UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-15006
AVANT IMMUNOTHERAPEUTICS,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
No. 13-3191702
|
(State of
Incorporation)
|
(I.R.S. Employer Identification
No.)
|
119 Fourth Avenue, Needham, Massachusetts 02494-2725
(Address
of principal executive offices) (Zip Code)
(781) 433-0771
(Registrants
telephone number, including area code)
Indicate by check
mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
As of May 16, 2008,
14,926,994 shares of common stock, $.001 par value per share, were outstanding.
AVANT IMMUNOTHERAPEUTICS, INC.
FORM 10-Q
Quarter Ended March 31, 2008
Table of Contents
2
PART IFINANCIAL
INFORMATION
Item 1.
Unaudited
Financial Statements
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31,
2008
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and Cash
Equivalents
|
|
$
|
11,418,544
|
|
$
|
4,909,530
|
|
Accounts and
Other Receivables
|
|
176,072
|
|
132,496
|
|
Prepaid Expenses
and Other Current Assets
|
|
11,082,306
|
|
656,347
|
|
|
|
|
|
|
|
Total Current
Assets
|
|
22,676,922
|
|
5,698,373
|
|
|
|
|
|
|
|
Property and
Equipment, Net
|
|
14,592,563
|
|
1,918,036
|
|
Investment in
Select Vaccines Ltd
|
|
487,624
|
|
|
|
Intangible
Assets, Net
|
|
2,784,552
|
|
1,032,902
|
|
Other Assets
|
|
262,099
|
|
725,193
|
|
Total Assets
|
|
$
|
40,803,760
|
|
$
|
9,374,504
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,880,035
|
|
$
|
749,865
|
|
Accrued Expenses
|
|
5,341,231
|
|
2,519,420
|
|
Payable Due
Medarex
|
|
2,945,050
|
|
5,835,552
|
|
Current Portion
of Deferred Revenue
|
|
1,093,324
|
|
974,156
|
|
Current Portion
of Deferred Rent
|
|
57,447
|
|
57,447
|
|
Current Portion
of Loans Payable
|
|
161,850
|
|
|
|
Total Current
Liabilities
|
|
11,478,937
|
|
10,136,440
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
103,215
|
|
219,754
|
|
Deferred Rent
|
|
150,823
|
|
150,207
|
|
Loans Payable
|
|
907,825
|
|
|
|
|
|
|
|
|
|
Commitments and
Contingent Liabilities (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity (Deficit):
|
|
|
|
|
|
Convertible
Preferred Stock, 3,000,000 Shares Authorized; None Issued and Outstanding at
March 31, 2008
|
|
|
|
|
|
Convertible
Preferred Stock, $1.00 Par Value; 1,000,000 Shares Authorized; None Issued
and Outstanding at December 31, 2007
|
|
|
|
|
|
Common Stock,
$.001 Par Value; 300,000,000 Shares Authorized; 14,926,994 Issued and
Outstanding at March 31, 2008
|
|
14,927
|
|
|
|
Class A
Common Stock, $.01 Par Value; 6,800,000 Shares Authorized, Issued and
Outstanding at December 31, 2007 (2,811,147 shares issued and
outstanding after adjustments to reflect the Merger and a reverse stock split
of 1-for-12 effective March 7, 2008)
|
|
|
|
68,000
|
|
Common Stock,
$.01 Par Value; 50,000,000 Shares Authorized; 13,300,000 Issued and
Outstanding at December 31, 2007 (5,498,273 shares issued and
outstanding after adjustments to reflect the Merger and a reverse stock split
of 1-for-12 effective March 7, 2008)
|
|
|
|
133,000
|
|
Additional
Paid-In Capital
|
|
121,418,956
|
|
69,696,514
|
|
Accumulated
Other Comprehensive Income
|
|
2,508,206
|
|
2,619,036
|
|
Accumulated
Deficit
|
|
(95,779,129
|
)
|
(73,648,447
|
)
|
|
|
|
|
|
|
Total
Stockholders Equity (Deficit)
|
|
28,162,960
|
|
(1,131,897
|
)
|
|
|
|
|
|
|
Total
Liabilities and Stockholders Equity
|
|
$
|
40,803,760
|
|
$
|
9,374,504
|
|
See
accompanying notes to unaudited consolidated financial statements
3
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
2008
|
|
March 31,
2007
|
|
REVENUE:
|
|
|
|
|
|
Product
Development and Licensing Agreements
|
|
$
|
119,864
|
|
$
|
116,538
|
|
Government
Contracts and Grants
|
|
27,534
|
|
27,502
|
|
|
|
|
|
|
|
Total Revenue
|
|
147,398
|
|
144,040
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Research and
Development
|
|
4,486,774
|
|
2,789,365
|
|
General and
Administrative
|
|
3,032,758
|
|
1,528,577
|
|
Charge for
In-Process Research and Development
|
|
14,755,908
|
|
|
|
Amortization of
Acquired Intangible Assets
|
|
48,894
|
|
29,233
|
|
|
|
|
|
|
|
Total Operating
Expense
|
|
22,324,334
|
|
4,347,175
|
|
|
|
|
|
|
|
Operating Loss
|
|
(22,176,936
|
)
|
(4,203,135
|
)
|
|
|
|
|
|
|
Investment and
Other Income, Net
|
|
46,254
|
|
170,732
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(22,130,682
|
)
|
$
|
(4,032,403
|
)
|
|
|
|
|
|
|
Basic and
Diluted Net Loss Per Common Share (See Note (3)(R))
|
|
$
|
(2.19
|
)
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
Shares Used in
Calculating Basic and Diluted Net Loss per Share (See Note (3)(R))
|
|
10,127,435
|
|
8,309,420
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS:
|
|
|
|
|
|
Net Loss
|
|
$
|
(22,130,682
|
)
|
$
|
(4,032,403
|
)
|
Unrealized
Losses on Foreign Exchange Translation
|
|
(50,426
|
)
|
(111,851
|
)
|
Unrealized
Losses on Investment in Select Vaccines Ltd.
|
|
(60,404
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
$
|
(22,241,512
|
)
|
$
|
(4,144,254
|
)
|
See
accompanying notes to unaudited consolidated financial statements
4
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY (DEFICIT)
FOR THE QUARTER ENDED MARCH 31,
2008 AND THE YEAR ENDED DECEMBER 31, 2007
(Unaudited)
|
|
Common
Stock
Shares(1)
|
|
Common
Stock
Par
Value(1)
|
|
Class A
Common
Stock
Shares(1)
|
|
Class A
Common
Stock Par
Value(1)
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Accumulated
Deficit
|
|
Total
Stockholders
Equity
(Deficit)
|
|
Balance
at December 31, 2006
|
|
5,498,273
|
|
$
|
5,498
|
|
2,811,147
|
|
$
|
2,811
|
|
$
|
71,322,900
|
|
$
|
2,388,196
|
|
$
|
(58,575,397
|
)
|
$
|
15,144,008
|
|
Share-Based
Compensation
|
|
|
|
|
|
|
|
|
|
1,604,922
|
|
|
|
|
|
1,604,922
|
|
Medarex Return of
Capital
|
|
|
|
|
|
|
|
|
|
(3,038,617
|
)
|
|
|
|
|
(3,038,617
|
)
|
Comprehensive
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,073,050
|
)
|
(15,073,050
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
230,840
|
|
|
|
230,840
|
|
Total
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,842,210
|
)
|
Balance
at December 31, 2007
|
|
5,498,273
|
|
$
|
5,498
|
|
2,811,147
|
|
$
|
2,811
|
|
$
|
69,889,205
|
|
$
|
2,619,036
|
|
$
|
(73,648,447
|
)
|
$
|
(1,131,897
|
)
|
Exchange of
Class A for Common Stock
|
|
2,811,147
|
|
2,811
|
|
(2,811,147
|
)
|
(2,811
|
)
|
|
|
|
|
|
|
|
|
Shares Issued to
Medarex in Settlement of a Payable.
|
|
351,692
|
|
352
|
|
|
|
|
|
3,038,265
|
|
|
|
|
|
3,038,617
|
|
Shares Received
in Exchange in the Merger
|
|
6,265,889
|
|
6,266
|
|
|
|
|
|
46,869,106
|
|
|
|
|
|
46,875,372
|
|
Cash Paid for
Fractional Shares in Connection with the Merger
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation
|
|
|
|
|
|
|
|
|
|
1,622,380
|
|
|
|
|
|
1,622,380
|
|
Comprehensive
Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,130,682
|
)
|
(22,130,682
|
)
|
Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
(110,830
|
)
|
|
|
(110,830
|
)
|
Total
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,241,512
|
)
|
Balance
at March 31, 2008
|
|
14,926,994
|
|
$
|
14,927
|
|
|
|
$
|
|
|
$
|
121,418,956
|
|
$
|
2,508,206
|
|
$
|
(95,779,129
|
)
|
$
|
28,162,960
|
|
(1)
Adjusted to reflect the Merger exchange
ratio and a reverse stock split of 1-for-12 effective March 7, 2008.
See accompanying notes to unaudited consolidated
financial statements
5
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
2008
|
|
March 31,
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
Net Loss
|
|
$
|
(22,130,682
|
)
|
$
|
(4,032,402
|
)
|
Adjustments to
Reconcile Net Loss to Net Cash Used in Operating Activities:
|
|
|
|
|
|
Depreciation and
Amortization
|
|
353,126
|
|
179,893
|
|
Amortization of
Intangible Assets
|
|
48,894
|
|
29,233
|
|
Stock-Based
Compensation Expense
|
|
1,622,380
|
|
403,394
|
|
In-Process Research
and Development
|
|
14,755,908
|
|
|
|
Changes in
Operating Assets and Liabilities:
|
|
|
|
|
|
Accounts and
Other Receivables
|
|
(4,987
|
)
|
2,923,618
|
|
Prepaid and
Other Current Assets
|
|
(110,026
|
)
|
(587,864
|
)
|
Accounts Payable
and Accrued Expenses
|
|
1,285,405
|
|
(1,312,437
|
)
|
Deferred Revenue
|
|
(107,372
|
)
|
(116,539
|
)
|
Deferred Rent
|
|
616
|
|
43,578
|
|
|
|
|
|
|
|
Net Cash Used in
Operating Activities
|
|
(4,306,738
|
)
|
(2,469,525
|
)
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
Cash Acquired in
the Acquisition of AVANT, Net of Transaction Costs
|
|
10,750,255
|
|
|
|
Restricted Cash
Deposits
|
|
(435
|
)
|
(542
|
)
|
Acquisition of
Property and Equipment
|
|
(12,498
|
)
|
(57,975
|
)
|
|
|
|
|
|
|
Cash Provided by
(Used in) Investing Activities
|
|
10,737,322
|
|
(58,517
|
)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
Related Party
Loan Due to Medarex
|
|
148,115
|
|
71,489
|
|
Payments of Loans
Payable
|
|
(19,259
|
)
|
|
|
|
|
|
|
|
|
Net Cash
Provided by Financing Activities
|
|
128,856
|
|
71,489
|
|
|
|
|
|
|
|
Effect of
Exchange Rate Changes on Cash and Cash Equivalents
|
|
(50,426
|
)
|
(113,047
|
)
|
|
|
|
|
|
|
Net Increase
(Decrease) in Cash and Cash Equivalents
|
|
6,509,014
|
|
(2,569,600
|
)
|
|
|
|
|
|
|
Cash and Cash
Equivalents at Beginning of Period
|
|
4,909,530
|
|
14,000,186
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents at End of Period
|
|
$
|
11,418,544
|
|
$
|
11,430,586
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Flow Information
|
|
|
|
|
|
Shares Received
in Exchange in the Merger
|
|
$
|
46,251,952
|
|
$
|
|
|
Shares Issued to
Medarex in Settlement of a Payable
|
|
$
|
3,038,617
|
|
$
|
|
|
Unpaid
Capitalized Merger Costs
|
|
$
|
150,441
|
|
$
|
|
|
See
accompanying notes to unaudited consolidated financial statements
6
AVANT IMMUNOTHERAPEUTICS, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2008
(1)
Nature
of Business and Overview
AVANT Immunotherapeutics, Inc.
(the Company or AVANT) is engaged in the discovery, development and
commercialization of products that harness the human immune system to prevent
and treat disease. The Company is developing a portfolio of vaccines and
targeted immunotherapeutics addressing a wide range of applications including
oncology, infectious and inflammatory diseases. The portfolio includes a
pipeline of
therapeutic
cancer vaccines, monoclonal antibodies,
single-dose, oral vaccines aimed at protecting
travelers and people in regions where infectious diseases are endemic and a
treatment to reduce complement-mediated tissue damage. AVANT is advancing a
pipeline of clinical and preclinical product candidates, the most advanced of
which are for treatment of various cancers. AVANTs lead programs are
therapeutic cancer vaccines designed to instruct the patients immune system to
recognize and destroy cancer cells. AVANT
further leverages the value of its technology portfolio through corporate,
governmental and non-governmental partnerships. One successful collaboration
resulted in the development and marketing of an oral human rotavirus vaccine.
Current collaborations encompass the development of vaccines addressed to
global health, human food safety and animal health. AVANTs product candidates
address large market opportunities for which the Company believes current
therapies are inadequate or non-existent.
Merger
with Celldex:
On October 22, 2007, AVANT and Celldex
Therapeutics, Inc. (Celldex), a privately-held company, announced the
signing of a definitive Agreement and Plan of Merger, dated October 19,
2007, by and between AVANT, Callisto Merger Corporation (Merger Sub) and
Celldex (the Merger Agrrement). On March 7, 2008, AVANT completed the
merger of Merger Sub, a wholly owned subsidiary of AVANT, with and into Celldex
(the Merger).
At the special
meeting of AVANT shareholders held on March 6, 2008 in connection with the
Merger, stockholders approved four proposals: (i) the issuance of shares
of AVANT common stock pursuant to the Merger Agreement in the amount necessary
to result in the Celldex stockholders owning 58% of AVANT common stock on a
fully diluted basis, (ii) an amendment to AVANTs Third Restated
Certificate of Incorporation to increase the number of authorized shares to
300,000,000, (iii) an amendment to AVANTs Third Restated Certificate of
Incorporation to effect a reverse stock split in a ratio ranging from
one-for-twelve to one-for-twenty of all the issued and outstanding shares of
AVANT common stock, the final ratio to be determined by the AVANT board of
directors and (iv) adoption of the 2008 Stock Option and Incentive Plan.
Also, pursuant to
the terms of the Merger Agreement, Celldex shareholders received 4.96 shares of
AVANT common stock in exchange for each share of Celldex common stock and Class A
common stock they owned at the effective time of the Merger, plus cash in lieu
of fractional shares. AVANT stockholders retained 42% of, and the former
Celldex stockholders now own 58% of, the outstanding shares of AVANTs common
stock on a fully-diluted basis. AVANT also assumed all of Celldexs stock
options outstanding at the effective time of the Merger.
AVANTs board of
directors approved a 1-for-12 reverse stock split of AVANTs common stock,
which became effective on March 7, 2008. As a result of the reverse stock
split, each twelve shares of common stock were combined and reclassified into
one share of common stock and the total number of shares outstanding was
reduced from approximately 180 million shares (including the shares issued
to Celldex stockholders in the Merger) to approximately 15 million shares.
The Merger was accounted
for using the purchase method of accounting and was treated as an acquisition
by Celldex of AVANT with Celldex being considered the accounting acquirer based
on the application of criteria specified in Statement of Financial Accounting
Standards (SFAS) No. 141,
Business
Combination,
(SFAS 141), even though AVANT was the issuer of
common stock and the surviving legal entity in the transaction. Under the
purchase method of accounting, the deemed purchase price was allocated to AVANTs
underlying tangible and identifiable intangible assets acquired and liabilities
assumed based upon the respective fair value of each with any excess deemed
purchase price allocated to goodwill. However, the valuation analysis conducted
by AVANT and Celldex determined that the fair value of assets acquired and the
fair value of liabilities assumed by Celldex exceeded the estimated purchase
price for AVANT, resulting in negative goodwill of approximately $6.0 million.
In accordance with SFAS 141
,
the negative goodwill has been allocated to all of the acquired assets that are
non-financial and non-current assets, including property and equipment,
identifiable intangible assets, and in-process research and development. See
Note 16 to the Companys unaudited consolidated financial statements for
additional information.
7
Because Celldex was
determined to be the acquirer for accounting purposes, the historical financial
statements of Celldex became the historical financial statements of the Company
as of the closing of the Merger. Accordingly, the financial statements of the
Company prior to the Merger reflect the financial position, results of
operations and cash flows of Celldex, which during the historical periods
presented in the accompanying consolidated financial statements, was then
majority-owned by Medarex, Inc. (Medarex). Following the Merger, the
financial statements of the current period reflect the financial position,
results of operation and cash flows of the Company. The results of operations
of AVANT are included in the results of operations of the Company beginning March 8,
2008. Accordingly, except as otherwise discussed below, this report reflects
the financial condition, results of operations and liquidity of the combined
company at March 31, 2008 and historically of Celldex on a stand-alone
basis for all periods prior to March 8, 2008.
The Companys cash
and cash equivalents at March 31, 2008 were $11,418,544. Its working
capital at March 31, 2008 was $11,197,985. The Company incurred a loss of
$22,130,682 and net cash used in operations of $4,516,738 for the three months
ended March 31, 2008. The Company believes that cash inflows from existing
grants and collaborations, interest income on invested funds and its current
cash and cash equivalents will be sufficient to meet estimated working capital
requirements and fund operations beyond March 31, 2009 and upfront
payments expected from Pfizer upon closing of the Pfizer License and
Development Agreement (the Pfizer Agreement). The working capital
requirements of the Company are dependent on several factors including, but not
limited to, the costs associated with research and development programs,
pre-clinical and clinical studies, manufacture of clinical materials and the
scope of collaborative arrangements.
On April 16,
2008, the Company and Pfizer Inc. (Pfizer) entered into a License and
Development Agreement (the Pfizer Agreement) under which Pfizer will be
granted an exclusive worldwide license to a therapeutic cancer vaccine
candidate, CDX-110, in Phase 2 development for the treatment of glioblastoma
multiforme (GBM). The Pfizer Agreement
also gives Pfizer exclusive
rights to the use of EGFRvIII vaccines in other potential indications. Under
the Pfizer Agreement, Pfizer will make an upfront payment to the Company of $40
million and will make a $10 million equity investment in the Company. Pfizer
will fund all development costs for these programs. The Company is also
eligible to receive milestone payments exceeding $390 million for the
successful development and commercialization of CDX-110 and additional EGFRvIII
vaccine products, as well as royalties on any product sales. The Pfizer Agreement
is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (as amended) and is expected to close in the second quarter of 2008.
On April 3,
2008, Rotarix
®
received Food
and Drug Administration (FDA) market approval for the prevention of rotavirus
gastroenteritis in infants that triggered a $1.5 million milestone payment
to AVANT from GlaxoSmithKline plc (Glaxo), $750,000 of which the Company has
retained under the Companys agreement with Paul Royalty Fund (PRF). Rotarix
®
is now licensed in over 100 countries
worldwide including the U.S. and the European Union. The market launch of
Rotarix
®
by Glaxo in the
U.S. market would result in a $10 million milestone payment to AVANT from
PRF, which the Company expects to receive in the second half of 2008.
During the
remainder of 2008, AVANT may take steps to raise additional capital including,
but not limited to, the licensing of technology programs with existing or new
collaborative partners, possible business combinations, or the issuance of
common stock via private placements or public offerings. If the Company does
not raise additional funds, the Company may take one or more cost reducing
measures, including further delays in some of the preclinical and clinical
research and development programs and reduced investment in property and
equipment. While the Company continues to seek capital through a number of
means, there can be no assurance that additional financing will be available on
acceptable terms, if at all, and the Companys negotiating position in
capital-raising efforts may worsen as existing resources are used. There is
also no assurance that the Company will be able to enter into further
collaborative relationships. Additional equity financing may be dilutive to the
Companys stockholders; debt financing, if available, may involve significant
cash payment obligations and covenants that restrict the Companys ability to
operate as a business; and licensing or strategic collaborations may result in
royalties or other terms that reduce the Companys economic potential from
products under development.
8
(2)
Interim
Financial Statements
The
accompanying unaudited consolidated financial statements for the three months
ended March 31, 2008 and 2007 include the consolidated accounts of the Company
and its wholly-owned subsidiaries, and have been prepared in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, the information contained herein reflects all
adjustments that are necessary to present fairly the Companys financial
position at March 31, 2008, results of operations for the three months
ended March 31, 2008 and 2007. The Companyss financial conditions,
results of operations and liquidity for the three-month period ended March 31,
2008 are not necessarily indicative of results for any future interim period or
for the full year.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been omitted, although the Company believes that
the disclosures included, when read in conjunction with the Companys Annual
Report on Form 10-K for the year ended December 31, 2007 are adequate
to make the information presented not misleading. The accompanying December 31,
2007 Consolidated Balance Sheet was derived from audited financial statements
of Celldex, but does not include all disclosures required by U.S. GAAP.
(3)
Significant
Accounting Policies
(A) Basis of Presentation
The unaudited
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Celldex, Celldex Therapeutics, Ltd. (Celldex Ltd)
and Megan Health, Inc. (Megan). The Companys operations constitute one
business segment. All intercompany transactions have been eliminated upon
consolidation.
(B) Cash and Cash Equivalents
Cash and cash
equivalents consist of cash and short-term investments with original maturities
of three months or less. Cash and cash equivalents are stated at cost, which
approximates fair value. At March 31, 2008, investments were primarily in
money market mutual funds.
AVANT may invest
its cash in debt instruments of financial institutions, government entities and
corporations, and mutual funds. The Company has established guidelines relative
to credit ratings, diversification and maturities to mitigate risk and maintain
liquidity.
(C) Investment in Securities
AVANT has
classified its equity investment in Select Vaccines Limited (Select Vaccines)
shares as available for sale securities under SFAS 115,
Accounting for Certain Investments in Debt and Equity
Securities
, (FAS 115). In accordance with SFAS 115, all available-for-sale
securities are recorded at fair market value and, to the extent deemed
temporary, unrealized gains and losses are included in accumulated other
comprehensive income (loss) in shareholders equity. Realized gains and losses
and declines in value, if any, judged to be other than temporary on
available-for-sale securities are reported in other income (expense). At March 31,
2008, AVANT had an investment with a fair value of $487,624 in the stock of
Select Vaccines.
(D) Restricted Cash
Restricted cash of
$180,574 and $180,139 at March 31, 2008 and December 31, 2007,
respectively, represents security deposits for the Companys facilities in
Phillipsburg, New Jersey, of which the Company took occupancy in 2006.
(E) Fair Value of Financial Instruments
AVANT enters into
various types of financial instruments in the normal course of business. The
carrying amounts of AVANTs cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair values due to the
short-term nature of these financial instruments. Receivables are concentrated
in the pharmaceutical industry and from United Kingdom Inland Revenue.
Management considers the likelihood of market credit risk to be remote. The
estimated fair value of long-term liabilities is discussed in Note 13.
(F) Trade and Other Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company has not historically experienced credit losses from its
accounts receivable and therefore has not established an allowance for doubtful
accounts. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Accounts and other receivables consist of the
following:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Trade
|
|
$
|
38,975
|
|
$
|
|
|
Other
|
|
137,097
|
|
132,496
|
|
|
|
$
|
176,072
|
|
$
|
132,496
|
|
9
Other receivables at March 31,
2008 represent primarily an employee loan of $27,845 and research and
development tax credit receivable of $88,058 from United Kingdom Inland
Revenue. Other receivables at December 31, 2007 primarily represent an
employee loan of $33,580 and research and development tax credit receivable of
$88,155 from United Kingdom Inland Revenue.
(G) Long-Lived Assets:
In the ordinary
course of its business, AVANT incurs substantial costs to construct property
and equipment. The treatment of costs to construct these assets depends on the
nature of the costs and the stage of construction. Costs incurred in the
project planning and design phase, and in the construction and installation
phase, are capitalized as part of the cost of the asset. AVANT stops
capitalizing costs when the asset is substantially complete and ready for its
intended use.
For manufacturing
property and equipment, AVANT also capitalizes the cost of validating these
assets for the underlying manufacturing process. AVANT completes the
capitalization of validation costs when the asset is substantially complete and
ready for its intended use. Costs capitalized include incremental labor and
fringe benefits, and direct consultancy services.
Property and
equipment is stated at cost and depreciated over the estimated useful lives of
the related assets using the straight-line method. Laboratory equipment and
office furniture and equipment are depreciated over a five-year period and
computer equipment is depreciated over a three-year period. Manufacturing
equipment is amortized over a seven- to ten-year period. Leasehold improvements
are amortized over the shorter of the estimated useful life or the
noncancelable term of the related lease, including any renewals that are
reasonably assured of occurring. Property and equipment under construction is
classified as construction in progress and is depreciated or amortized only
after the asset is placed in service. Expenditures for maintenance and repairs
are charged to expense whereas the costs of significant improvements which
extend the life of the underlying asset are capitalized. Upon retirement or
sale, the cost of assets disposed of and the related accumulated depreciation
are eliminated and the related gains or losses are reflected in net income.
(H) Accounting for the
Impairment of Long-Lived Assets:
AVANT periodically
evaluates its long-lived assets, primarily property and equipment and
intangible assets for potential impairment under SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets,
(SFAS No. 144).
AVANT performs these evaluations whenever events or changes in circumstances
suggest that the carrying amount of an asset or group of assets is not
recoverable. Indicators of potential impairment include:
·
a significant change in the manner in which an asset is used;
·
a significant decrease in the market value of an asset;
·
a significant adverse change in its business or the industry in which
it is sold; and
·
a current period operating cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with the asset.
If AVANT believes
an indicator of potential impairment exists, the carrying values of the assets
are evaluated in relation to the operating performance and future undiscounted
cash flows of the underlying asset. The net book value of an asset is adjusted
to fair value if its expected future undiscounted cash flows are less than its
book value. The Company charges impairments
of the long-lived assets to operations if its evaluations indicate that the
carrying value of these assets is not recoverable. Management had identified no
indicators of impairment at March 31, 2008.
(I) Accounting for Patent
Costs:
Patent costs are
expensed as incurred. Certain patent costs are reimbursed by the Companys
product development and licensing partners. Any reimbursed patent costs are
recorded as product development and licensing agreement revenues in the
Companys financial statements.
10
(J) Interest Capitalization
AVANT capitalizes
interest cost as part of the historical cost of acquiring certain assets during
the period of time required to get the asset ready for its intended use. The
amount of capitalized interest is limited to the amount of interest incurred by
AVANT.
(K) Operating Leases
The Company
presently has three facilities that are located at Phillipsburg, New Jersey,
Needham and Fall River, Massachusetts under non-cancellable operating lease
agreements for office, laboratory and manufacturing space. The rent payments
for the three locations escalate over the lease term. Rent expense is recorded
on a straight-line basis over the terms of the leases, including any renewals
that are reasonably assured of occurring. The difference between rent expense
and amounts paid under the lease agreements is recorded as deferred rent in the
accompanying consolidated balance sheets. Tenant improvements paid by the
landlord are capitalized as leasehold improvements and amortized over the
shorter of their estimated useful lives or the remaining lease term.
(L) Intangible Assets
The Company has
acquired intangible assets, which include core technology, developed technology
and a strategic partner agreement, through the merger of AVANT and Celldex and
the acquisition of Lorantis, Ltd (Lorantis). These acquired intangible assets
are being amortized on a straight-line basis over their estimated lives, which
range from 4.5 to 11 years. The determination of the amortization period
involves estimates and judgments on managements part. Any significant changes
in the Companys estimates or assumptions could impact the carrying value of
acquired intangible assets. The Company evaluates the recoverability of these
assets when facts and circumstances suggest the asset could be impaired in
accordance with SFAS No. 144.
(M) Revenue Recognition
The Company accounts for
revenue arrangements that include multiple deliverables in accordance with Emerging
Issues Task Force (EITF) No. 00-21,
Accounting
for Revenue Arrangements with Multiple Arrangements
(EITF 00-21).
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying the
guidance, revenue arrangements with multiple deliverables can only be
considered as separate units of accounting if (i) the delivered item has
value to the customer on a standalone basis, (ii) there is objective and
reliable evidence of the fair value of the undelivered items and (iii) if
the right of return exists, delivery of the undelivered items is considered
probable and substantially in the control of the vendor. If these criteria are
not met, the revenue elements must be considered a single unit of accounting
for purposes of revenue recognition.
Payments received to fund
certain research activities are recognized as revenue in the period in which
the research activities are performed. Payments received in advance that are
related to future performance are deferred and recognized as revenue when the
research projects are performed. Upfront non-refundable fees associated with
license and development agreements where the Company has continuing involvement
in the agreement are recorded as deferred revenue and recognized over the
estimated service period. If the estimated service period is subsequently
modified, the period over which the upfront fee is recognized is modified
accordingly on a prospective basis.
AVANT has entered
into various license and development agreements with pharmaceutical and
biotechnology companies. The terms of the agreements typically include
non-refundable license fees, funding of research and development, payments
based upon achievement of certain milestones and royalties on net product
sales. Non-refundable license fees are recognized as contract and license fee
revenue when AVANT has a contractual right to receive such payments, provided
that (i) a contractual arrangement exists, (ii) the contract price is
fixed or determinable, (iii) the collection of the resulting receivable is
reasonably assured and (iv) AVANT has no further performance obligations
under the license agreement. When AVANT has performance obligations under the
terms of a contract, non-refundable fees are recognized as revenue as AVANT
completes its obligations. Where AVANTs level of effort is relatively constant
over the performance period, the revenue is recognized on a straight-line
basis. Revenue is limited to the lesser of the cumulative amount of payments
received or the cumulative amount of revenue earned, as determined using the
straight-line basis, as of the period ending date. The determination of the
performance period involves judgment on managements part. Funding of research
and development is recognized over the term of the applicable contract as costs
are incurred related to that contract.
11
Milestone payments are
recognized as revenue upon the achievement of mutually agreed milestones,
provided that (i) the milestone event is substantive and its achievement
is not reasonably assured at the inception of the agreement, and (ii) there
are no continuing performance obligations associated with the milestone
payment. Revenues from milestone payments related to arrangements under which the
Company has continuing performance obligations are recognized as revenue upon
achievement of the milestone only if all of the following conditions are met:
the milestone payments are non-refundable; achievement of the milestone was not
reasonably assured at the inception of the arrangement; substantive effort is
involved in achieving the milestone; and, the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone. If any of these conditions are not met, the
milestone payments are deferred and recognized as revenue over the term of the
arrangement as AVANT completes its performance obligations. At March 31, 2008,
the Company had not recorded any revenue for milestone payments.
Revenue from
government contracts and grants, including U.S. government grants under Small
Business Innovation Research (SBIR), is recognized as the services are
performed and recorded as effort is expended on the contracted work and billed
to the government. Product royalty revenue consists of payments received from
licensees for a portion of sales proceeds from products that utilize AVANTs
licensed technologies and are recognized when the amount of and basis for such
royalty payments are reported to us in accurate and appropriate form and in
accordance with the related license agreement. Payments received in advance of
activities being performed are recorded as deferred revenue. Any significant
changes in the Companys estimates or assumptions could impact its revenue
recognition.
(N) Research and Development
Costs
Research and
development costs, including internal and contract research costs, are expensed
as incurred. Research and development expenses consist mainly of clinical trial
costs, manufacturing of clinical material, toxicology and other studies,
salaries, depreciation, technology access fees, royalty fees and funding of
outside research. Costs to acquire technologies that are utilized in research
and development that have no alternative future use are expensed as incurred.
(O) Clinical Trial Accruals
Most of the Companys
clinical trials are performed by third-party contract research organizations (CROs)
and clinical supplies are manufactured by contract manufacturing organizations
(CMOs). Invoicing from these third parties may be monthly based upon services
performed or based upon milestones achieved. The Company accrues these expenses
based upon its assessment of the status of each study and the work completed,
and upon information obtained from the CROs and CMOs.
(P) Foreign
Currency Translation
The financial statements
of Celldex Ltd have been translated into U.S. dollars in accordance with SFAS No. 52,
Foreign Currency Translation
. All
asset and liability accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using the average exchange rate for the period. The gains and losses resulting
from the changes in exchange rate from this period have been reported in other
comprehensive (loss) income. As of March 31, 2008 and December 31,
2007, the accumulated unrealized foreign exchange translation (losses) gains
included in accumulated other comprehensive income were $2,508,206 and
$2,619,036,
respectively.
(Q) Income Taxes
The Company uses the asset and liability method to
account for income taxes, including the recognition of deferred tax assets and
deferred tax liabilities for the anticipated future tax consequences
attributable to differences between financial statement amounts and their
respective tax bases. The Company reviews its deferred tax assets for recovery.
A valuation allowance is established when the Company believes that it is more
likely than not that its deferred tax assets will not be realized. Changes in
valuation allowances from period to period are included in the Companys tax
provision in the period of change.
12
(R) Net Loss Per Share
AVANT computes and
reports earnings per share in accordance with the provisions of SFAS No. 128,
Earnings Per Share
. The computations of
basic and diluted loss per common share are based upon the weighted average
number of common shares outstanding and potentially dilutive securities.
Potentially dilutive securities include stock options and warrants. Options and
warrants to purchase 2,463,579 and 1,024,759 shares of common stock were not
included in the March 31, 2008, 2007 computation of diluted net loss per
share, respectively, because inclusion of such shares would have an
anti-dilutive effect on net loss per share. Share amounts shown on the
consolidated balance sheets and share amounts and basic and diluted net loss
per share amounts shown on the consolidated statements of operations and
comprehensive loss have been adjusted to reflect the Merger exchange ratio and
a reverse stock split of 1-for-12 effective March 7, 2008.
(S) Comprehensive Loss
Comprehensive loss
is comprised of two components: net loss and other comprehensive income. During
the quarter ended March 31, 2008, AVANT recorded other comprehensive loss
of $60,404 related to unrealized gains in its investment in Select Vaccines and
$50,426 related to unrealized foreign exchange translation losses. During the
quarter ended March 31, 2007, AVANT recorded other comprehensive loss of
$21,889 related to unrealized foreign exchange translation gains.
(T) Stock-Based Compensation
The Company
accounts for stock-based awards under SFAS No. 123 (revised 2004),
Share-Based Payment
, (SFAS No. 123(R)), which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options and employee stock purchases related to the Employee Stock
Purchase Plan (employee stock purchases) based on estimated grant date fair
values.
Compensation
expense for all share-based payment awards are recognized using the
straight-line method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations are based on awards ultimately expected to
vest, compensation expense has been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
The Company
estimates the fair value of share-based awards granted using the Black-Scholes
option-pricing model (Black-Scholes model). The Companys determination of
fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Companys stock price as well as
assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, the Companys expected stock
price volatility over the term of the awards, and actual and projected employee
stock option exercise behaviors.
SFAS No. 123(R) does
not change the accounting guidance for how the Company accounts for options
issued to nonemployees. The Company accounts for options issued to nonemployees
in accordance with SFAS No. 123(R) and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services
.
As such, the value of such options is periodically re-measured and income or
expense is recognized during the vesting terms.
See Note 5
for additional information.
13
(U) Use of Estimates
The preparation of
the financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect
reported amounts and disclosures. Actual results could differ from those
estimates.
(V) Segments
Management uses
consolidated financial information in determining how to allocate resources and
assess performance. For this reason, AVANT has determined that it is engaged in
one industry segment. Substantially all of AVANTs revenue since inception has
been generated in the United States and all of our assets are in the United
States.
(W) Recent
Accounting Pronouncements
SFAS 141(R) and
SFAS 160:
In
December 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141(R),
Business Combinations,
(SFAS No. 141(R)), and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51,
(SFAS No. 160),
which introduce significant changes in the accounting for and reporting of
business acquisitions and noncontrolling interests in a subsidiary. SFAS No. 141(R) is
to be applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption of both
statements is prohibited. The adoption of SFAS No. 141(R) and
SFAS No. 160 will only have an impact on the Companys financial
statements if it is involved in a business combination that occurs after January 1,
2009.
EITF
07-1:
In December 2007, the EITF reached a
consensus on Issue No. 07-1,
Accounting for
Collaborative Arrangements
(EITF 07-1). The EITF concluded on the definition of a
collaborative arrangement and that revenues and costs incurred with third
parties in connection with collaborative arrangements would be presented gross
or net based on the criteria in EITF 99-19,
Reporting
Revenue Gross as a Principal versus Net as an Agent
, and other
accounting literature. Based on the
nature of the arrangement, payments to or from collaborators would be evaluated
and its terms, the nature of the entitys business, and whether those payments
are within the scope of other accounting literature would be presented. Companies are also required to disclose the
nature and purpose of collaborative arrangements along with the accounting
policies and the classification and amounts of significant financial statement
amounts related to the arrangements.
Activities in the arrangement conducted in a separate legal entity
should be accounted for under other accounting literature; however, required
disclosure under EITF 07-1 applies to the entire collaborative agreement. EITF 07-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and is to be applied retrospectively
to all periods presented for all collaborative arrangements existing as of the
effective date. The Company is currently
evaluating the requirements of EITF 07-1; however, it does not believe that its
adoption will have a significant impact on its consolidated financial
statements.
FSP No. FAS
142-3:
In April 2008,
the FASB staff issued FASB Staff Position (FSP) No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(FSP No. FAS 142-3). FSP No. FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB No. 142.
The intent of this FSP is to improve the consistency between the useful life of
a recognized intangible under Statement 142 and the period of expected cash flows
used to measure fair value of the asset under FASB No. 141 and other accounting
principles generally accepted in the United States of America (U.S.GAAP). The
FSP is effective for financial statements issued for fiscal years beginning
after December 31, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. The adoption of FSP No. FAS 142-3 is not
expected to have a material impact on AVANTs financial position and results of
operations.
14
(4)
Fair Value Measurements
On January 1, 2008,
the Company adopted SFAS No. 157,
Fair
Value Measurements,
(SFAS No. 157), and SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115,
(SFAS No. 159), for its financial
assets and liabilities. The adoption of SFAS No. 157 did not have a
material impact on the Companys financial position or results of operations.
As permitted by FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157
,
the Company elected to defer the adoption of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, until January 1, 2009. SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. The Company did
not elect to adopt the fair value option for eligible financial instruments
under SFAS No. 159.
SFAS No. 157
provides a framework for measuring fair value under U.S. GAAP and requires
expanded disclosures regarding fair value measurements. SFAS No. 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Market participants are
buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable,
(iii) able to transact and (iv) willing to transact.
SFAS No. 157
requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach
uses prices and other relevant information generated by market transactions
involving identical or comparable assets and liabilities. The income approach
uses valuation techniques to convert future amounts, such as cash flows or
earnings, to a single present amount on a discounted basis. The cost approach
is based on the amount that currently would be required to replace the service
capacity of an asset (replacement cost). Valuation techniques should be
consistently applied. SFAS No. 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs, where
available, and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1
Quoted prices in active markets for identical assets
or liabilities. The Companys Level 1 assets consist of cash and cash
equivalents and its investment in Select Vaccines. As of March 31, 2008,
the Company held cash and cash equivalents of $11,418,544 and an investment in
Select Vaccines of $487,624.
Level 2
Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. The Company had no Level 2 assets or liabilities at March 31,
2008.
Level 3
Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities. The Company had no material Level 3 assets or liabilities at
March 31, 2008.
The Companys financial
instruments consist mainly of cash and cash equivalents, short-term accounts
receivable, common stock in a publicly-traded company, accounts payable and
debt obligations. Short-term accounts receivable and accounts payable are
reflected in the accompanying consolidated financial statements at cost, which
approximates fair value due to the short-term nature of these instruments.
15
(5)
Stock-Based
Compensation
As of March 31,
2008, the Company had two shareholder approved, share-based compensation plans:
the 2004 Employee Stock Purchase Plan (the 2004 ESPP Plan) and the 2008 Stock
Option and Incentive Plan (the 2008 Plan).
Employee
Stock Benefit Plans
Employee Stock Purchase Plan
The 2004 ESPP Plan was
adopted on May 13, 2004 and assumed by the Company in connection with the
Merger. All full time employees of AVANT are eligible to participate in the
2004 ESPP Plan. A total of 12,500 shares of common stock are reserved for
issuance under the 2004 ESPP Plan. Under the 2004 ESPP Plan, each participating
employee may contribute up to 15% of his or her compensation to purchase up to
500 shares of common stock per year in any six-month offering period and may
withdraw from the offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of common stock in an offering is 85% of the lower of its fair market
value at either the beginning of the offering period or the applicable exercise
date. At March 31, 2008, 9,885 shares were available for issuance under
the 2004 ESPP Plan.
The last purchase period
ended on December 31, 2007. As a consequence of the Merger, no current
purchase period was offered beginning on January 1, 2008.
Employee Stock Option Plan
Stock
Option Plan Description
On March 6,
2008, AVANTs 2008 Plan was adopted at a special meeting of AVANT shareholders.
The 2008 Plan replaced the 1999 Stock Option and Incentive Plan (the 1999 Plan)
and the Amended and Restated 1991 Stock Compensation Plan, which was an
amendment and restatement of AVANTs 1985 Incentive Option Plan. The 2008 Plan
permits the granting of incentive stock options (intended to qualify as such
under Section 422A of the Internal Revenue Code of 1986, as amended),
non-qualified stock options, stock appreciation rights, performance share
units, restricted stock and other awards of restricted stock in lieu of cash
bonuses to employees, consultants and outside directors.
The 2008 Plan
allows for a maximum of 1,500,000 shares of common stock to be issued prior to October 19,
2017. The board of directors determines the term of each option, option price,
and number of shares for which each option is granted and the rate at which
each option vests. The board of directors has granted employee stock option
awards with four-year vesting periods. The term of each option cannot exceed
ten years (five years for options granted to holders of more than 10% of the
voting stock of AVANT) and the exercise price of stock options cannot be less
than the fair market value of the common stock at the date of grant (110% of
fair market value for incentive stock options granted to holders of more than
10% of the voting stock of AVANT). The 2008 Plan also provides for discretionary
grants of non-qualified stock options to non-employee directors. Vesting of all
employee and non-employee director stock option awards is accelerated upon a
change in control as defined in the 2008 Plan.
In connection with
the Merger, AVANT assumed the obligations of Celldex under Celldexs Stock
Option Plan (the Celldex Plan) and each outstanding option to purchase
Celldex common stock (a Celldex Stock Option) granted under the Celldex Plan.
Each Celldex Stock Option assumed by AVANT is deemed to constitute an option to
acquire, on the same terms and conditions as were applicable under the Celldex
Plan, shares of AVANTs common stock that have been adjusted consistent with
the ratio at which AVANTs common stock was issued in exchange for Celldexs common
stock in the Merger. As of March 7, 2008, AVANT assumed options to acquire
1,446,913 shares of its common stock at a weighted average exercise price of $8.35.
The Celldex Stock Options generally vest over a two-to four-year period and the term of each option cannot exceed ten
years from the date of grant. No additional awards will be issued under the
Celldex Plan.
16
General
Option Information
A
summary of stock option activity under the 2008 Plan for the three months ended
March 31, 2008, adjusted to reflect the Merger exchange ratio and a
reverse stock split of 1-for-12 effective March 7, 2008, is as follows:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term (In Years)
|
|
Outstanding at
January 1
|
|
787,440
|
|
$
|
12.70
|
|
5.81
|
|
Granted
|
|
2,463,579
|
|
8.18
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Canceled/forfeited
|
|
(787,440
|
)
|
12.70
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31
|
|
2,463,579
|
|
$
|
8.18
|
|
8.94
|
|
|
|
|
|
|
|
|
|
Ending Vested
and Expected to Vest at March 31, 2008
|
|
739,406
|
|
$
|
8.23
|
|
9.93
|
|
|
|
|
|
|
|
|
|
At March 31
|
|
|
|
|
|
|
|
Options
exercisable
|
|
739,406
|
|
$
|
8.23
|
|
|
|
The
weighted average fair value of options granted during the three-month period
ended March 31, 2008 was $4.23.
Non-Employee Grants
The
Company has historically granted stock options to consultants for services.
These options were issued at or above their fair market value on the date of
grant and generally have four-year vesting terms from date of grant. Should the
Company or the consultant terminate the consulting agreements, any unvested
options will be cancelled. Options issued to non-employees are
marked-to-market, which means that as the Companys stock price fluctuates, the
related expense either increases or decreases. The Company recognized expense
of $16,440 and $16,253 related to non-employee stock options for the quarter
ended March 31, 2008 and 2007, respectively. As of March 31, 2008,
the Company had total unrecognized compensation costs of $216,864 related to
unvested non-employee options.
Valuation
and Expense Information under SFAS No. 123(R)
The following table
summarizes stock-based compensation expense related to employee and
non-employee director stock options and employee stock purchases under SFAS No. 123(R) for
the three months ended March 31, 2008 and 2007, respectively, which was
allocated as follows:
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Research and
development
|
|
$
|
594,376
|
|
$
|
199,086
|
|
General and
administrative
|
|
1,028,004
|
|
195,834
|
|
Total
stock-based compensation expense
|
|
$
|
1,622,380
|
|
$
|
394,920
|
|
During the quarter ended
March 31, 2008, the Company entered into an Option Cancellation Agreement
concurrent with Stock Option Grant Agreement with Celldex employees. The Option
Cancellation Agreement provided for the cancellation of all previously granted
options under the Plan while the Stock Option Grant Agreement provided for the
re-grant of stock options pursuant to the Option Cancellation Agreement. In addition, at the consumption of the merger
with AVANT, all options to purchase Celldex common stock then outstanding under
the Celldex 2005 Equity Incentive Plan was assumed by AVANT and converted into
options to purchase shares of AVANT common stock. The number of shares subject
to the outstanding awards and related exercise price was proportionately
adjusted by the same exchange ratio as Celldex shareholders received in
accordance with the provisions of the Celldex 2005 Equity Incentive Plan. The Company considered both the re-grant of
stock options and exchange of Celldex options into options to acquire shares of
AVANT common stock as a modification
under the provisions of SFAS 123R. The modification affected a total of 15
employees, including members of the Celldex board of directors. The total
incremental compensation cost resulting from the modifications amounted to
approximately $2.6 million, of which $0.9 million was related to vested awards
and was recognized immediately as stock based compensation in the quarter ended
March 31, 2008.
Based on basic and
diluted weighted average common shares outstanding of 10,127,435, the effect of
stock-based compensation expense recorded under SFAS No. 123R for the
three-month period had a $0.16 per share impact on net loss per share.
As of March 31,
2008, total compensation cost related to non-vested stock options not yet
recognized was $5,681,503, net of estimated forfeitures, which is expected to
be recognized as expense over a weighted average period of 2.71 yrs. The
total fair value of stock options vested, including the incremental fair value
for options vested that were modified during the quarter, during the quarter
ended March 31, 2008 was $1,366,155
17
The
fair values of employee and non-employee director stock options granted during
the three months ended March 31, 2008 and 2007 were valued using the
Black-Scholes model with the following assumptions:
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Expected stock
price volatility (employees)
|
|
55-67
|
%
|
67
|
%
|
Expected stock
price volatility (non-employee directors)
|
|
57-67
|
%
|
67
|
%
|
Expected option
term (employees)
|
|
3-6 Years
|
|
5.2 Years
|
|
Expected option
term (non-employee directors)
|
|
4-6 Years
|
|
5.2 Years
|
|
Risk-free
interest rate
|
|
1.5-3.5
|
%
|
4.5
|
%
|
Expected
dividend yield
|
|
None
|
|
None
|
|
The Company used its
daily historical stock price volatility consistent with the expected term of
grant as the basis for its expected volatility assumption in accordance with
SFAS No. 123(R) and SAB 107 for its employee and non-employee
director stock options and employee stock purchases. The Company has concluded
that its historical volatility is representative of expected future stock price
trends.
The risk-free interest
rate assumption is based upon observed interest rates appropriate for the
expected term of the Companys employee and non-employee director stock options
and employee stock purchases. The dividend yield assumption is based on the
Companys history of zero dividend payouts and expectation that no dividends
will be paid in the foreseeable future.
The expected term of
employee and non-employee director stock options represents the
weighted-average period the stock options are expected to remain outstanding.
SAB 107 provides for a simplified method for estimating expected term for plain-vanilla
options. The simplified method is based on the vesting period and the
contractual term for each grant or for each vesting tranche for awards with
graded vesting. The mid-point between the vesting date and the expiration date
is used as the expected term under this method. In December 2007, the
Securities and Exchange Commission released SAB 110, which extended the use of
the simplified method if a company met certain criteria. AVANT has concluded
that the Merger represents a significant structural change in its business and
in the terms of its share option grants such that AVANTs historical exercise
data may no longer provide a reasonable basis upon which to estimate expected
term. The Company has elected to follow the guidance of SAB 107 and SAB 110 and
has adopt the simplified method in determining expected term for all of its
stock option awards. There were 121,703
stock options granted to non-employee directors during the three months ended March 31,
2008.
Forfeitures were
estimated based on historical experience by applying an eleven and zero percent
forfeiture rate to employee and non-employee director stock option awards
granted during the three months ended March 31, 2008, respectively.
The Company has not
recognized any tax benefits or deductions related to the tax effects of
employee stock-based compensation as the Company carries a full deferred tax
asset valuation allowance and has significant net operating loss carryforwards
available.
(6)
Retirement
Savings Plan
The
Companys 401(k) Plan (the 401(k) Plan) is intended to be a
tax-qualified plan covering substantially all employees. Under the terms of the
401(k) Plan, employees may elect to contribute up to 15% of their
compensation, or the statutory prescribed limits. The Company may make matching
contributions of up to 4% of a participants annual salary. Benefit expense for
the 401(k) Plan was approximately $27,715 and $9,942 for the quarters
ended March 31, 2008 and 2007, respectively.
18
(7)
Property
and Equipment
Property and equipment includes the following:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Laboratory
Equipment
|
|
$
|
5,303,692
|
|
$
|
1,551,896
|
|
Manufacturing
Equipment
|
|
987,225
|
|
|
|
Office Furniture
and Equipment
|
|
1,535,569
|
|
405,581
|
|
Leasehold
Improvements
|
|
13,897,387
|
|
2,046,663
|
|
Assets Held for
Sale
|
|
451,100
|
|
|
|
Construction in
Progress
|
|
114,377
|
|
|
|
Total Property
and Equipment
|
|
22,289,350
|
|
4,004,140
|
|
Less Accumulated
Depreciation and Amortization
|
|
(7,696,787
|
)
|
(2,086,104
|
)
|
|
|
$
|
14,592,563
|
|
$
|
1,918,036
|
|
A portion of the purchase
price in the Merger totaling $15,170,702 has been allocated and recorded to
acquired property and equipment above and was then reduced by approximately $2,606,649
of negative goodwill.
As a result of the
Merger, AVANT is converting its Fall River manufacturing facility to provide
mammalian cell culture production capabilities and has classified certain
manufacturing-related equipment having a fair value of $451,100 as long-lived
assets to be disposed of by sale. The fair value was established based on
quoted market prices by an equipment re-seller less estimated costs to remove
and sell the equipment.
Depreciation expense related to equipment and
leasehold improvements was $353,126 and $179,893 for the three months ended March 31,
2008 and 2007, respectively.
(8)
Intangible
and Other Assets
Intangible
and other assets include the following:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
Estimated
Lives
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
Intangible
Assets
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
Intangible
Assets
|
|
Intangible
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Technology
|
|
4.5 - 11 years
|
|
$
|
2,193,249
|
|
$
|
(304,500
|
)
|
$
|
1,888,749
|
|
$
|
1,296,000
|
|
$
|
(263,097
|
)
|
$
|
1,032,903
|
|
Developed
Technology
|
|
8 years
|
|
273,796
|
|
(2,271
|
)
|
271,525
|
|
¾
|
|
¾
|
|
¾
|
|
Strategic
Partner Agreement
|
|
8 years
|
|
629,499
|
|
(5,221
|
)
|
624,278
|
|
¾
|
|
¾
|
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible
Assets
|
|
|
|
$
|
3,096,544
|
|
$
|
(311,992
|
)
|
$
|
2,784,552
|
|
$
|
1,296,000
|
|
$
|
(263,097
|
)
|
$
|
1,032,903
|
|
On March 7, 2008,
AVANT completed the Merger with Celldex being considered the accounting
acquirer. Under the purchase method of accounting, AVANT determined the
identifiable intangible assets acquired based upon the respective fair values
of certain technology and intellectual property acquired and license agreement
assumed. AVANT has determined that this technology has alternative future uses
and will be incorporated into a number of AVANTs bacterial vaccine programs. A
portion of the purchase price in the transaction totaling $2,174,100 has been
allocated and recorded to acquired intangible assets above and then was reduced
by approximately $373,557 of negative goodwill.
All of AVANTs intangible
assets are amortized over their estimated useful lives. Total amortization
expense for intangible assets was $48,894 and $29,233 for the three-month
periods ended March 31, 2008 and 2007, respectively.
19
The
estimated future amortization expense of intangible assets as of March 31,
2008 for the remainder of fiscal year 2008 and the five succeeding years is as
follows:
Year ending December 31,
|
|
Estimated
Amortization
Expense
|
|
2008 (remaining
nine months)
|
|
$
|
312,112
|
|
2009
|
|
415,896
|
|
2010
|
|
415,896
|
|
2011
|
|
415,896
|
|
2012
|
|
340,313
|
|
2013 and
thereafter
|
|
884,442
|
|
|
|
|
|
|
(9)
Income
Taxes
On January 1, 2007,
the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken on a tax return, including a
decision whether to file or not to file in a particular jurisdiction. As a result of the implementation of FIN 48,
AVANT recognized no material adjustment in the liability for unrecognized
income tax benefits. At adoption date
and at March 31, 2008, AVANT had no material unrecognized income tax
benefits.
As of December 31,
2007, the Company had federal and state net operating loss (NOL)
carryforwards and federal and state research and development (R&D) credit
carryforwards, which may be available to offset future federal and state income
tax liabilities which expire at various dates starting in 2008 and going
through 2027. Utilization of the NOL and
R&D credit carryforwards may be subject to substantial annual limitation
due to ownership change limitations that have occurred previously or that could
occur in the future provided by Section 382 of the Internal Revenue Code
of 1986, as well as similar state provisions.
These ownership changes may limit the NOL and R&D credit
carryforwards that can be utilized annually to offset future taxable income and
tax, respectively. In general, an
ownership change, as defined by Section 382, results from transactions
increasing the ownership of certain shareholders or public groups in the stock
of a corporation by more than 50 percentage points over a three-year
period. Since the Companys formation,
the Company has raised capital through the issuance of capital stock on several
occasions which, combined with the purchasing shareholders subsequent disposition
of those shares, may have resulted in a change of control, as defined by Section 382,
or could result in a change of control in the future upon subsequent
disposition. AVANT believes its merger
with Celldex may have generated an ownership change that could further affect
the limitation in future years.
During the first
quarter of 2008 the Company underwent a merger in which AVANT and Celldex
became a combined group for tax reporting purposes. The merger was treated as a purchase under
SFAS 141 with Celldex being the accounting acquirer. For U.S. federal income tax purposes, AVANT
is the acquirer and Celldex is the wholly owned subsidiary of AVANT. Together they form a combined group and
report income taxes as such with AVANT as the Parent Company and Celldex as the
Subsidiary. As a result of this merger,
all of the prior tax attributes of both AVANT and Celldex will carry forward
for potential future use. These tax
attributes are included in the Companys income tax provision.
20
Massachusetts, New
Jersey and Missouri are the three states in which the Company operates or has
operated and has income tax nexus. Open federal and state return years subject
to examination by major tax jurisdictions include the tax years ended December 31,
2004, 2005, 2006 and 2007 (which has not yet been filed). Carryforward
attributes that were generated prior to 2004 may still be adjusted upon
examination by the IRS if they either have been or will be used in a future
period. The Company is currently not under examination by the Internal Revenue
Service or any other jurisdictions for any tax years.
The Companys
policy is to recognize interest and penalties related to uncertain tax
positions in income tax expense. There have been no interest or penalties recognized
in the consolidated statement of operations and on the consolidated balance
sheet as a result of FIN 48 calculations. The Company has not recorded any
interest and penalties on any unrecognized tax benefits since its inception.
As required by Statement
of Financial Accounting Standards No. 109, management has evaluated the
positive and negative evidence bearing upon the realizability of its net
deferred tax assets, which are comprised principally of NOL, capitalized
R&D expenditures and R&D tax credit carryforwards. Management has
determined that it is more likely than not that AVANT will not recognize the
benefits of federal and state deferred tax assets and, as a result, a full
valuation allowance was maintained at March 31, 2008 and December 31,
2007.
(10)
Product
Development and Licensing Agreements
AVANTs revenue from
product development and licensing agreements was received pursuant to contracts
and arrangements with different organizations. A summary of these contracts
follows:
(A)
GlaxoSmithKline
plc (Glaxo) and Paul Royalty Fund II, L.P. (PRF)
In 1997, AVANT entered
into an agreement with Glaxo to collaborate on the development and
commercialization of the Companys oral rotavirus vaccine and Glaxo assumed
responsibility for all subsequent clinical trials and all other development
activities. AVANT licensed-in the Rotarix
®
technology in 1995 and owes a license fee of
30% to Cincinnati Childrens Hospital Medical Center (CCH) on net royalties
received from Glaxo. AVANT is obligated to maintain a license with CCH with
respect to the Glaxo agreement. All licensing fees are included in research and
development expense. The term of the Glaxo agreement is through the expiration
of the last of the relevant patents covered by the agreement, although Glaxo
may terminate the agreement upon 90 days prior written notice.
In May 2005, AVANT
entered into an agreement whereby an affiliate of PRF purchased an interest in
the
net
royalties
AVANT will receive on worldwide sales of Rotarix
®
.
Under the PRF agreement, AVANT will retain 50% of future Glaxo milestone
payments beginning on the effective date of the agreement with PRF, with 70% of
the remaining balance payable to PRF and 30% of the remaining balance payable
to CCH, respectively. AVANTs retained interests in Rotarix
®
net royalties
which were not sold to PRF are recorded as product royalty revenue and a
corresponding amount that is payable to CCH is recorded as royalty expense,
which is included in research and development expense.
On April 3, 2008,
Rotarix
®
received FDA market approval for the
prevention of rotavirus gastroenteritis in infants, which triggered a
$1.5 million milestone payment to AVANT from Glaxo, $750,000 of which
AVANT has retained under AVANTs agreement with PRF. The market launch of
Rotarix
®
by
Glaxo in the U.S. market would result in a $10 million milestone payment
to AVANT from PRF, which AVANT expects to receive in the second half of 2008. In
connection with the Merger, AVANT recorded $9.8 million as an other current asset,
which represents the present value of this milestone payment adjusted for
probability of success.
Royalty rates on Rotarix
®
escalate from 7% to 10% based on net product
sales in countries that have valid patent protection. These royalty rates are
discounted by 30% for non-patent countries (primarily international markets).
In September 2006, AVANT received notice from Glaxo that Glaxo would begin
paying royalties on sales of Rotarix
®
vaccine at the lower of the two royalty rates
under their 1997 license agreement. Glaxos decision to pay the lower royalty
rate (which is 70% of the full rate) is based upon Glaxos assertion that
Rotarix
®
is not covered by the patents Glaxo licensed
from AVANT in Australia and certain European countries.
If Glaxos position
stands, the royalties to which PRF is entitled will no longer be limited by a
$27.5 million annual threshold, which AVANT projected may have been reached in
later years as sales of Rotarix
®
increased. Irrespective of Glaxos position,
AVANT will still retain the royalties on worldwide sales of Rotarix
®
once PRF receives 2.45 times the aggregate
cash payments it makes to AVANT, though the potential amount of such residual
royalties will be lower if Glaxos position stands.
21
(B)
Glaxo
and Corixa Corporation (Corixa)
On December 21,
2005, Corixa, a wholly-owned subsidiary of Glaxo, and Celldex Ltd (formerly
Lorantis), entered into a termination agreement of their collaboration of
CDX-2101 or HepVax for the development of a therapeutic vaccine for Hepatitis B
(the Termination Agreement). Under the terms of the Termination Agreement,
Glaxo paid the Company the sum of approximately $1,632,000. In addition, and
subject to the terms and conditions of the Termination Agreement, Glaxo granted
to Celldex a worldwide, fully paid up, royalty-free, perpetual, nonexclusive
license under the Corixa Patent Rights, Corixa Know-How Rights and Corixa
Licensed Technology (each as defined in the Termination Agreement): (a) to
use RC-529SE in products being developed and/or commercialized by Celldex Ltd
or its Permitted Sublicensees in the Lorantis Field; and (b) to make or
have made RC-529SE using RC-529 adjuvant for the limited use permitted by the
license granted to reformulate Corixas proprietary adjuvant.
The Company has concluded
that because the original collaboration between Corixa and Lorantis contained
multiple deliverables EITF 00-21 applies. For the three-month periods ended March 31,
2008 and 2007, the Company recognized $116,538 of revenue under the Termination
Agreement.
(C)
Pfizer
Inc (Pfizer)
The Company entered into
a licensing agreement in December 2000 with Pfizers Animal Health
Division whereby Pfizer has licensed Megans technology for the development of
animal health and food safety vaccines. Under the agreement, AVANT may receive
additional milestone payments of up to $3 million based upon attainment of
specified milestones. AVANT may receive royalty payments on eventual product
sales. The term of this agreement is through the expiration of the last of the
patents covered by the agreement. AVANT has no obligation to incur any research
and development costs in connection with this agreement.
As of June 1, 2006,
AVANT entered into a Collaborative Research and Development Agreement with
Pfizer aimed at the discovery and development of vaccines to protect animals.
In 2007, further funded work at AVANT on the joint research program was
terminated by Pfizer after AVANT provided two of four deliverables to Pfizer.
(D)
Rockefeller
University(Rockefeller) and Gates Grand Challenge Award
AVANT is
developing a vaccine, CDX-2401, aimed at providing protection from infection
with HIV, the virus known to cause AIDS. This program is in a Bill &
Melinda Gates Foundation funded partnership with collaborators at Rockefeller
and the Aaron Diamond AIDS Research Center, who have shown in model systems
that protective immunity can be induced with such a vaccine. Preclinical
studies and manufacturing development are in progress and payments to AVANT are
made on a time and materials basis. For the three-month periods ended March 31,
2008 and 2007, AVANT did not recognize any grant revenue from Rockefeller.
22
(11)
Collaboration Agreements
(A)
Rockefeller University
On November 1, 2005,
the Company and Rockefeller University (Rockefeller) entered into a license
agreement for the exclusive worldwide rights to human DEC-205 receptor, with
the right to sublicense the technology. The license grant is exclusive except
that Rockefeller may use and permit other nonprofit organizations to use the
human DEC-205 receptor patent rights for educational and research purposes. In
addition, the Company acknowledges that Rockefeller has granted Howard Hughes
Medical Institute (HHMI) a paid-up, nonexclusive, irrevocable license to use
the patent rights, biological materials, and technical information for HHMIs
research purposes, but with no right to sublicense. The Company may also be
required to pay royalties on any product sales. The royalties will be payable
on a country-by-country and licensed product-by-licensed product basis until
the date which is the later of (i) the expiration of the last to expire of
the patents covering the licensed product in such country or (ii) ten
years following the first commercial sale of a licensed product in such
country.
The Company may be
required to pay license fees and milestone payments to Rockefeller with respect
to development of the human DEC-205 receptor. These fees and milestones may
total up to $2 million to $4 million per product candidate that
receives approval from the FDA and equivalent foreign agencies.
(B)
Duke University Brain Tumor Cancer Center
On September 1,
2006, the Company and Duke University Brain Tumor Cancer Center of Duke
University (Duke) entered into a license agreement that gave the Company
access and reference to the clinical data generated by Duke and its
collaborators in order for the Company to generate its own filing with the FDA
relating to its CDX-110 product.
In exchange for
referencing all the Duke data, the Company paid Duke a one-time upfront payment
of $175,000 and issued to Duke 100,000 shares of the Companys common stock,
which the Company recorded in 2006 as a licensing expense in research and
development. The estimated aggregate fair value of the common shares issued was
$330,000.
The Company may be
required to pay license fees and milestone payments to Duke with respect to
development of the CDX-110 product. These fees and milestones may total up to
$1.2 million if CDX-110 receives approval from the FDA and equivalent
foreign agencies. The Company may also be required to pay royalties upon
approval of CDX-110. The royalties will be payable on a country-by-country and
licensed product-by-licensed product basis until the date of the expiration of
the last to expire of the patents covering the licensed product in such
country.
(C)
Ludwig Institute for Cancer Research
On October 20, 2006,
the Company and Ludwig Institute for Cancer Research (Ludwig) entered into an
agreement for the nonexclusive rights to six cancer tumor targets for use in
combination with the Companys APC Targeting Technology. The term of the
agreement is for ten years. As consideration
for the nonexclusive license, the Company agreed to pay an annual license fee
of $7,500 and $2,500 for each full-length antigen and partial-length antigen,
respectively, until such antigens enter a randomized Phase 1 clinical trial.
(D)
Select Vaccines Limited (Select Vaccines)
In February 2007,
AVANT entered into a research and
development partnership with Select Vaccines, a public Australian biotechnology
company, focused on the use of Select Vaccines virus-like particles (VLPs)
as a platform technology for the development of viral vaccines. Under
the terms of the agreement, AVANT made an upfront equity investment of $735,000
in Select Vaccines and would fund influenza vaccine research and development
for two years, as well as provide payments to Select Vaccines for the
achievement of specific preclinical and clinical development milestones. On November 1,
2007, AVANT notified Select Vaccines that, effective December 31, 2007,
AVANT was exercising its rights to terminate its Collaboration and License
Agreement with Select Vaccines for strategic reasons.
AVANT has
classified its equity investment in Select Vaccines shares as available for
sale securities under SFAS 115,
Accounting
for Certain Investments in Debt and Equity Securities
, (SFAS 115).
In accordance with SFAS 115, all available-for-sale securities are
recorded at fair market value and, to the extent deemed temporary, unrealized
gains and losses are included in accumulated other comprehensive income (loss)
in shareholders equity. Realized gains and losses and declines in value, if
any, judged to be other than temporary on available-for-sale securities are
reported in other income (expense).
During the quarter ended March 31, 2008, AVANT
recorded other comprehensive loss of $60,404 related to unrealized losses in
its investment in Select Vaccines.
23
In consideration for the
nonexclusive license, the Company may be required to pay license fees and
milestone payments to Ludwig for the use of the cancer targets in combination
with the Companys technology. The fees and milestones may total up to $1.5
million to $2.5 million on a product candidate that receives approval from the
FDA and equivalent foreign agencies. The Company may also be required to pay
royalties upon approval of any product candidate. The royalties will be payable
on a country-by-country and licensed product-by-licensed product basis until
the date of the expiration of the last to expire of the patents covering the licensed
product in such country.
(12)
Related
Party Transactions
The Company and Medarex
have entered into the following agreements, each of which was approved by a
majority of its independent directors who did not have an interest in the
transaction. The Company believes that each of its agreements with Medarex is
on terms as favorable to the Company as it could have obtained on an arms-length
basis from unaffiliated third parties. These agreements include:
·
An Assignment and License Agreement that provides for the assignment of
certain patent and other intellectual property rights and a license to certain
Medarex technology;
·
A Research and Commercialization Agreement which provides us with
certain rights to obtain exclusive commercial licenses to proprietary
monoclonal antibodies raised against certain antigens;
·
An Affiliation Agreement, which, among other things, details Medarexs
obligation to elect independent directors to the Companys board of directors
and contains certain restrictions, effective for a period of 36 months from April 6,
2004, on Medarexs ability to acquire additional shares of the Companys common
stock and to sell shares of the Companys common stock;
·
A Master Services Agreement, which sets forth Medarexs agreement to provide
us with certain services to be mutually agreed upon, which may include, among
others, clinical and regulatory assistance.
The Company may be
required to pay license fees and milestone payments to Medarex with respect to
any antibodies developed using its HuMab-Mouse technology. These fees and
milestones may total up to $7 million to $10 million per antibody
that receives approval from the FDA and equivalent foreign agencies.
The Company may also be
required to pay royalties on any product sales. The royalties will be payable
on a country-by-country and licensed product-by-licensed product basis until
the date which is the later of (i) the expiration of the last to expire of
the patents covering the licensed product in such country or (ii) ten
years following the first commercial sale of a licensed product in such
country.
Celldex
and Medarex entered into a settlement and mutual release agreement on October 19,
2007, whereby the parties agreed to a settlement with respect to a disputed
return of capital related to certain unsuccessful initial public offering costs
that were funded by Medarex on behalf of Celldex in prior years. Celldex agreed
to issue to Medarex 351,691 AVANT shares equal in value to $3,038,617, based on
the per share price of $8.64 set on the second trading day prior to the closing
date of the Merger. Medarex has agreed to amend certain terms of the existing
Research and Commercialization Agreement and Assignment and License Agreement.
Both parties have agreed to mutual releases under the settlement and mutual
release agreement.
(13)
Loans
Payable
In December 2003,
AVANT entered into a Lease Agreement (the Lease Agreement), a Secured
Promissory Note: Equipment Loan (the Secured Promissory Note) and a Security
Agreement with the Massachusetts Development Finance Agency (MassDevelopment),
an economic development entity for the Commonwealth of Massachusetts, for AVANT
to occupy and build-out a manufacturing facility in Fall River, Massachusetts.
24
(A)
Loan
Payable
Under the Lease
Agreement, AVANT received a Specialized Tenant Improvement Loan of $1,227,800
to finance the build-out of its Fall River facility which was recorded as
leasehold improvements. AVANT is amortizing the leasehold improvements over the
remaining expected lease term. Principal and interest payments on the loan are
due monthly using an amortization period of 15 years and an interest rate of
5.5% per annum.
In connection with the
Merger, AVANT recorded $722,683 as the fair value of the loan payable based on
current market interest rates available to AVANT for long-term liabilities with
similar terms and maturities. At March 31, 2008, AVANT has recorded a loan
payable of $715,862 to MassDevelopment, of which $55,982 is classified as
current and $659,880 as long-term.
(B)
Note
Payable
Under the Secured
Promissory Note, AVANT received $903,657 from MassDevelopment to finance the
purchases of manufacturing and laboratory equipment to be placed in its Fall
River facility (the Loan). The Loan has a term of 84 months and an interest
rate of 5.5% per annum. The Loan is collateralized by all of the equipment
purchased with the principal amount. The net book values of these
collateralized assets at March 31, 2008 were $460,643.
In connection with
the Merger, AVANT recorded $366,251 as the fair value of the note payable based
on current market interest rates available to AVANT for long-term liabilities
with similar terms and maturities. At March 31, 2008, the balance of the
note payable to MassDevelopment was $353,813, of which $105,868 is classified
as current and $247,945 as long-term.
The following
table summarizes the Companys approximate contractual obligations to
MassDevelopment with respect to the loan and note payable:
|
|
Loan Payable
|
|
Note Payable
|
|
|
|
Principal
|
|
Interest
|
|
Total
|
|
Principal
|
|
Interest
|
|
Total
|
|
2008 (remaining
nine months)
|
|
$
|
54,600
|
|
$
|
35,000
|
|
$
|
89,600
|
|
$
|
101,900
|
|
$
|
16,200
|
|
$
|
118,100
|
|
2009
|
|
81,900
|
|
48,500
|
|
130,400
|
|
160,200
|
|
16,900
|
|
177,100
|
|
2010
|
|
81,900
|
|
43,900
|
|
125,800
|
|
169,400
|
|
7,800
|
|
177,200
|
|
2011
|
|
81,900
|
|
39,400
|
|
121,300
|
|
46,900
|
|
500
|
|
47,400
|
|
2012
|
|
81,900
|
|
34,900
|
|
116,800
|
|
|
|
|
|
|
|
Thereafter
|
|
579,600
|
|
115,800
|
|
695,400
|
|
|
|
|
|
|
|
Total Obligation
|
|
$
|
961,800
|
|
$
|
317,500
|
|
$
|
1,279,300
|
|
$
|
478,400
|
|
$
|
41,400
|
|
$
|
519,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current
Portion
|
|
75,000
|
|
|
|
|
|
141,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term
Portion
|
|
$
|
886,800
|
|
|
|
|
|
$
|
337,200
|
|
|
|
|
|
(14)
Commitments
and Contingencies
(A)
Commitments
for the Needham, Massachusetts Facility
In November 2005,
AVANT entered into a lease amendment that extended its lease of laboratory and
office space in Needham, Massachusetts through April, 2017 and reduced AVANTs
leased space to approximately 35,200 square feet. As of March 31, 2008,
AVANTs share of tenant improvements costs of $401,804 for the Needham facility
renovations project remain unpaid. Under this lease amendment, AVANT is
obligated to pay an escalating base annual rent ranging from $879,700 to
$1,161,200 during the remaining lease term.
25
(B) Commitments for the Fall
River, Massachusetts Facility
In 2003, the
Company reached agreement with MassDevelopment, an economic development entity
for the Commonwealth of Massachusetts, for AVANT to occupy and build-out an
11,800 square foot manufacturing facility in Fall River, Massachusetts. The
lease has an initial seven-year term that expires in December 2010 and two
renewal options of five years each. Management has determined that it is
reasonably assured that AVANT will exercise one five-year renewal option.
Therefore, AVANT is amortizing leasehold improvements made to the Fall River
facility over the remaining original lease term plus one five-year renewal
term. In November 2005 and December 2006, AVANT amended the
MassDevelopment lease to increase the rentable space to approximately 14,300
and 16,200 square feet, respectively, at the Fall River facility.
(C) Commitments for the
Philipsburg, New Jersey Facility
AVANT leases
approximately 20,000 square feet of office and laboratory space in
Phillipsburg, New Jersey. The lease has an initial five-year term which expires
in August 2011. Under the lease agreement, AVANT is obligated to pay an annual
rent of approximately $347,700 plus certain common area maintenance costs.
Aggregate rental payments including common area maintenance costs were $86,913 for
the three-month periods ended March 31, 2008 and 2007.
As an incentive to
enter into a lease agreement with the Phillipsburg landlord, the Company
received four months of rent-free occupancy of the facilities, and the Company
is amortizing this over the original five-year term of the lease. In addition,
the landlord provided the Company an allowance on future rent payments towards
tenant improvements that the Company made to the facilities and that credit is
also included in deferred rent and is being amortized over the lease term.
Construction of the tenant improvements was completed in August 2006.
The Company
entered into a letter of credit facility with a national U.S. financial
institution for $177,000, which is collateralized by a security deposit for the
leased facility in Phillipsburg, New Jersey. The total amount of the security
deposit is recorded as restricted cash on the Companys consolidated balance
sheets.
(D) Commitments for the
Operating Leases
Obligations for
base rent under these and other non-cancelable operating leases as of March 31,
2008 are approximately as follows:
Year ending December 31,
|
|
|
|
2008 (remaining
nine months)
|
|
$
|
1,567,072
|
|
2009
|
|
2,326,435
|
|
2010
|
|
2,388,235
|
|
2011
|
|
2,333,957
|
|
2012
|
|
2,159,947
|
|
2013 and
thereafter
|
|
9,692,192
|
|
Total minimum
lease payments
|
|
$
|
20,467,838
|
|
The Companys
total rent for all operating leases was approximately $86,913 for the
three-month periods ended March 31, 2008 and 2007.
(15)
Severance
Arrangements
Una S. Ryan, Ph. D.
entered into an employment agreement with AVANT (the Ryan Agreement), which
was amended and restated as of August 20, 1998, amended as of December 23,
2002, September 18, 2003 and again as of October 19, 2007. The term
of the Agreement is for 13 months from the effective date of a merger, with
rolling automatic one-year extensions. Further, if Dr. Ryan resigns, AVANT
will pay Dr. Ryan a special retirement payment of $1,323,203. At March 31,
2008, AVANT had accrued $87,005 of Dr. Ryans special retirement payment,
and expects to record a charge for the remainder in the second quarter of 2008
as a result of her departure. Please see Note 17(B) for information about
Dr. Ryans departure.
26
The Company and Dr. Robert
F. Burns, formerly the President and Chief Executive Officer of Celldex,
entered into a separation and mutual release agreement dated as of October 19,
2007, under which Dr. Burns employment was terminated, effective as of February 15,
2008. Until such date, Dr. Burns had no obligation to render services to
Celldex, although he was to hold himself available to consult with Celldex by
telephone at reasonable times. As severance, Celldex was obligated to pay to Dr. Burns
the sum of £33,333 for nine consecutive months, commencing with the first
payment on March 15, 2008, and a payment of £100,000 on December 15,
2008, in each case less applicable withholdings and other customary payroll
deductions. Dr. Burns is also entitled to the continuation of benefits
until February 15, 2010. A portion of Dr. Burns stock options became
fully vested and exercisable on February 15, 2008, and he may exercise
them for up to three years following that date. Dr. Burns and Celldex
provided one another with mutual releases under such separation and mutual
release agreement.
As Dr. Burns has not
provided substantive service to the Company since October 19, 2007, these
severance benefits, which in the aggregate equal $1,014,017, have been accrued
in the consolidated financial statements as of December 31, 2007 in
accordance with SFAS No. 146,
Accounting
for Costs Associated with Exit or Disposal Activities
. In addition,
stock-based compensation has been adjusted for the modification of Dr. Burns
stock option awards in accordance with SFAS No. 123(R).
The following table sets
forth an analysis of the severance costs, which are included in accrued
liabilities in the consolidated balance sheet as of March 31, 2008 and December 31,
2007:
|
|
Balance at
December 31,
|
|
|
|
|
|
Balance at
March 31,
|
|
|
|
2007
|
|
Charges
|
|
Paid Cash
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
benefits
|
|
$
|
1,014,017
|
|
$
|
87,005
|
|
$
|
(212,290
|
)
|
$
|
888,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16)
Merger
of AVANT and Celldex
On March 7, 2008,
AVANT completed the Merger with Celldex with Celldex considered the accounting
acquirer, even though AVANT issued common stock and was the surviving legal
entity in the transaction. AVANT issued 8,309,420 shares of AVANTs common
stock in exchange for all of the outstanding capital stock of Celldex, on the
basis of 4.65 shares of AVANT common stock for each share of Celldex common
stock. AVANT also issued 351,692 shares having a value of $3,038,617 in
settlement of a payable due Medarex. The purchase price of $47,570,867 and
represents the shares attributable to AVANT shareholders and consisted of (i) the 6,265,889
shares outstanding of AVANT common stock on the effective date of the Merger valued
at $46,875,372 and (ii) estimated transaction costs totaling $695,495.
The acquisition has been
accounted for as a purchase with Celldex the accounting acquirer. Consequently,
the operating results of AVANT since March 7, 2008 have been included in
the consolidated results of operations. The purchase price was allocated to the
acquired tangible and identifiable intangible assets and assumed liabilities,
based upon their fair value at the date of acquisition, as follows:
Tangible assets
acquired
|
|
$
|
34,959,482
|
|
Less:
Liabilities assumed
|
|
(3,945,067
|
)
|
Net tangible
assets acquired
|
|
$
|
31,014,415
|
|
Intangible
assets acquired:
|
|
|
|
Core Technology
|
|
897,249
|
|
Developed
Technology
|
|
273,796
|
|
Strategic
Partner Agreement
|
|
629,499
|
|
In-Process
Research and Development (IPR&D)
|
|
14,755,908
|
|
Total
|
|
$
|
47,570,867
|
|
27
The values assigned to
the intangible assets acquired, including the IPR&D, were determined based
on fair market value using a risk adjusted discounted cash flow approach. Fair
values were then reduced by $6,041,597 of negative goodwill. AVANT is a
biotechnology enterprise and its resources are substantially devoted to
research and development at the date of the Merger. Management is responsible
for determining the fair value of the acquired IPR&D.
Each of AVANTs three
significant research and development projects in-process were valued through
detailed analysis of product development data concerning the stage of development,
time and resources needed to complete the project, expected income-generating
ability and associated risks. The value of IPR&D was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the net cash flows from such projects
and discounting the net cash flows back to their present values. The
probability of success and discount rates used for each project take into
account the uncertainty surrounding the successful development and commercialization
of the purchased in-process technology. The resulting net cash flows for these
projects were based on managements best estimates of revenue, cost of sales,
research and development costs, selling, general and administrative costs, and
income taxes for each project, and the net cash flows reflect assumptions that
would be used by market participants.
The significant
assumptions underlying the valuations included potential revenues, costs of
completion, the timing of product approvals and the selection of appropriate
probability of success and discount rates. None of AVANTs IPR&D projects
have reached technological feasibility nor do they have any alternative future
use. Consequently, in accordance with U.S. GAAP, the amount allocated to
IPR&D was charged as an expense in the Companys consolidated financial
statements for the quarter ended March 31, 2008. The remaining acquired
intangible assets arising from the acquisition are being amortized on a
straight line basis over their estimated lives which range from 4.5 to 8 years.
As of March 31,
2008, the technological feasibility of the projects had not yet been reached
and no significant departures from the assumptions included in the valuation
analysis had occurred. Substantial additional research and development will be
required prior to reaching technological feasibility. In addition, each product
needs to successfully complete a series of clinical trials and to receive FDA
or other regulatory approval prior to commercialization. The Company is also
dependent upon the activities of its collaborators in developing, manufacturing
and marketing its products. There can be no assurance that these projects will
ever reach feasibility or develop into products that can be marketed profitably,
nor can there be assurance that AVANT and its collaborators will be able to
develop, manufacture and commercialize these products before AVANTs
competitors. If these products are not successfully developed and do not become
commercially viable, the Companys financial condition and results of
operations could be materially affected.
The following unaudited
pro forma financial summary is presented as if the operations of AVANT and
Celldex were combined as of January 1, 2007. The unaudited pro forma
combined results are not necessarily indicative of the actual results that
would have occurred had the acquisition been consummated at that date or of the
future operations of the combined entities. The following pro forma financial
summary includes the charge for in-process research and development, which is a
material non recurring charge.
Three Months Ended March 31,
|
|
2008
|
|
2007
|
|
Revenue
|
|
$
|
1,642,765
|
|
$
|
901,081
|
|
Net loss
|
|
(23,971,415
|
)
|
(23,780,126
|
)
|
Basic and
diluted net loss per share
|
|
(1.61
|
)
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
28
(17)
Subsequent
Events
(A) Pfizer
License and Development Agreement
On April 16, 2008,
AVANT and Pfizer entered into a License and Development Agreement (the Pfizer Agreement)
under which Pfizer will be granted an exclusive worldwide license to a
therapeutic cancer vaccine candidate, CDX-110, in Phase 2 development for the
treatment of glioblastoma multiforme. The
Pfizer Agreement also gives Pfizer exclusive rights to the use of EGFRvIII
vaccines in other potential indications. Under the Pfizer Agreement,
Pfizer will make an upfront payment to AVANT of $40 million and will make a $10
million equity investment in AVANT. Pfizer will fund all development costs for
these programs. AVANT is also eligible to receive milestone payments exceeding
$390 million for the successful development and commercialization of CDX-110
and additional EGFRvIII vaccine products, as well as royalties on any product
sales. The Pfizer Agreement is subject to approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (as amended) and is expected to close in the
second quarter of 2008.
(B) Resignation
of Dr. Una S. Ryan, Ph.D.
On May 14, 2008,
AVANT announced the departure of Una S. Ryan, Ph.D, President and CEO,
effective immediately thereafter. Anthony S. Marucci, then the Executive Vice
President of the Company, became interim CEO and will serve until a permanent
successor is announced. The nominating and corporate governance committee of
the Companys board of directors will commence a search process which will
include a review of internal and external candidates.
29
Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995:
This quarterly report on Form 10-Q
contains forward-looking statements within the meaning of the federal
securities laws. You can identify forward-looking statements by the use of the
words believe, expect, anticipate, intend, estimate, project, will,
should, may, plan, intend, assume and other expressions which predict
or indicate future events and trends to and which do not relate to historical
matters. You should not rely on forward-looking statements, because they
involve known and unknown risks, uncertainties and other factors, some of which
are beyond the control of AVANT. These risks, uncertainties and other factors
may cause the actual results, performance or achievements of AVANT to be
materially different from the anticipated future results, performance or
achievements expressed or implied by the forward-looking statements.
There
are a number of important factors that could cause the actual results to differ
materially from those expressed in any forward-looking statements made by
AVANT.
These factors include, but
are not limited to: (1) the successful post-merger integration of the
business, multiple technologies and programs; (2) the ability to adapt
AVANTs APC Targeting Technology
TM
to develop new, safe and effective vaccines
against oncology and infectious disease indications; (3) the ability to
adapt AVANTs vectoring systems to develop new, safe and effective orally
administered vaccines against disease causing agents; (4) the ability to
successfully complete product research and further development, including
animal, pre-clinical and clinical studies, and commercialization of CDX-110,
CDX-1307, CholeraGarde
®
(Peru-15), Ty800, ETEC E. coli vaccine, and
other products and AVANTs expectations regarding market growth; (5) the
cost, timing, scope and results of ongoing safety and efficacy trials of
CDX-110, CDX-1307, CholeraGarde
®
(Peru-15), Ty800, ETEC E. coli vaccine and
other preclinical and clinical testing; (6) the ability to negotiate
strategic partnerships or other disposition transactions for AVANTs
cardiovascular programs, including TP10 and CETi; (7) the ability of AVANT
to manage multiple clinical trials for a variety of product candidates; (8) the volume and profitability of
product sales of Megan
®
Vac 1, Megan
®
Egg and other future products; (9) the
process of obtaining regulatory approval for the sale of Rotarix
®
in major commercial markets, as well as the
timing and success of worldwide commercialization of Rotarix
®
by our partner, GlaxoSmithKline or Glaxo; (10) Glaxos
strategy and business plans to launch and supply Rotarix
®
worldwide, including in the U.S. and other
major markets and its payment of royalties to AVANT; (11) AVANTs
expectations regarding its technological capabilities and expanding its focus
to broader markets for vaccines; (12) changes in existing and potential
relationships with corporate collaborators; (13) the availability, cost,
delivery and quality of clinical and commercial grade materials produced at
AVANTs own manufacturing facility or supplied by contract manufacturers and
partners; (14) the timing, cost and uncertainty of obtaining regulatory
approvals; (15) AVANTs ability to develop and commercialize products before
competitors that are superior to the alternatives developed by such
competitors; (16) AVANTs ability to retain certain members of management;(17)
AVANTs expectations regarding research and development expenses and general
and administrative expenses; (18) AVANTs expectations regarding cash balances,
capital requirements, anticipated royalty payments (including those from Paul
Royalty Fund), revenues and expenses, including infrastructure expenses; (19) the ability to obtain substantial additional
funding; (20) AVANTs belief regarding the validity of its patents and
potential litigation; (21) Pfizers and AVANTs strategy and business plans
concerning the continued development and commercialization of CDX-110; and (22)
certain other factors that might cause AVANTs actual results to differ
materially from those in the forward-looking statements including those set
forth under the headings Business, Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of Operations in AVANTs
annual report on Form 10-K for the year ended December 31, 2007 and other
reports that Avant files with the Securities and Exchange Commission. You should carefully review all of these
factors, and you should be aware that there may be other factors that could
cause these differences. These
forward-looking statements were based on information, plans and estimates at
the date of this report, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
30
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
As used herein, the terms
we, us, our, the Company, or AVANT refer to AVANT Immunotherapeutics, Inc.,
a Delaware corporation organized in 1983 and its subsidiaries: Celldex
Therapeutics, Inc. (Celldex), Celldex Therapeutics, Ltd. (Celldex Ltd)
and Megan Health, Inc. (Megan). AVANTs
principal activity since our inception has been research and product
development conducted on our own behalf, as well as through joint development
programs with several pharmaceutical companies and other collaborators.
CRITICAL ACCOUNTING POLICIES
The Companys critical
accounting policies are set forth in Note 2 to these unaudited consolidated
financial statements and under the heading Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 to our
2007 Form 10-K. There have been no changes in these policies since December 31,
2007.
OVERVIEW
We are a
biopharmaceutical company that uses novel applications of immunology to develop
products for the prevention and treatment of diseases. We are developing a
broad portfolio of vaccines and targeted immunotherapeutics addressing a wide
range of applications including oncology, infectious and inflammatory diseases.
These include
therapeutic cancer vaccines, monoclonal antibodies, single-dose,
oral vaccines that protect against important disease-causing infectious agents
and a treatment to reduce complement-mediated tissue damage. We are advancing a
robust pipeline of clinical and preclinical product candidates, the most
advanced of which are for treatment of various cancers. Our lead programs are
therapeutic cancer vaccines designed to instruct the patients immune system to
recognize and destroy cancer cells.
Our strategy is to
demonstrate proof-of-concept for our product candidates before leveraging their
value through partnerships or, in appropriate situations, continuing late stage
development ourselves. Demonstrating proof-of-concept for a product candidate
generally involves bringing it through Phase 1 clinical trials and one or
more Phase 2 clinical trials so that we are able to demonstrate, based on
human trials, good safety data for the product candidate and some data
indicating its effectiveness. Our current collaborations encompass the
commercialization of an oral human rotavirus vaccine, the development of oral
cholera, typhoid fever, ETEC and HIV vaccines, and vaccines addressed to human
food safety and animal health. Our product candidates address large market
opportunities for which we believe current therapies are inadequate or
non-existent.
We are targeting its
efforts where it can add the greatest value to the development of its products
and technologies. Its goal is to demonstrate clinical proof-of-concept for each
product, and then seek excellent partners to help see those products through to
commercialization. We thus leverage the value of its technology portfolio
through corporate, governmental and non-governmental partnerships. This
approach allows us to maximize the overall value of its technology and product
portfolio while best ensuring the expeditious development of each individual
product.
On March 7, 2008, We
closed the merger (the Merger) contemplated by the Agreement and Plan of
Merger dated October 19, 2007 by and among AVANT, Callisto Merger
Corporation (Merger Sub), a wholly owned subsidiary of AVANT, and Celldex
(the Merger Agreement). Pursuant to the terms of the Merger Agreement, Merger
Sub merged with and into Celldex, with Celldex as the surviving company and a
wholly-owned subsidiary of AVANT. The total value of the transaction was
approximately $75 million. Approximately 8.7 million shares were issued to the
former Celldex shareholders in connection with the Merger. The Merger created a
NASDAQ-listed, fully-integrated and diversified biopharmaceutical company with
a deep pipeline of product candidates addressing high-value indications
including oncology, infectious and inflammatory diseases. Celldex and AVANT
shareholders own 58% and 42% of the combined company on a fully diluted basis,
respectively.
Our board of
directors approved a 1-for-12 reverse stock split of AVANTs common stock,
which became effective on March 7, 2008. As a result of the reverse stock
split, each twelve shares of common stock were combined and reclassified into
one share of common stock and the total number of shares outstanding was
reduced from approximately 180 million shares (including the shares issued
to Celldex stockholders in the Merger) to approximately 15 million shares.
31
The Merger was accounted
for using the purchase method of accounting and was treated as an acquisition
by Celldex of AVANT with Celldex being considered the accounting acquirer based
on the application of criteria specified in Statement of Financial Accounting Standards
SFAS No. 141,
Business Combinations,
(SFAS 141), even though AVANT was the issuer of common stock and the
surviving legal entity in the transaction. Under the purchase method of
accounting, the deemed purchase price was allocated to AVANTs underlying
tangible and identifiable intangible assets acquired and liabilities assumed
based upon their respective fair values with any excess deemed purchase price
allocated to goodwill. However, the valuation analysis conducted by the Company
determined that the fair value of assets acquired and the fair value of
liabilities assumed by Celldex exceeded the estimated purchase price for AVANT,
resulting in negative goodwill of approximately $6.0 million. In
accordance with SFAS 141
,
the negative goodwill has been allocated to all of the acquired assets which
are non-financial and non-current assets, including property and equipment,
identifiable intangible assets, and in-process research and development. See
Note 17 to the Companys consolidated financial statements for additional
information.
Because Celldex was
determined to be the acquirer for accounting purposes, the historical financial
statements of Celldex became the historical financial statements of the
Company. Accordingly, the financial statements of the Company prior to the
Merger reflect the financial position, results of operations and cash flows of
Celldex, which, during the historical periods presented in the accompanying
consolidated financial statements, was majority-owned by Medarex, Inc. (Medarex).
Following the Merger, the financial statements of the current period reflect
the financial position, results of operation and cash flows of the Company. The
results of operations of AVANT are included in the results of operations of the
Company beginning March 8, 2008. Accordingly, except as otherwise
discussed below, this report reflects the financial condition, results of
operations and liquidity of the Company at March 31, 2008 and historically
of Celldex on a stand-alone basis for all periods prior to March 8, 2008.
The financial condition, results of operations and liquidity of the Company as
of the quarters ended March 31, 2008 and 2007 may not be indicative of the
Companys future performance or reflect what the Companys financial conditions,
results of operations and liquidity would have been had the Merger been
consummated as of January 1 of each respective year or had the Company
operated as a separate, stand-alone entity during the periods presented.
RESEARCH AND DEVELOPMENT ACTIVITIES
Our products are
derived from a broad set of complementary technologies which have the ability
to utilize the human immune system and enable the creation of preventative and
therapeutic agents. We are using these technologies to develop vaccines and
targeted immunotherapeutics that prevent or treat disease caused by infectious
organisms, and treatment vaccines that modify undesirable activity by the bodys
own proteins or cells. A number of our immunotherapeutic and vaccine product
candidates are in various stages of clinical trials. We expect that a large
percentage of our research and development expenses will be incurred in support
of our current and future clinical trial programs. Below is a table of our
currently active programs:
CURRENT PROGRAMS AND PARTNERSHIPS
Technology
|
|
Product
|
|
Indication/Field
|
|
Partner
|
|
Status
|
|
|
|
|
|
|
|
|
|
ONCOLOGY
|
|
CDX-110
|
|
Glioblastoma Multiforme
|
|
Pfizer
|
|
Phase 2b/3
|
|
|
CDX-1307
|
|
Colorectal, Bladder,
Pancreas, Ovarian and Breast Tumors
|
|
|
|
Phase 1
|
|
|
CDX-1401
|
|
Solid Tumors
|
|
|
|
Pre-clinical
|
|
|
|
|
|
|
|
|
|
INFECTIOUS DISEASE
|
|
CholeraGarde
®
Ty800
|
|
Cholera
Typhoid fever
|
|
IVI
NIH
|
|
Phase 2b
Phase 2
|
|
|
ETEC
Paratyphoid
|
|
Enterotoxigenic
E coli
infection
Paratyphoid fever
|
|
NIH
|
|
Pre-clinical
Pre-clinical
|
|
|
CDX-2401
|
|
HIV
|
|
Rockefeller University
|
|
Pre-clinical
|
|
|
|
|
|
|
|
|
|
INFLAMMATORY
DISEASE
|
|
TP10
|
|
Transplantation
AMD
|
|
|
|
Phase 2
Pre-clinical
|
32
MARKETED PRODUCTS
|
|
Rotarix
®
Megan
®
Vac 1
Megan
®
Egg
|
|
Rotavirus infection
Salmonella infection in chicken
Salmonella infection in laying hens and eggs
|
|
GlaxoSmithKline Lohmann
Lohmann
|
|
Marketed
Marketed
Marketed
|
PROGRAM
DEVELOPMENTS
A.
Cancer
Vaccine Development Programs
CDX-110:
Our lead clinical development program,
CDX-110, is a peptide-based immunotherapy that targets the tumor specific
molecule called EGFRvIII, a functional variant of the naturally expressed
epidermal growth factor receptor (EGFR), a protein which has been well
validated as a target for cancer therapy. Unlike EGFR, EGFRvIII is not present
in normal tissues, and has been shown to be a transforming oncogene that can
directly contribute to the cancer cell growth.
EGFRvIII is commonly
present in glioblastoma multiforme, or GBM, the most common and aggressive form
of brain cancer, and has also been observed in various other cancers such as
breast, ovarian, prostate, colorectal, and head & neck cancers. We are
currently pursuing the development of CDX-110 for GBM therapy, and plan to
expand the clinical development into other cancers through additional clinical
studies.
Initial clinical
development of EGFRvIII immunotherapy was led by collaborating investigators at
the Brain Tumor Center at the Duke Comprehensive Cancer Center and at the M.D.
Anderson Cancer Center in Houston, Texas. The results from Phase 1 and
Phase 2a studies, 16 and 23 patients, respectively, have demonstrated a
significant increase in the time to disease progression (greater than 113%) in
the patients who were vaccinated, and also in overall survival rates (greater
than 100%), both relative to appropriately matched historical controls. AVANT
believes that the therapy has been well tolerated, and significant immune
responses to EGFRvIII were generated in many patients. An extension of the
Phase 2a program at the same two institutions has enrolled 18 additional
GBM patients treated with standard of care. The preliminary data support the
observations from the previous studies. Independently, active immunotherapy for
EGFRvIII in prostate and ovarian cancer patients has been conducted in a
Phase 1 trial at the University of Washington.
We initiated a
Phase 2b/3 randomized study of CDX-110 combined with standard of care,
temozolomide
,
versus standard of care alone in patients with GBM in May 2007, we intend
to open a total of 29 sites in the United States and Canada during 2008. The
FDA has granted orphan drug designation for CDX-110 for the treatment of
EGFRvIII expressing GBM as well as fast track designation.
On April 16, 2008,
AVANT and Pfizer, Inc. (Pfizer) entered into a License and Development
Agreement (the Pfizer Agreement) under which Pfizer will be granted an
exclusive worldwide license to CDX-110. The Pfizer Agreement also gives Pfizer exclusive rights to the use of EGFRvIII
vaccines in other potential indications. Under the Pfizer Agreement,
Pfizer will make an upfront payment to AVANT of $40 million and will make a $10
million equity investment in AVANT. Pfizer will fund all development costs for
these programs. AVANT is also eligible to receive milestone payments exceeding
$390 million for the successful development and commercialization of CDX-110
and additional EGFRvIII vaccine products, as well as royalties on any product
sales. The Pfizer Agreement is subject to approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (as amended) and is expected to close in the
second quarter of 2008.
CDX-1307:
AVANT has developed an APC Targeting
Technology
that utilizes fully human monoclonal
antibodies to directly target specialized types of immune system cells, known
as antigen presenting cells. AVANT is advancing several clinical and
preclinical product candidates that use APC Targeting Technology
to manipulate critical types of antigen
presenting cells, known as dendritic cells and macrophages, which are key cells
within the immune system. Because these cells are largely responsible for
initiating the immune systems disease-fighting mechanisms, AVANT believes that
product candidates using AVANTs technology will create more potent immune
responses than standard vaccination strategies.
33
AVANTs lead APC
Targeting Technology
product candidate, CDX-1307, is in development
for the treatment of epithelial tumors such as colorectal, pancreatic, bladder,
ovarian and breast cancers. CDX-1307 targets the beta chain of human chorionic
gonadotropin, known as hCG-
b
, which is an antigen often found
in epithelial tumors. The presence of hCG-
b
in these
cancers correlates with a poor clinical outcome, suggesting that this molecule
may contribute to tumor growth. Normal adult tissues have minimal expression of
hCG-
b
; therefore, targeted immune responses are not expected
to generate significant side effects.
Thirty-five
(35) patients with epithelial cancers have been treated in Phase 1
clinical trials of CDX-1307 at the Duke Comprehensive Cancer Center. The
immunotherapy has been well tolerated, and one patient with pancreatic cancer
demonstrated a reduction in tumor burden, with only minor adverse events
observed (reddening at the injection site). The investigators at the Duke
Comprehensive Cancer Center were awarded a two year $500,000 grant from the
Avon Foundation and the National Cancer Institute to support Phase 1 work
in breast cancer. The safety of CDX-1307 in combination with defined immune
stimulators will next be evaluated with intent to enter Phase 2 research
in 2009.
CDX-1401:
AVANT is developing CDX-1401, another
APC-Targeting vaccine, for treatment of malignant melanoma and a variety of
solid tumors which express the proprietary cancer antigen NY-ESO-1, which AVANT
licensed from the Ludwig Institute for Cancer Research in 2006. AVANT believes
that preclinical studies have shown that CDX-1401 is effective for activation
of human T-cell responses against NY-ESO-1. Further preclinical studies and
manufacturing process optimization are in progress, with an IND filing planned
for the fourth quarter of 2008.
B.
Infectious
Disease Development Programs
AVANTs goal is to become
a leading developer of innovative vaccines that address health care needs on a
global basis. Utilizing its
Cholera
-
and
Salmonella
-vectored delivery
technologies together with its drying and preservation technologies, the
Company can now develop a new generation of vaccines that have an ideal product
profile: safe, effective, oral, single-dose, rapidly protective and increased
thermostability.
CholeraGarde®
Vaccine:
Development
of a safe, effective cholera vaccine is the first step in establishing AVANTs
single-dose, oral bacterial vaccine franchise. In December 2002, the
International Vaccine Institute (IVI) initiated a Phase 2 study of
CholeraGarde® in Bangladesh, where cholera is endemic. In July 2005,
Bangladesh study results in children and infants showed CholeraGarde® to be
well tolerated and highly immunogenic, with 77% of children aged 9 months to 5
years generating protective immune responses.
Previously published results showed the vaccine to be well tolerated and
immunogenic against the cholera organism in the adult portion of this trial.
In August 2006, IVI
received $21 million in funding from the Bill & Melinda Gates
Foundation for a Cholera Vaccine Initiative (CHOVI), which will include
conducting further clinical trials of CholeraGarde®. IVI plans to conduct Phase 2 clinical trials
of CholeraGarde® in Bangladesh, India and Thailand beginning in the second half
of 2008 followed by Phase 3 field studies. IVI will be purchasing clinical
materials produced at AVANTs Fall River, MA manufacturing facility for the
trials.
AVANT
has decided to focus only on the fully-funded opportunity for CholeraGarde
®
in the developing world. AVANT has determined that the high clinical costs of
its own Phase 3 clinical trials in the United States and the investment in a
commercial manufacturing facility are not justified by the limited market
opportunities for a cholera vaccine in developed countries at this time.
Ty800
Typhoid Fever Vaccine:
AVANT has developed an oral vaccine to offer rapid, single-dose
protection against
Salmonella typhi
,
the cause of typhoid fever. Ty800 is targeted for both the travelers market
and global health needs. In 2006, the National Institute of Allergy and
Infectious Disease (NIAID) of the National Institutes of Health (NIH)
initiated a Phase 1/2 in-patient dose-ranging clinical trial aimed at
demonstrating the safety and immunogenicity of the Ty800 typhoid fever vaccine.
NIAID funded the production of Ty800 vaccine for clinical testing and completed
the Phase 1/2 trial at a NIH-funded clinical site in 2007. Results showed
the single-dose, oral vaccine to be well tolerated and immunogenic, with over
90% of vaccinated subjects generating immune responses. AVANT initiated its own
sponsored Phase 2 trial of Ty800 in July 2007. Preliminary results
reported in April 2008 from the study showed that the single-dose, oral
vaccine was well tolerated and immunogenic, demonstrating that the desired
immune response was achieved. Incidence of reactogenicity symptoms and adverse
events post-vaccination were similar to placebo. Importantly, immunogenic
response was dose-dependent. Positive immune response or seroconversion
(prospectively defined as a 4-fold increase in anti-LPS titers over
34
pre-dose level) rates
were 65.5% (36/55) and 80% (44/55) in the low and high dose groups,
respectively, and was significantly (p<0.001) higher than placebo.
Travelers Vaccines:
AVANT has several travelers vaccine programs
in pre-clinical developmentall addressing important causes of serious
diarrheal diseases worldwide. In November 2007, AVANT entered into an
agreement with the Division of Microbiology and Infectious Diseases of the
NIAID, whereby NIAID will sponsor a Phase 1 study of AVANTs
investigational single-dose, oral vaccine designed to offer combined protection
against both enterotoxigenic
Escherichia
coli
(ETEC) and cholera. AVANT expects NIAID to initiate the
Phase 1 trial of its ETEC vaccine candidate in the first half of 2008.
AVANTs long-term goal is to develop a combination vaccine containing Cholera,
Ty800,
S. paratyphi
and ETEC as a
super enteric vaccine to address the travelers market.
CDX-2401:
AVANT is also using its APC Targeting
Technology to develop vaccines against infectious disease. The lead program is CDX-2401, an
APC-Targeting prophylactic vaccine, aimed at providing protection from
infection with HIV, the virus known to cause AIDS. This program is in a Bill &
Melinda Gates Foundation funded partnership with collaborators at Rockefeller
University in New York City, who have shown in model systems that protective
immunity can be induced with such a vaccine. Preclinical studies and
manufacturing development are in progress and AVANT, with its collaborators,
plans to initiate Phase 1 clinical studies in the first half of 2009.
C.
Inflammatory
Disease Programs
TP10:
We have been developing a new class of
immunotherapeutics that inhibit a part of the immune system called the
complement system. The complement system is a series of proteins that are
important initiators of the bodys acute inflammatory response against disease,
infection and injury. Excessive complement activation also plays a role in some
persistent inflammatory conditions. Our lead compound, TP10, a soluble form of
naturally occurring Complement Receptor 1, has effectively shown to inhibit the
activation of the complement cascade in animal models and in human clinical
trials. We believe that regulating the complement system could have therapeutic
and prophylactic applications in several acute and chronic conditions,
including reperfusion injury from surgery or ischemic disease, organ
transplant, multiple sclerosis, rheumatoid arthritis, age-related macular
degeneration (AMD), and myasthenia gravis. AVANT is currently spending limited resources on this program and is
seeking a corporate partner to complete the development and commercialization
of TP10.
D.
Marketed
Products
Rotavirus Vaccine:
Rotavirus is a major cause of diarrhea and
vomiting in infants and children. In 1997, AVANT licensed its oral rotavirus
vaccine to Glaxo. All of the ongoing development for this program is being
conducted and funded by Glaxo. Glaxo gained approval for Rotarix
®
in Mexico in July 2004, which represented
the first in an expected series of worldwide approvals and commercial launches
for the product. Glaxo was subsequently launched in additional Latin American
and Asian Pacific countries during 2005 2007. Additionally, Glaxo filed for
market approval with the European regulatory authorities in late 2004, which
triggered a $2 million milestone payment to AVANT. In February 2006, the
European Commission granted approval of Rotarix
®
in the European Union, which triggered a $4
million milestone payment from Glaxo. On April 3, 2008, Rotarix
®
received approval
from the FDA for the prevention of rotavirus gastroenteritis in infants. FDA
approval triggered a $1.5 million milestone payment from Glaxo. AVANT
licensed-in the Rotarix
®
technology in 1995 and owes a license fee of
30% to Cincinnati Childrens Hospital Medical Center (CCH) on net royalties
received from Glaxo. In May 2005, AVANT entered into an agreement whereby
an affiliate of Paul Royalty Fund (PRF) purchased an interest in the net
royalties AVANT will receive on worldwide sales of Rotarix
®
(see Note 10(A) of our unaudited consolidated
financial statements). To date, AVANT has received $50 million in milestone
payments under the PRF agreement. The PRF agreement provides for a
$10 million milestone payment to AVANT if Rotarix
®
is launched in the United States in 2008.
AVANT expects to achieve this milestone in the second half of 2008. Also under
the PRF agreement, AVANT has retained 50% of any Glaxo milestone payments
received beginning on the effective date of the agreement with PRF, with 70% of
the remaining balance payable to PRF and 30% of the remaining balance payable
to CCH, respectively.
In September 2006,
AVANT received notice from Glaxo that Glaxo would begin paying royalties on
sales of Rotarix
®
vaccine at the lower of two royalty rates
under their 1997 license agreement. Glaxos decision to pay the lower royalty
rate (which is 70% of the full rate) is based upon Glaxos assertion that
Rotarix
®
is
not covered by the patents Glaxo licensed from AVANT in Australia and certain
European countries. AVANT is analyzing various options to counter Glaxos
35
assertions and protect
AVANTs rights. AVANT is determined to take all available steps to enforce its
rights under its license agreement with Glaxo.
If Glaxos position
stands, the royalties to which PRF is entitled will no longer be limited by a
$27.5 million annual threshold, which AVANT projected may have been reached in
later years as sales of Rotarix
®
increased. Irrespective of Glaxos position,
AVANT will still retain the royalties on worldwide sales of Rotarix
®
once PRF receives
2.45 times the aggregate cash payments it makes to AVANT, though the potential
amount of such residual royalties will be lower if Glaxos position stands.
Megan
®
Vac
1
and
Megan
®
Egg
Vaccines:
On
December
1,
2000,
AVANT
acquired
all
of
the
outstanding
capital
stock
of
Megan.
Megan
has
commercialized
three
veterinary
vaccines;
Argus
SC,
licensed
by
the
United
States
Department
of
Agriculture
(USDA)
in
March
1998
and
marketed
by
Intervet,
Inc.,
and
Megan
®
Vac
1
and
Megan
®
Egg,
licensed
by
the
USDA
in
November
1998
and
2003,
respectively,
and
marketed
by
Lohmann
Animal
Health
International
(LAHI).
Because
AVANTs
focus
is
on
human
health
care,
in
September
2002,
we
appointed
LAHI
as
the
exclusive
distributor
of
our
Megan
Health
poultry
vaccines
in
North
America.
LAHI
performs
all
marketing
and
distribution
activities
of
Megans
marketed
products
for
the
commercial
poultry
market
and
pays
us
product
royalties.
TECHNOLOGY LICENSING
AVANT has adopted a
business strategy of out-licensing technology that does not match its
development focus or where it lacks sufficient resources for the technologys
efficient development or where certain uses of the technology are outside of
AVANTs focus. For example, when AVANT acquired Megan, it entered into a
licensing agreement in December 2000 with Pfizers Animal Health Division
to leverage the value of Megans oral vaccine technology in a significant
market opportunity (animal health and human food safety) outside of AVANTs own
focus on human health care. Under the Pfizer agreement, AVANT may receive
additional milestone payments of up to $3 million based upon attainment of
specified milestones. AVANT may receive royalty payments on eventual product
sales. The term of this agreement is through the expiration of the last of the
patents covered by the agreement.
RESULTS OF OPERATIONS
Three-Month Period Ended
March 31
, 2008 as Compared
with the Three-Month Period Ended March 31
, 2007
AVANT reported a
consolidated net loss of $22,130,602, or $2.19 per share, for the first quarter
ended March 31, 2008, compared with a net loss of $4,032,403, or $0.49 per
share, for the first quarter ended March 31, 2007. The net loss for the
quarter ended March 31, 2008 includes a one-time non-cash charge of $14,755,908
for purchased in-process research and development related to the Merger which
closed in March 2008. The weighted
average common shares outstanding used to calculate net loss per common share
was 10,127,435 in 2008 and 8,309,420 in 2007.
Revenue:
Total revenue increased to $147,398 for the
first quarter of 2008 compared to $144,040 for the first quarter of 2007.
Product
development and licensing revenue increased to $119,864 in 2008 from $116,538
in 2007 due to the receipt of reimbursed patent expense by AVANTs partner,
Pfizer. For the three months ended March 31, 2008 and 2007, the Company
recognized $116,538 of revenue under the Corixa termination agreement.
Under an SBIR grant,
AVANT recognized $27,534 in government contract and grant revenue during the
first quarter of 2008 for work performed. AVANT received SBIR grant revenue
from Medarex of $27,502 in the first quarter of 2007.
36
Operating
Expense:
Total operating expense increased to $22,324,334
for the first quarter of 2008 compared to $4,347,175 for the first quarter of
2007. Operating expense for 2008 includes a one-time non-cash charge charge of
$14,755,908 for purchased in-process research and development related to the Merger
in March 2008.
Research
and development expense increased $1,697,409 to $4,486,774 from $
2,789,365 in 2007. The increase in the first quarter
of 2008 compared to the first quarter of 2007 was primarily due to increases
in clinical trial costs of $921,025 and stock-based compensation of $781,371.
AVANT expects research and development expense to increase during the remainder
of 2008 as a result of the Merger with Celldex.
General
and administrative expense increased $1,504,181 to $3,032,758 in the first
quarter of 2008 compared to $1,528,577 in the first quarter of 2007 and was
primarily attributed to increases in professional services costs of $213,542
primarily related to the Celldex merger transaction and increases in consulting
expenses of $477,732, offset by lower personnel and related costs of $322,834.
AVANT expects general and administrative expense to
increase during the
remainder of 2008 as a result of the Merger with Celldex.
Amortization
expense of acquired intangible assets was $48,894 and $29,233 in 2008 and 2007,
respectively.
Investment
and Other Income, Net:
Interest and other income decreased $124,479 to $46,254 for the first
quarter of 2008 compared to $170,733 for the first quarter of 2007. The
decrease was due to lower average cash balances and lower interest rates during
the first quarter of 2008 compared to the first quarter of 2007.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008,
AVANTs principal sources of liquidity consisted of cash and cash equivalents
of $11,418,544. AVANTs cash and cash equivalents are highly liquid investments
with a maturity of three months or less at the date of purchase and consist of
time deposits and investments in money market mutual funds with commercial
banks and financial institutions. Also, the Company maintains cash balances
with financial institutions in excess of insured limits. AVANT does not anticipate
any losses with respect to such cash balances.
The use of AVANTs cash
flows for operations has primarily consisted of salaries and wages for its
employees, facility and facility-related costs for its offices, laboratories
and manufacturing facility, fees paid in connection with preclinical studies,
clinical studies, contract manufacturing, laboratory supplies and services,
consulting fees, and legal fees. To date, the primary sources of cash flows
from operations have been payments received from the Companys collaborative
partners and from government entities. In general, AVANTs sources of cash
flows from operations for the foreseeable future will be upfront license
payments, payments for the achievement of milestones, product royalty payments,
payments under government contracts and grants and funded research and
development under collaboration agreements that AVANT may receive. The timing
of any new collaboration agreements, government contracts or grants and any
payments under these agreements, contracts or grants cannot be easily predicted
and may vary significantly from quarter to quarter.
Net cash used in
operating activities was $4,516,738 for the first three months of 2008 compared
to $2,469,525 for the first three months of 2007. The increase in net cash used
in operating activities was primarily attributed to the increase in net loss
incurred as a result of the Companys Merger with Celldex in the first quarter of 2008 compared to the first quarter of 2007, partially
offset by a non-cash charge for acquired in-process research and development of
$14.8 million (see Note 16). AVANT
expects that cash used in operations will increase in the remainder of 2008.
37
Cash provided by
investing activities was $10,947,322 for the first three months of 2008
compared to cash used in investing activities of $58,517 for the first three
months of 2007. The change in amounts
between years primarily reflects the impact of the Merger.
Net cash provided by financing
activities was $128,856 for the first three months of 2008 compared to $71,489
for the first three months of 2007. The increase in net cash used in financing
activities was primarily due to increases in the related party loan due to
Medarex and payments of long-term liabilities.
On April 16,
2008, AVANT and Pfizer entered into an agreement under which Pfizer will be
granted an exclusive worldwide license to a therapeutic cancer vaccine
candidate, CDX-110, in Phase 2 development for the treatment of glioblastoma
multiforme. The agreement also gives Pfizer exclusive rights to the use of EGFRvIII vaccines in other potential
indications. Under the licensing and development agreement, Pfizer will
make an upfront payment to AVANT of $40 million and will make a $10 million
equity investment in AVANT. Pfizer will fund all development costs for these
programs. AVANT is also eligible to receive milestone payments exceeding $390
million for the successful development and commercialization of CDX-110 and
additional EGFRvIII vaccine products, as well as royalties on any product
sales. The agreement is subject to approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (as amended) and is expected to close in the
second quarter of 2008.
On April 3,
2008, Rotarix
®
received FDA market approval for the
prevention of rotavirus gastroenteritis in infants which triggered a
$1.5 million milestone payment to AVANT from Glaxo, $750,000 of which
AVANT has retained under AVANTs agreement with PRF. Rotarix
®
is now licensed in over 100 countries
worldwide including the U.S. and the European Union. The market launch of
Rotarix
®
by
Glaxo in the U.S. market would result in a $10 million milestone payment
to AVANT from PRF, which AVANT expects in the second half of 2008.
During 2008, AVANT
may take steps to raise additional capital including, but not limited to, the
licensing of technology programs with existing or new collaborative partners,
possible business combinations, or the issuance of common stock via private placements
or public offerings. If AVANT does not raise additional funds in 2008, AVANT
may take one or more cost reducing measures, including further delays in some
of the preclinical and clinical research and development programs and reduced
investment in property and equipment. While we continue to seek capital through
a number of means, there can be no assurance that additional financing will be
available on acceptable terms, if at all, and AVANTs negotiating position in
capital-raising efforts may worsen as existing resources are used. There is
also no assurance that AVANT will be able to enter into further collaborative
relationships. Additional equity financing may be dilutive to AVANTs
stockholders; debt financing, if available, may involve significant cash
payment obligations and covenants that restrict AVANTs ability to operate as a
business; and licensing or strategic collaborations may result in royalties or
other terms which reduce AVANTs economic potential from products under
development.
38
AGGREGATE CONTRACTUAL OBLIGATIONS
The following table summarizes AVANTs contractual
obligations at
March 31
, 2008 and the effect such obligations and
commercial commitments are expected to have on its liquidity and cash flow in
future years. These obligations, commitments and supporting arrangements
represent payments based on current operating forecasts, which are subject to
change:
|
|
Total
|
|
2008
|
|
2009-2011
|
|
2012-2013
|
|
Thereafter
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
$
|
20,467,800
|
|
$
|
1,567,100
|
|
$
|
7,048,600
|
|
$
|
4,414,200
|
|
$
|
7,437,900
|
|
Loan
Payable*
|
|
1,279,300
|
|
89,600
|
|
377,500
|
|
228,900
|
|
583,300
|
|
Note
Payable*
|
|
519,800
|
|
118,100
|
|
401,700
|
|
¾
|
|
¾
|
|
Licensing
obligations
|
|
1,330,000
|
|
75,000
|
|
465,000
|
|
310,000
|
|
480,000
|
|
R&D
obligations
|
|
74,100
|
|
74,100
|
|
¾
|
|
¾
|
|
¾
|
|
Restructuring
costs
|
|
58,200
|
|
58,200
|
|
¾
|
|
¾
|
|
¾
|
|
Severance
obligations
|
|
2,310,000
|
|
2,246,700
|
|
63,300
|
|
¾
|
|
¾
|
|
Construction
contract
|
|
401,800
|
|
401,800
|
|
¾
|
|
¾
|
|
¾
|
|
Total
contractual obligations
|
|
$
|
26,441,000
|
|
$
|
4,630,600
|
|
$
|
8,356,100
|
|
$
|
4,953,100
|
|
$
|
8,501,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
development
|
|
$
|
10,452,300
|
|
$
|
5,445,500
|
|
$
|
5,006,800
|
|
$
|
|
|
$
|
|
|
Total
commercial commitments
|
|
$
|
10,452,300
|
|
$
|
5,445,500
|
|
$
|
5,006,800
|
|
$
|
|
|
$
|
|
|
*
includes
interest obligations
In the future, we may owe
royalties and other Contingent payments to our licensors based on the
achievement of developmental milestones, product sales and specified other
objectives. These potential future obligations are not included in the above
table.
39
Item 3.
Quantitative
and Qualitative Disclosures about Market Risk
AVANT
owns financial instruments that are sensitive to market risk as part of its
investment portfolio. AVANTs investment portfolio is used to preserve its
capital until it is used to fund operations, including its research and
development activities. None of these market-risk sensitive instruments are
held for trading purposes. AVANT invests its cash primarily in money market
mutual funds. These investments are evaluated quarterly to determine the fair
value of the portfolio. AVANTs investment portfolio includes only marketable
securities with active secondary or resale markets to help insure liquidity.
AVANT has implemented investment policies regarding the amount and credit
ratings of investments. Because of the short-term nature of these investments,
AVANT does not believe it has material exposure due to market risk. The impact
to AVANTs financial position and results of operations from likely changes in
interest rates is not material.
AVANT
does not utilize derivative financial instruments. The carrying amounts
reflected in the consolidated balance sheet of cash and cash equivalents,
accounts receivables and accounts payable approximates fair value at
March 31
, 2008 due to the short-term maturities of these
instruments.
Item 4.
Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
AVANT, the registrant, maintains disclosure controls
and procedures that are designed to provide reasonable assurance that
information required to be disclosed by AVANT in its reports that it files and
submits under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported within time periods
specified by the SEC's rules and forms, and that such information is
accumulated and communicated to its management, including its interim Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
As required by Rule 13a 15 under the Securities
Exchange Act of 1934 (the Exchange Act), as of March 31, 2008, we carried out
an evaluation under the supervision and with the participation of our
management, including our interim Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of the quarter ended March 31, 2008. In designing and
evaluating our disclosure controls and procedures, we and our management
recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures.
Based upon that evaluation, our interim Chief
Executive Officer and Chief Financial Officer have concluded that as of March
31, 2008, as a result of the material weaknesses discussed below, our
disclosure controls and procedures were not effective
Changes in Internal Control Over Financial
Reporting.
On October 22, 2007, AVANT and Celldex Therapeutics,
Inc. (Celldex), a privately-held company, announced the signing of a
definitive Agreement and Plan of Merger, dated October 19, 2007, by and between
AVANT, Callisto Merger Corporation (Merger Sub) and Celldex (the Merger
Agreement). On March 7, 2008, AVANT completed the merger of Merger Sub, a
wholly owned subsidiary of AVANT, with and into Celldex (the Merger). The
Merger with Celldex was accounted for using the purchase method of accounting
and was treated for accounting purposes as an acquisition by Celldex of AVANT
with Celldex being considered the accounting acquirer based on the
application of criteria specified in Statement of Financial Accounting
Standards SFAS No. 141, Business Combination, (SFAS 141), even though AVANT
was the issuer of common stock and the surviving legal entity and registrant in
the transaction. Because Celldex was determined to be the acquirer for
accounting purposes, the historical financial statements of Celldex, which had
prior to the Merger been a privately-held company, became the historical
financial statements of the Company. Accordingly, the financial statements of
the Company prior to the Merger reflect the financial position, results of
operations and cash flows of Celldex only, which during the historical periods
presented in the accompanying consolidated financial statements, was then a
privately-held company which was majority-owned by Medarex, Inc. (Medarex).
Following the Merger, the financial statements of the current period reflect
the financial position, results of operation and cash flows of the Company. The
results of operations of AVANT are included in the results of operations of the
Company beginning March 8, 2008.
The Merger with Celldex resulted in a change that has
materially affected, or is reasonably likely to materially affect, the combined
Companys internal control over financial reporting (as defined in Rules 13a
15(f) and 15d 15(f) under the Exchange Act) during the period covered by this Quarterly
Report on Form 10 Q.
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the Company's
annual or interim financial statements will not be prevented or detected on a
timely basis. As of March 31, 2008,
40
management has identified the following material weaknesses in the
Company's internal control over financial reporting:
·
Celldex did
not maintain an effective segregation of duties. Specifically, certain authority and
responsibility were not appropriately assigned and delegated to employees
within the organization.
·
Celldex did
not maintain an effective control over financial statement closing
process. Specifically, Celldex did not
maintain formal, written policies and procedures governing the financial close
and reporting process to ensure an accurate and timely financial statement
closing process. This control deficiency
resulted in misstatements to employee benefit expense, research and development
expense and accrued liability accounts and related financial disclosures.
Additionally, the above control deficiencies could
result in misstatements of financial statement accounts and disclosures that
would results in a material misstatement of the consolidated financial
statements that would not be prevented or detected.
Remediation of Material Weakness
Management is in the process of reviewing and, as necessary,
revising its assignment of authority and responsibility as well as its policies
and procedures with respect to its controls over the financial statement
closing process to ensure that all reasonable steps will be taken to correct
this material weakness. As part of this process, management expects the Merger
with AVANT to facilitate the remediation of material weaknesses and enhancement
of internal controls as the accounting function for Celldex has now been
assumed by AVANT, which has a larger accounting staff and experience in the
requirements applicable to publicly-traded companies. The deficiencies will not
be considered remediated until the AVANT internal controls are operational for
a sufficient period of time and are tested, and management has concluded that
the controls are designed and operating effectively.
41
PART II
OTHER INFORMATION
Item 1.
Legal
Proceedings
None.
Item 1A.
Risk Factors
In addition to the other
information set forth in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2007, which could materially affect our
business, financial condition or future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to the Company or that
the
42
Company currently deems
to be immaterial also may materially adversely affect the Companys business,
financial condition and/or operating results.
Item 4.
Submission
of Matters to a Vote of Security Holders
On March 6, 2008,
AVANT held a Special Meeting of Stockholders at which the stockholders approved
four proposals: (i) the issuance of shares of AVANT common stock pursuant
to the Merger Agreement in the amount necessary to result in the Celldex
stockholders owning 58% of AVANT common stock on a fully diluted basis, (ii) an
amendment to AVANTs Third Restated Certificate of Incorporation to increase
the number of authorized shares to 300,000,000, (iii) an amendment to
AVANTs Third Restated Certificate of Incorporation to effect a reverse stock
split in a ratio ranging from one-for-twelve to one-for-twenty of all the
issued and outstanding shares of AVANT common stock, the final ratio to be
determined within the discretion of the AVANT board of directors and (iv) adoption
of the 2008 Stock Option and Incentive Plan.
At the Special Meeting of
Stockholders, the following votes were tabulated for the proposal before AVANTs
Stockholders:
PROPOSAL I
To
issue shares of AVANT common stock pursuant to the Merger Agreement in
the amount necessary to result in the Celldex stockholders owning 58% of AVANT
common stock on a fully diluted basis.
For
|
|
Against
|
|
Abstain
|
|
37,356,519
|
|
1,695,943
|
|
133,474
|
|
PROPOSAL II
To
amend AVANTs Third Restated Certificate
of Incorporation to increase the number of authorized shares to 300,000,000.
For
|
|
Against
|
|
Abstain
|
|
59,288,137
|
|
4,376,122
|
|
452,541
|
|
PROPOSAL III
To
amend AVANTs Third Restated Certificate
of Incorporation to effect a reverse stock split in a ratio ranging from
one-for-twelve to one-for-twenty of all the issued and outstanding shares of
AVANT common stock, the final ratio to be determined within the discretion of
the AVANT board of directors.
For
|
|
Against
|
|
Abstain
|
|
58,934,582
|
|
4,833,582
|
|
348,636
|
|
PROPOSAL IV
To approve the
2008 Stock Option and
Incentive Plan.
For
|
|
Against
|
|
Abstain
|
|
31,606,375
|
|
7,229,463
|
|
350,096
|
|
The number of shares issued,
outstanding and eligible to vote as of the record date of Janaury 17, 2008 was
74,190,677. A quorum was present at the
Special Meeting of Stockholders with 64,116,800 shares represented by proxies
or 86.42% of the eligible voting shares.
43
Item 6.
Exhibits
3.1
|
|
Third Restated
Certificate of Incorporation of AVANT, incorporated by reference to Exhibit 3.1
of AVANTs Registration Statement on Form S-4 (Reg. No. 333-59215),
filed July 16, 1998 with the Securities and Exchange Commission.
|
3.2
|
|
Certificate of
Amendment of Third Restated Certificate of Incorporation of AVANT, incorporated
by reference to Exhibit 3.1 of AVANTs Registration Statement on
Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the
Securities and Exchange Commission.
|
3.3
|
|
Second
Certificate of Amendment of Third Restated Certificate of Incorporation of
AVANT, incorporated by reference to Exhibit 3.2 of AVANTs Registration
Statement on Form S-4 (Reg. No. 333-59215), filed July 16,
1998 with the Securities and Exchange Commission.
|
3.4
|
|
Third
Certificate of Amendment of Third Restated Certificate of Incorporation of
AVANT, incorporated by reference to Exhibit 3.1 of AVANTs Quarterly
Report on Form 10-Q, filed May 10, 2002 with the Securities and
Exchange Commission.
|
3.5
|
|
Fourth
Certificate of Amendment of Third Restated Certificate of Incorporation of AVANT,
incorporated by reference to Exhibit 3.1 of AVANTs Current Report on
Form 8-K, filed on March 11, 2008 with the Securities and Exchange
Commission.
|
3.6
|
|
Fifth
Certificate of Amendment of Third Restated Certificate of Incorporation
of AVANT, incorporated by reference to Exhibit 3.2 of AVANTs
Current Report on Form 8-K, filed on March 11, 2008 with the
Securities and Exchange Commission.
|
4.3
|
|
Amendment
No. 2 to Shareholder Rights Agreement dated November 5, 2004,
between AVANT and Computershare Trust Company, N.A. (formerly EquiServe Trust
Company, N.A.), as Rights Agent, incorporated by reference to
Exhibit 10.1 of AVANTs Registration Statement on Form 8-A1G/A,
filed on March 7, 2008 with the Securities and Exchange Commission.
|
10.1
|
|
License and
Development Agreement, dated as of April 16, 2008, between Celldex
Therapeutics, Inc. and Pfizer Vaccines LLC.*
|
*31.1
|
|
Certification of
President and Chief Executive Officer
|
*31.2
|
|
Certification of
Senior Vice President and Chief Financial Officer
|
**32.1
|
|
Section 1350
Certifications
|
*
|
|
Portions of this
document have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment in
accordance with Rule 24b-2 of the Securities Exchange Act of 1934 as amended.
|
*
|
*
|
Filed herewith.
|
*
|
**
|
Furnished
herewith.
|
44
SIGNATURES
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.
|
|
|
|
AVANT
IMMUNOTHERAPEUTICS, INC.
|
|
|
|
|
|
|
|
|
|
BY:
|
|
|
|
|
|
|
|
|
|
|
/s/ ANTHONY S.
MARUCCI
|
Dated: May 19,
2008
|
|
|
|
|
Anthony S.
Marucci
|
|
|
|
|
|
Interim
President and Chief Executive Officer
|
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ AVERY W.
CATLIN
|
Dated: May 19,
2008
|
|
|
|
|
Avery W. Catlin
|
|
|
|
|
|
Senior Vice
President, Treasurer
|
|
|
|
|
|
and Chief
Financial Officer
|
|
|
|
|
|
(Principal
Financial and
|
|
|
|
|
|
Accounting
Officer)
|
45
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
3.1
|
|
Third Restated
Certificate of Incorporation of AVANT, incorporated by reference to
Exhibit 3.1 of AVANTs Registration Statement on Form S-4 (Reg.
No. 333-59215), filed July 16, 1998 with the Securities and
Exchange Commission.
|
3.2
|
|
Certificate of
Amendment of Third Restated Certificate of Incorporation of AVANT,
incorporated by reference to Exhibit 3.1 of AVANTs Registration
Statement on Form S-4 (Reg. No. 333-59215), filed July 16,
1998 with the Securities and Exchange Commission.
|
3.3
|
|
Second
Certificate of Amendment of Third Restated Certificate of Incorporation of
AVANT, incorporated by reference to Exhibit 3.2 of AVANTs Registration
Statement on Form S-4 (Reg. No. 333-59215), filed July 16,
1998 with the Securities and Exchange Commission.
|
3.4
|
|
Third Certificate
of Amendment of Third Restated Certificate of Incorporation of AVANT,
incorporated by reference to Exhibit 3.1 of AVANTs Quarterly Report on
Form 10-Q, filed May 10, 2002 with the Securities and Exchange
Commission.
|
3.5
|
|
Fourth
Certificate of Amendment of Third Restated Certificate of Incorporation of
AVANT, incorporated by reference to Exhibit 3.1 of AVANTs Current
Report on Form 8-K, filed on March 11, 2008 with the Securities and
Exchange Commission.
|
3.6
|
|
Fifth
Certificate of Amendment of Third Restated Certificate of Incorporation of
AVANT, incorporated by reference to Exhibit 3.2 of AVANTs Current
Report on Form 8-K, filed on March 11, 2008 with the Securities and
Exchange Commission.
|
4.3
|
|
Amendment No. 2
to Shareholders Rights Agreement dated November 5, 2004 between AVANT and
Computer share Trust Company, N.A. (formerly Equiserve Trust Company, N.A.)
as Rights Agent, incorporated by reference to Exhibit 10.1 of AVANTs
Registration Statement on Form 8-A1G/A, filed on March 7, 2008 with the
Securities and Exchange Commission.
|
10.1
|
|
License and
Development Agreement, dated as of April 16, 2008, between audex
therapeuties, Inc. and Pfizer Vaccines LLC.*
|
*31.1
|
|
Certification of
President and Chief Executive Officer
|
*31.2
|
|
Certification of
Senior Vice President and Chief Financial Officer
|
**32.1
|
|
Section 1350
Certifications
|
*
|
|
Portions of this document have been omitted and
filed separately with the securities and Exchange Commission pursuan to a
request for confidential treatment in accordance with Rule 24b-2 of the
securities Exchange Act of 1934 as amended.
|
**
|
|
Filed herewith.
|
***
|
|
Furnished herewith.
|
46
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