Avanir Pharmaceuticals (AVNR) 10-Q/A 2001 Q3 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter endedJune 30, 2001 Commission File No. 0-18734

AVANIR Pharmaceuticals
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of
incorporation or organization)

11388 Sorrento Valley Road, Suite 200
San Diego, California
(Address of principal executive office) 33-0314804
(IRS Employer Identification No).



92121
(Zip Code)

(858) 622-5200
(Registrant’s 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 [   ]

The number of shares of Common Stock of the Registrant issued and outstanding as of August 7, 2001:

Class A Common stock, no par value	57,642,593
Class B Common stock, no par value	36,500

TABLE OF CONTENTS

	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES

AVANIR Pharmaceuticals

FORM 10-Q

For the Quarter Ended June 30, 2001

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets		3
	Consolidated Statements of Operations		4
	Consolidated Statements of Cash Flows		5
	Notes to Consolidated Financial Statements		6

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AVANIR Pharmaceuticals

CONSOLIDATED BALANCE SHEETS (Unaudited)

					June 30,			September 30,
					2001			2000
ASSETS
Current assets:
	Cash and cash equivalents				$	13,476,478		$	19,699,768
	Short-term investments					5,220,129			868,474
	Receivables, net					560,560			95,429
	Inventory					222,585			9,804
	Prepaid and other					488,746			411,999
			Total current assets			19,968,498			21,085,474
	Property and equipment, net					1,681,716			1,050,703
	Intangible costs, net					1,086,219			614,816
	Investments					400,000			700,000
	Other assets					63,587			68,244
			TOTAL ASSETS		$	23,200,020		$	23,519,237
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	591,283		$	965,636
	Accrued expenses and other liabilities					1,018,813			537,027
	Accrued compensation and payroll taxes					279,020			248,599
	Notes payable					31,210			171,667
			Total current liabilities			1,920,326			1,922,929
COMMITMENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK
	Series D — no par value, 500 shares authorized;
				50 shares issued and outstanding		498,295			465,920
SHAREHOLDERS’ EQUITY
	Preferred stock — no par value, 9,999,500 shares authorized:
		Series C Junior Participating — 1,000,000 shares authorized, no shares issued or outstanding				—			—
	Common stock — no par value:
		Class A — 99,288,000 shares authorized; 57,535,012 and 56,974,828 issued and outstanding				85,349,626			84,695,590
		Class B — 712,000 shares authorized; 36,500 and 65,000 shares issued and outstanding (convertible into Class A Common Stock)				19,894			34,145
	Receivable for Class A common stock					—			(649,431	)
	Accumulated deficit					(64,556,877	)		(62,949,916	)
	Accumulated other comprehensive loss					(31,244	)		—
		Total shareholders’ equity				20,781,399			21,130,388
		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$	23,200,020		$	23,519,237

See notes to consolidated financial statements.

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AVANIR Pharmaceuticals

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

			Three months ended						Nine months ended
			June 30,						June 30,
			2001			2000			2001			2000
REVENUES:
Contract and license revenues			$	5,000			—		$	5,017,350		$	1,000,000
Royalty revenues				508,739			—			1,761,790			—
Grant revenue				—			—			72,535			—
Interest and other				284,975		$	162,631			960,474			213,646
	Total revenues			798,714			162,631			7,812,149			1,213,646
EXPENSES:
Product launch expenses				235,919			—			728,148			—
Research and development				1,394,732			638,616			5,165,822			1,581,351
Sales and marketing				360,550			214,336			866,844			465,834
General and administrative				799,002			758,742			2,620,613			2,684,547
Litigation settlement				—			—			—			4,097,504
Interest				870			874			5,308			346,220
	Total expenses			2,791,073			1,612,568			9,386,735			9,175,456
NET LOSS			$	(1,992,359	)	$	(1,449,937	)	$	(1,574,586	)	$	(7,961,810	)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS:
Net loss			$	(1,992,359	)	$	(1,449,937	)	$	(1,574,586	)	$	(7,961,810	)
Dividends on redeemable convertible preferred stock				(6,233	)		(155,613	)		(18,698	)		(155,613	)
Accretion of discount related to redeemable convertible preferred stock				(4,559	)		—			(13,677	)		—
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS			$	(2,003,151	)	$	(1,605,550	)	$	(1,606,961	)	$	(8,117,423	)
NET LOSS PER SHARE:
		BASIC	$	(0.03	)	$	(0.03	)	$	(0.03	)	$	(0.16	)
		DILUTED	$	(0.03	)	$	(0.03	)	$	(0.03	)	$	(0.16	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
		BASIC		57,542,291			55,181,700			57,368,194			50,417,191
		DILUTED		57,542,291			55,181,700			57,368,194			50,417,191

See notes to consolidated financial statements.

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AVANIR Pharmaceuticals

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

			Nine Months Ended
			June 30,
			2001			2000
OPERATING ACTIVITIES:
Net loss			$	(1,574,586	)	$	(7,961,810	)
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization				516,770			103,486
Non-cash interest expense				—			402,990
Compensation paid with common stock and stock options				95,271			573,170
Litigation settlements paid with common stock				—			4,097,504
Loss on disposal of assets				16,482			5,224
Patents abandoned				—			87,325
Changes in assets and liabilities:
	Accounts receivable			(465,131	)		76,499
	Inventory			(212,781	)		(1,551	)
	Prepaid and other			(72,090	)		120,200
	Deferred costs			(256,175	)		100,000
	Accounts payable			(374,353	)		(1,005,379	)
	Accrued expenses and other liabilities			366,320			(17,003	)
	Accrued compensation and payroll taxes			30,421			50,766
		Net cash used for operating activities:		(1,929,852	)		(3,368,579	)
INVESTING ACTIVITIES:
	Investments in securities			(4,450,000	)		(388,122	)
	Proceeds from investments			367,101			—
	Patent costs			(386,059	)		(83,530	)
	Capital expenditures			(882,278	)		(105,072	)
		Net cash used for investing activities		(5,351,236	)		(576,724	)
FINANCING ACTIVITIES:
	Proceeds from issuance of common and preferred stock			1,198,255			14,398,748
	Proceeds from issuance of convertible notes payable			—			1,500,000
	Debt issue costs			—			(155,015	)
	Repayment of convertible notes payable			—			(1,500,000	)
	Proceeds from issuance of subordinated notes payable			27,648			36,277
	Repayment of subordinated notes payable			(168,105	)		(189,356	)
		Net cash provided by financing activities		1,057,798			14,090,654
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				(6,223,290	)		10,145,351
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD				19,699,768			122,674
CASH AND CASH EQUIVALENTS AT END OF PERIOD			$	13,476,478		$	10,268,025
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid			$	5,308		$	343,340
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued leasehold improvements				—		$	245,700
Value of conversion discount — convertible preferred stock				—		$	140,000
Patent purchased with common stock			$	111,158			—

See notes to consolidated financial statements

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AVANIR Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.We have prepared the unaudited consolidated financial statements in this quarterly report in accordance with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934. These statements should be read with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2000. These statements include all adjustments, consisting only of normal recurring accruals, necessary to present fairly our financial position as of June 30, 2001, and the results of operations for the three and nine-month periods ended June 30, 2001. The results of operations for the three and nine months ended June 30, 2001 may not be indicative of the results that may be expected for the fiscal year ending September 30, 2001.

Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of our assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications.Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to current period presentation.

2.      BALANCE SHEET DETAIL

The following tables provide details of selected balance sheet items.

			June 30,			September 30,
			2001			2000
Receivables, net:
	Total receivables		$	575,101		$	109,970
	Allowance for doubtful accounts			(14,541	)		(14,541	)
		Receivables, net	$	560,560		$	95,429
Property and Equipment, Net:
	Leasehold improvements		$	483,311		$	416,523
	Computer equipment and related software			290,105			233,200
	Research and development equipment			1,494,712			781,677
	Office equipment, furniture, and fixtures			208,147			193,808
				2,476,275			1,625,208
	Less, accumulated depreciation and amortization			(794,559	)		(574,505	)
		Property and equipment, net	$	1,681,716		$	1,050,703
Intangible costs, net:
	Intangible costs		$	1,212,438		$	715,222
	Less, accumulated amortization			(126,219	)		(100,406	)
		Intangible costs, net	$	1,086,219		$	614,816

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3.      INVENTORY

     Inventories are stated at the lower of cost (first-in, first-out) or market price. Inventories consist of the raw material, docosanol, which is the active ingredient in docosanol 10% cream.

4.      INVESTMENTS

     The following tables summarize the Company’s investments in securities, which are either held to maturity or available for sale. Available-for-sale securities are those investments that the Company does not intend to sell in the near term nor hold to maturity. The available-for-sale investments are carried at fair value with unrealized gains or losses reported in shareholders’ equity as a component of comprehensive income. Investments classified as held to maturity are recorded at amortized cost.

							Gross		Gross
					Amortized		Unrealized		Unrealized		Fair
					Cost		Gain		Loss		Value
As of June 30, 2001:
		Certificates of deposit			$	501,373	$	10,787		—	$	512,160
		Government securities				4,950,000		—	$	31,152		4,918,848
		Commercial paper				200,000		—		1,374		198,626
				Total	$	5,651,373	$	10,787	$	32,526	$	5,629,634
Reported as:
	Short-term investments:
		Classified as available for sale			$	4,418,756
		Classified as held to maturity				801,373
			Short-term investments			5,220,129
	Long-term investments					400,000
				Total	$	5,620,129
As of September 30, 2000:
		Certificates of deposit			$	588,122		—		—	$	588,122
		Government securities				780,352		—	$	1,517		778,835
		Commercial paper				200,000		—		336		199,664
				Total	$	1,568,474		—	$	1,853	$	1,566,621
Reported as:
		Short-term investments			$	868,474
		Investments				700,000
				Total	$	1,568,474

5.      ROYALTY REVENUES FROM LICENSE AGREEMENTS

     Our policy is to recognize royalty revenues from our licensed products when earned. Net sales figures used for calculating royalties due the Company can often include deductions for costs of unsaleable returns, managed care chargebacks, cash discounts, freight and warehousing, and miscellaneous write-offs, which may vary over the course of the license agreement. Sales of Abreva™, if publicly reported by our licensee, GlaxoSmithKline, could differ from net sales used for calculating royalties and in determining the royalties earned according the license agreement.

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6.      PRODUCT LAUNCH COSTS

     AVANIR has incurred certain costs related to the product launch phase for Abreva™ through June 30, 2001. Our obligation to share product launch costs with GlaxoSmithKline ceased after June 30, 2001.

7.      NET INCOME (LOSS) PER SHARE

     Computation of Net Income and Net Loss per Common Share. Basic income and basic loss per share is computed by dividing the net income and net loss by the weighted average number of common shares outstanding during the period (“basic EPS method”). Diluted earnings (loss) per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period (“diluted EPS method”). Dilutive common equivalent shares consist of shares issuable upon exercise of stock options and warrants and conversion of preferred stock. In the accompanying consolidated statements of operations, diluted net loss per share is the same as basic net loss per share for both the three and nine months ended June 30, 2001, because the inclusion of 6,936,816 and 7,362,746 dilutive common equivalent shares, respectively, would be anti-dilutive.

8.      COMPREHENSIVE LOSS

     Comprehensive income for the Company includes unrealized gains and losses on available-for-sale securities. The components of comprehensive income (loss) are as follows:

		Three Months Ended June 30,						Nine Months Ended June 30,
		2001			2000			2001			2000
Comprehensive loss:
	Net loss	$	(1,992,359	)	$	(1,449,937	)	$	(1,574,586	)	$	(7,961,810	)
	Net change in unrealized loss on available-for-sale investments		(31,244	)		—			(31,244	)		—
Total comprehensive loss		$	(2,023,603	)	$	(1,449,937	)	$	(1,605,830	)	$	(7,961,810	)

9.      MINORITY INTEREST IN SUBSIDIARY

     At June 30, 2001, IDEC Pharmaceuticals held an ownership interest in our subsidiary, Xenerex Biosciences, of approximately 5% on a fully diluted basis. We consider the cost basis of the minority interest held by IDEC to be immaterial for separate financial statement disclosure at this time.

10.      SHAREHOLDERS’ EQUITY

Preferred Stock

     Preferred stock consists of Series C Junior Participating Preferred Stock and Series D Redeemable Convertible Preferred Stock.

Series C Junior Participating Preferred Stock.None of the Series C Junior Participating Preferred Stock is outstanding.

Series D Redeemable Convertible Preferred Stock.At June 30, 2001 and September 30, 2000, 50 shares of Series D redeemable convertible preferred stock (“Series D Shares”) remained outstanding in connection with a securities purchase agreement made with certain investors on March 22, 1999. The Series D holders may convert any or all of the remaining Series D Shares into shares of Class A common stock at a conversion rate equal to $10,000 divided by a conversion price equal to the lesser of:

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• the Fixed Conversion Price— an amount equal to $2.715 per share of Class A common stock; or

• the Variable Conversion Price— an amount equal to 86% of the market price of our Class A common stock, defined as the lower of:

— the average of the five lowest trading prices per share of Class A common stock on The American Stock Exchange during the 25 trading days immediately preceding a given date of determination, where trading price is determined as the average of the high and low trading prices of our Class A common stock on a particular trading day; or

— the average of the high and low trading price per share of Class A common stock on The American Stock Exchange on the date of determination.

Common Stock

Class A Common Stock.For the three months ended June 30, 2001, we issued an aggregate of 97,518 shares of Class A common stock in exchange for $136,831 received in connection with the exercise of employee stock options. The average exercise price per share for the three-month period was $1.403. For the nine months ended June 30, 2001, we issued an aggregate of 384,549 shares of Class A common stock in exchange for $382,262 received in connection with the exercise of employee stock options. The average exercise price for the common stock for the nine-month period was $0.99 per share.

Class B Common Stock Conversion.On June 27, 2001, 12,500 shares of Class B common stock converted to 12,500 shares of Class A common stock.

11.      RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133”). SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. We currently do not have any derivative instruments or any embedded derivative instruments that require bifurcation and we are not conducting any hedging activity; therefore, there is no material impact on our financial statements.

     In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB”). SAB 101, as amended, summarizes certain of the SEC’s views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements, including revenues earned from collaborations between companies. On April 1, 2001, we adopted SAB 101, which did not change the accounting of the Company for revenue recognition. At June 30, 2001, we were involved in two research collaborations that contained payments that are tied to the achievement of future milestones. We intend to recognize the revenues associated with those milestone payments as the services contemplated by the agreements have been achieved.

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”.SFAS No. 141 establishes new standards for accounting and reporting requirements for business combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Management does not believe that SFAS No. 141 will have a material impact on the Company’s consolidated financial statements.

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     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets”. SFAS No. 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of goodwill and other intangible assets with indefinite lives and instead sets forth methods to periodically evaluate goodwill for impairment. The Company expects to adopt this statement during the first quarter of fiscal 2002. Management does not believe that SFAS No. 142 will have a material impact on the Company’s financial statements.

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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.

Signature	Title	Date
/s/GERALD J. YAKATAN Gerald J. Yakatan	President and Chief Executive Officer (Principal Executive Officer)	August 21, 2001
/s/GREGORY P. HANSON Gregory P. Hanson	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	August 21, 2001

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