to the Company. The Company's inability to obtain needed funding on satisfactory terms may require the Company to delay, curtail or eliminate one or more of its planned product development programs, scale back its planned manufacturing operations or enter into collaborative arrangements that may require the Company to issue additional equity or relinquish rights to certain technologies or product candidates that the Company would not otherwise issue or relinquish. 11 12 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results are difficult to predict and may be affected by a number of factors, including the following, that could cause actual results to differ materially from those indicated by the forward-looking statements made herein and presented elsewhere by management from time to time. Early Stage of Product Development. The products under development by the Company will require significant additional research and development efforts, including extensive clinical testing and regulatory approval, prior to commercial use. The Company's potential products are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies. These risks include the possibilities that the Company's therapeutic approach will not be successful, that any or all of the Company's potential products will be found to be unsafe, ineffective, toxic or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances, that the potential products, if safe and effective, will be difficult to develop into commercially viable products, to manufacture on a large scale or be uneconomical to market, that proprietary rights of competitors or other parties will preclude the Company from marketing such products; or that competitors or other parties will market superior or equivalent products. Future Capital Needs. In addition, the Company will require substantial additional funds in order to continue its research and development programs, preclinical and clinical testing of its product candidates and to conduct full scale manufacturing and marketing of any pharmaceutical products that may be developed. The Company's capital requirements depend on numerous factors, including but not limited to the progress of its research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements, and the purchase of additional facilities and capital equipment. The Company believes, based upon its current operating plan, that, in addition to its available cash balances and known revenues, it will need to raise additional capital in the second half of 1998 in order to fund operations. There can be no assurance, however, that changes in the Company's research and development plans, acquisitions or other events affecting the Company's operations will not result in accelerated or unexpected expenditures. Thereafter, the Company will need to raise substantial additional capital to fund its operations. There can be no assurance, however, that additional financing will be available, or if available, will be available on acceptable or affordable terms. Manufacturing Limitations. At present, the Company's ability to manufacture its products is limited to clinical trial quantities. The Company currently does not have the capability to manufacture commercial quantities of products. The Company's strategy is to develop its manufacturing facilities, initially through the manufacturing agreements for products funded by the US Department of Defense's Joint Vacccine Acquisition Program ("JVAP"), for producing both pilot-scale and commercial quantities of its products. To ensure compliance with current Good Manufacturing Practices ("cGMP") imposed by the FDA, OraVax will need to establish sufficient technical staff to oversee all product operations, including quality control, quality assurance, technical support and manufacturing management. The Company may enter into arrangements with contract manufacturing companies to expand its own production capacity in order to meet requirements for its product candidates. If the Company chooses to contract for manufacturing services and encounters delays or difficulties in establishing relationships with manufacturers to produce, package and distribute its finished pharmaceutical or other medical products (if any), clinical trials, market introduction and subsequent sales of such products would be adversely affected. Moreover, contract manufacturers must operate in compliance with cGMP. The Company's potential dependence upon third parties for the manufacture of its products may adversely affect the Company's profit margins and its ability to develop and deliver such products on a timely and competitive basis. Risks Associated With Collaborative Arrangements. The Company's product development strategy may require the Company to enter into various additional arrangements with corporate, government and academic collaborators, licensors, licensees and others. Therefore, the Company may be dependent upon the subsequent success of these outside parties in performing their responsibilities. There can be no assurance that the 12 13 Company will be able to establish additional collaborative arrangements or license agreements that the Company deems necessary or acceptable to develop and commercialize its potential pharmaceutical products or that such collaborative arrangements or license agreements will be successful. Patent and Proprietary Rights. The Company seeks to protect its trade secrets and proprietary know-how, in part, through confidentiality agreements with its employees, consultants, advisors and collaborators. There can be no assurance that these agreements will not be violated by the other parties, that OraVax will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Certain of the technology that may be used in the products of OraVax is not covered by any patent or patent application. There can be no assurance that any pending patent applications relating to the Company's product candidates will result in patents being issued. Moreover, there can be no assurance that any such patents will afford protection against competitors with similar technology. There may be pending or issued third-party patents relating to the product candidates of OraVax. OraVax may need to acquire licenses to, or to contest validity of, any such third party patents. It is likely that significant funds would be required to defend any claim that OraVax infringes a third-party patent, and any such claim could adversely affect sales of the challenged product of OraVax until the claim is resolved. There can be no assurance that any license required under any such patent would be made available. Government Regulation. The rigorous preclinical and clinical testing requirements and regulatory approval process of the FDA and of foreign regulatory authorities can take a number of years and require the expenditure of substantial resources. The Company has limited experience in conducting and managing preclinical and clinical testing necessary to obtain government approvals. There can be no assurance that the Company will be able to obtain the necessary approvals for clinical testing or for the manufacturing and marketing of any products that it develops. Additional government regulation may be established that could prevent or delay regulatory approval of the Company's product candidates. Delays in obtaining regulatory approvals would adversely affect the marketing of any products developed by the Company and the Company's ability to receive product revenues or royalties. If regulatory approval of a potential product is granted, such approval may include significant limitations on the indications for which such product may be marketed. Even if initial regulatory approvals for the Company's product candidates are obtained, the Company, its products and its manufacturing facilities are subject to continual review and periodic inspection. The regulatory standards for manufacturing are applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product, manufacturer or facility, including warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions, delays in obtaining new product approvals, withdrawal of the product from the market, and criminal prosecution. Other violations of FDA requirements can result in similar penalties. Uncertainty of Third-Party Reimbursement. Government and other third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third party payers for uses of the Company's products, the market acceptance of these products would be adversely affected. Year 2000 Issues. The approaching millennium ("Year 2000") could result in challenges related to the Company's computer software, accounting records and relationships with suppliers, collaborative partners and licensees. The Company's management is studying Year 2000 issues and is seeking to avoid such problems. Based on the Company's review of its business and operating systems, the Company does not expect to incur material costs with respect to assessing and remediating Year 2000 problems. However, there can be no assurance that such problems will not be encountered or that costs incurred to resolve such problems will not be material. Because of these and other factors, past financial performance should not be an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarter- 13 14 to-quarter variations in operating results, changes in the biotechnology and pharmaceutical industries and recommendations by analysts or other events. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULT UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Company held a Special Meeting of Stockholders on March 10, 1998. At this meeting the stockholders of the Company approved the issuance of shares of the Company's 6% Convertible Preferred Stock pursuant to the terms of several Preferred Stock agreements (by a vote of 4,710,733 shares of common stock in favor, 300,938 shares of common stock against, and 300,028 shares of common stock abstaining.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1998. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORAVAX, INC. /s/ LANCE K. GORDON ------------------------------------ LANCE K. GORDON PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 31, 1999 /s/ BRIGID A. MAKES ------------------------------------ BRIGID A. MAKES VICE PRESIDENT FINANCE & CFO Date: March 31, 1999 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 6,731 1,549 555 0 0 8,936 7,530 4,487 11,527 5,234 0 0 5,545 10 (517) 11,527 0 2,256 0 3,782 2,349 0 76 (3,951) 0 (3,951) 0 294 0 (4,245) (.41) (.41)
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