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 September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
- --------- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File No. 0-21972
------------------------
INNOVIR LABORATORIES, INC.
(Exact name of Registrant as specified in its Charter)
------------------------
Delaware 13-3536290
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
510 East 73rd Street, New York, New York 10021
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 249-4703
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
--- ---
The number of shares of Registrant's common stock outstanding on
November 10, 1997 was 29,750,529.
------------------------
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
INDEX
-----
Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) at September 30,
1997 and December 31, 1996 ............................... 3
Condensed Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 1997 and 1996 and for
the period from January 6, 1995 (inception) through September 30,
1997...................................................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficit) (unaudited) for the nine months ended September 30,
1997...................................................... 5
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1997 and 1996 and for the
period from January 6, 1995 (inception) through September 30,
1997...................................................... 6
Notes to Condensed Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................. 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................ 12
SIGNATURES. ................................................................ 13
2
Part I. Financial Information
Item 1. Financial Statements
--------------------
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets (unaudited)
September 30, December 31,
1997 1996
----------------- ------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 1,775,000 $ 6,412,000
Prepaid expenses and other current assets 62,000 203,000
----------------- ------------------
Total current assets 1,837,000 6,615,000
Fixed assets less accumulated depreciation and amortization 2,641,000 2,439,000
Amount due from VIMRX Pharmaceuticals Inc. - 535,000
Goodwill, net 927,000 1,236,000
Other assets 244,000 249,000
================= ==================
Total assets $ 5,649,000 $ 11,074,000
================= ==================
LIABILITIES:
Current liabilities:
Accounts payable and accrued expenses $ 960,000 $ 1,319,000
Capital lease - current portion 492,000 472,000
Term note payable - warrantholder; current portion includes accrued 36,000 36,000
interest of $5,000
Other liabilities 91,000 -
----------------- ------------------
Total current liabilities 1,579,000 1,827,000
Amount due to VIMRX Pharmaceuticals Inc. 135,000 -
Term note payable - warrantholder; includes accrued interest of $39,000 227,000 227,000
Capital leases 234,000 463,000
----------------- ------------------
Total liabilities 2,175,000 2,517,000
----------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.06; 15,000,000 shares authorized
Class B Convertible Preferred Stock; 2,500,000 shares designated; 17,000 18,000
280,000 shares issued and outstanding at September 30, 1997,
297,000 shares issued and outstanding at December 31, 1996
Class D Convertible Preferred Stock; 8,667,000 shares designated, -- 520,000
issued and outstanding at December 31, 1996
Common stock, par value $.013; 70,000,000 shares authorized 29,751,000
shares issued and outstanding at September 30, 1997, 17,946,000
shares issued and outstanding at December 31, 1996 387,000 233,000
Additional paid-in capital 32,083,000 29,667,000
Cumulative translation adjustment (43,000) (8,000)
Unearned compensation - (181,000)
Deficit accumulated during the development stage (28,970,000) (21,692,000)
----------------- ------------------
Total stockholders' equity 3,474,000 8,557,000
================= ==================
Total liabilities and stockholders' equity $ 5,649,000 $ 11,074,000
================= ==================
3
INNOVIR LABORATORIES, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Operations (unaudited)
For the Nine Months Ended September 30, 1997
Period
Three months ended September 30 Nine months ended September 30 January 6, 1995
------------------------------------ --------------------------------- (inception)
through
1997 1996 1997 1996 September 30, 1997
------------- ------------- ------------- ------------- -------------------
Operating expenses:
Research and development $ 1,377,000 $ 431,000 $ 4,711,000 $ 1,041,000 $ 8,092,000
Purchased in process research and
development -- 163,000 -- 3,105,000 17,374,000
General and administrative 752,000 20,000 2,289,000 312,000 3,362,000
Amortization of Goodwill 103,000 -- 309,000 -- 309,000
------------- ------------- ------------- ------------- ---------------
2,232,000 614,000 7,309,000 4,458,000 29,137,000
------------- ------------- ------------- ------------- ---------------
Other (income) expenses:
Interest income (22,000) -- (153,000) (41,000) (166,000)
Interest expense -- --
37,000 122,000 150,000
Other-net -- -- -- -- (151,000)
------------- ------------- ------------- ------------- ---------------
15,000 -- (31,000) (41,000) (167,000)
------------- ------------- ------------- ------------- ---------------
Net (loss) $ (2,247,000) $ (614,000) $ (7,278,000) $ (4,417,000) $ (28,970,000)
============= ============= ============= ============= ===============
Loss-per-share data:
Net loss per share $ (0.08) $ (0.06) $ (0.34) $ (0.46)
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding 28,055,938 9,500,000 21,374,889 9,500,000
============= ============= ============= =============
4
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficit) (unaudited) For the Nine Months Ended September 30, 1997
Class B Convertible Class D Convertible
Preferred Stock Preferred Stock Common Stock
---------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 297,000 $18,000 8,667,000 $520,000 17,946,000 $233,000
Exercise of options and warrants 3,131,000 41,000
Costs incurred in connection with
issuance of equity securities
Conversion of Class
B Convertible Stock (17,000) (1,000) 26,000
Conversion of Class D Convertible
Stock (8,667,000) (520,000) 8,667,000 113,000
Adjustment for shares held in
escrow in connection with
stockholder's litigation (19,000)
Compensation expense incurred in
connection with the issuance of
stock options
Amortization of unearned
compensation
Cumulative transaction adjustment
Net loss for the nine months ended
September 30, 1997
--------- --------- --------- --------- ---------- ---------
Balance at September 30, 1997 280,000 $17,000 -- -- 29,751,000 $387,000
========= ========= ========= ========= ========== =========
Deficit
Accumulated
Additional Cumulative During the
Paid-in Translation Unearned Development
Capital Adjustment Compensation Stage Total
----------- ------------- -------------- ------------ ----------
Balance at December 31, 1996 $29,667,000 $(8,000) $(181,000) $(21,692,000) $8,557,000
Exercise of options and warrants 1,973,000 2,014,000
Costs incurred in connection with
issuance of equity securities (24,000) (24,000)
Conversion of Class B Convertible
Stock 1,000 --
Conversion of Class D Convertible
Stock 407,000 --
Adjustment for shares held in
escrow in connection with
stockholder's litigation
Compensation expense incurred in
connection with the issuance of
stock options 59,000 59,000
Amortization of unearned
compensation 181,000 181,000
Cumulative transaction adjustment (35,000) (35,000)
Net loss for the nine months ended
September 30, 1997 $(7,278,000) $(7,278,000)
----------- --------- --------- ------------ -----------
Balance at September 30, 1997 $32,083,000 (43,000) -- $(28,970,000) $3,474,000
=========== ========= ========= ============ ===========
5
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 1997
Period
January 6, 1995
(inception)
Nine months ended through
September 30 September 30,
1997 1996 1997
------------------ ------------------ -------------------
Cash flows from operating activities:
Net (loss) $ (7,278,000) $ (4,458,000) $ (28,970,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation 451,000 20,000 601,000
Amortization of goodwill 309,000 - 309,000
Amortization of unearned compensation 181,000 - 388,000
Purchased in process research and development - 3,105,000 17,374,000
Provision for losses on notes receivable - - 85,000
Non-cash compensation 59,000 - 59,000
Changes in operating assets and liabilities:
(Decrease) increase in other current assets 140,000 (19,000) 100,000
(Decrease) in other assets 6,000 - 6,000
(Decrease) increase in accounts payable and accrued
expenses (359,000) (65,000) 224,000
Increase in other current liabilities 91,000 - 92,000
----------------- ----------------- -----------------
Net cash (used in) operating activities (6,399,000) (1,417,000) (9,732,000)
================= ================= =================
Cash flows from investing activities:
Purchase of equipment (587,000) (110,000) (1,241,000)
Cash acquired in acquisitions - 145,000 3,532,000
----------------- ----------------- -----------------
Net cash provided by (used in) investing
activities (587,000) 35,000 2,291,000
----------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from sales of common stock 2,014,000 - 2,026,000
Advances and contributed capital from VIMRX
Pharmaceuticals Inc. 670,000 1,486,000 7,536,000
Costs incurred in connection with issuance of
equity securities (24,000) - (24,000)
Repayment of capital leases (275,000) - (275,000)
Net cash provided by financing activities 2,385,000 1,486,000 9,263,000
Effect of exchange rate changes on cash (36,000) - (47,000)
----------------- ----------------- -----------------
Net increase in cash and cash equivalents (4,637,000) 104,000 1,775,000
Cash and cash equivalents at beginning of period 6,412,000 68,000 --
----------------- ----------------- -----------------
Cash and cash equivalents at end of period $ 1,775,000 $ 172,000 $ 1,775,000
================= ================= ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 122,000 $ 125,000
================= ==================
6
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The condensed consolidated financial statements of Innovir Laboratories,
Inc. and Subsidiaries (the "Company") reflect all adjustments, consisting
only of normal recurring accruals, which are, in the opinion of the
Company's management, necessary for a fair presentation of the Company's
results of operations for the respective periods presented. Operating
results for any interim period are not necessarily indicative of results
for a full year. These notes do not include all the information required by
generally accepted accounting principles. The condensed interim
consolidated financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1996 and in the transition
report for the transition period from October 1, 1996 to December 31, 1996,
filed on Form 10-Q.
(2) Statements of Cash Flows - Supplemental schedule of noncash activities:
During the nine months ended September 30, 1997, the Company converted
17,000 shares of Class B Convertible Preferred Stock into 26,000 shares of
Common Stock. All of the outstanding Class D Convertible Preferred Stock
("D Preferred Stock") was automatically converted to 8,666,667 shares of
Common Stock effective July 1, 1997. The D Preferred Stock was issued in
connection with the transaction between the Company, VIMRX Pharmaceuticals
Inc. ("VIMRX") and certain stockholders of the Company whereby VIMRX
acquired a majority holding in the Company. In August 1997, warrants to
purchase 1,000,000 shares of Common Stock at $1.00 per share were exercised
by VIMRX. In addition, VIMRX owns warrants to purchase 1,000,000 shares of
Common Stock at an exercise price of $2.00 per share. In August 1997,
warrants to purchase 2,000,000 shares of Common Stock at $0.50 per share
were exercised by certain other shareholders. VIMRX owns approximately 65%
of the Company's common stock at September 30, 1997.
(3) Contingency: The Company may be considered to be in violation of the terms
of its office and laboratory sublease by not obtaining the required
approval from the owner of the property prior to the consummation of the
transactions with VIMRX whereby VIMRX acquired a majority holding in
Innovir Laboratories, Inc. ("Innovir") and Innovir acquired all of the
issued and outstanding shares of VIMRX Holding, Ltd. ("VHL"), a wholly
owned subsidiary of VIMRX, in December 1996. In addition, the owner of the
property has alleged, and the Company's sublandlord disputes, that the
sublandlord may also be in breach of its lease with the owner of the
property. If the sublandlord is evicted, the Company would lose its right
to occupy its current space. While the Company believes these matters may
be resolved without a materially adverse effect on the Company's business
or financial position, no assurance can be given as to the ultimate
outcome.
(4) During February 1996, Innovir was named as defendant in an action filed by
an investor alleging that Innovir wrongfully refused to honor the
investor's request to convert certain shares of Innovir's preferred stock
into Innovir's Common Stock. During February 1997, the investor and Innovir
settled the action at no material cost to the Company. In connection with
the settlement, 19,000 shares of Common Stock, which had been held in
escrow pending the resolution of the action, were returned to the Company.
7
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
(5) In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This Statement establishes standards
for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. This
Statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. This Statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement
of all prior-period EPS data presented. The adoption of this Statement will
not have any impact on the Company's EPS disclosure, as the Company's stock
options and warrants are anti-dilutive and will be excluded from the
denominator of earnings per share; thus, earnings per common share is equal
to basic earnings per share as computed under SFAS No. 128.
The FASB recently issued three new accounting standards, Statement No. 129,
Disclosure of Information about Capital Structure, Statement No. 130,
Reporting Comprehensive Income, and Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, and if adopted will be
effective for the period presented after December 31, 1997. The Company is
evaluating the effect of these new statements.
8
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans to differ. Factors that may cause such differences include,
but are not limited to, the progress of the Company's research and development
programs, the Company's ability to obtain additional funds, the Company's
ability to compete successfully, the Company's ability to attract and retain
qualified personnel, the Company's ability to successfully enter into
collaborations with third parties, the Company's ability to enter into and
progress in clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in obtaining and enforcing patents and any
necessary licenses, the Company's ability to establish development and
commercialization relationships, the cost of manufacturing, and those other
risks discussed under the heading Risk Factors included in the Company's Form S-
3 Registration Statement (Reg. No. 333-12865).
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto contained herein and the Company's Annual
Report on Form 10-K for the year ended September 30, 1996 and the transition
report for the transition period from October 1, 1996 to December 31, 1996,
filed on Form 10-Q.
Background
On December 23, 1996, Innovir, VIMRX and certain stockholders of Innovir ("The
Aries Funds") consummated a transaction (the "Transaction") whereby VIMRX
acquired 68% of the outstanding stock of Innovir and Innovir acquired all of the
issued and outstanding shares of VHL, a wholly-owned subsidiary of VIMRX.
Innovir's acquisition of VHL and VIMRX's partial acquisition of Innovir have
been accounted for as a purchase in accordance with APB Opinion No. 16, Business
Combinations and Emerging Issues Task Force Issue No. 90-13, Accounting for
Simultaneous Common Control Mergers ("EITF No. 90-13"). The application of APB
No. 16 and EITF No. 90-13 requires that the Transaction be accounted for as a
reverse acquisition and accordingly, for accounting purposes, (i) VHL is deemed
to be the acquirer and surviving entity, (ii) because Innovir is deemed to be
the legal acquirer, VHL's historic capital accounts have been retroactively
restated (recapitalized) to reflect Innovir's capital accounts and the
equivalent number of shares received by VIMRX in the Transaction, (iii) Innovir
has fair valued its assets and liabilities to the extent acquired by VIMRX (68%)
and (iv) the assets and liabilities of VHL are carried at VHL's historic cost.
Since VHL is deemed to be the surviving entity, the statement of operations
includes the operations of VHL for the period from January 6, 1995 (inception).
The operations of Innovir are included only since the date of acquisition, i.e.,
for the period from December 23, 1996 to September 30, 1997. For accounting
purposes, VHL assumed the name of Innovir Laboratories, Inc. and Subsidiaries,
and, for purposes of this Quarterly Report, all references to the "Company"
shall mean the consolidated entity consisting of Innovir, VHL and subsidiaries.
On February 11, 1997, Innovir elected to change its fiscal year end date from
September 30 to December 31 of each year, effective January 1, 1997. This change
was made to conform Innovir's
9
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
fiscal year end date with that of VHL. This Quarterly Report on Form 10-Q covers
the first nine months of the new fiscal year, that is January 1 to September 30,
1997.
Results of Operations
Since its inception, substantially all of the Company's resources have been
applied to research and development, patents and licensing and other general and
administrative matters. The Company has no commercially viable therapeutic
products and does not anticipate having any for several years. The Company is
developing the technology to be used as a research tool to facilitate
determination of gene function and to validate drug targets. No significant
revenues have been earned from this use. The Company has had no operating
revenues to date and has sustained net losses since its inception. The Company
expects losses to continue for the foreseeable future.
Three Month Period Ended September 30, 1997 vs. September 30, 1996
Research and development expenses increased $946,000 due to the acquisition of
Innovir's operations in December 1996 ($918,000) and an increase in spending in
the European operations.
General and administrative expenses increased $732,000 due to the acquisition of
Innovir ($689,000) and a increase in VHL expenses related to the European
operations ($43,000).
Purchases in process research and development in the three months ended
September 30, 1996 relate to the acquisition of Ribonetics GmbH; in May 1996,
VHL had acquired Ribonetics GmbH and had incurred expenses in connection
therewith.
Amortization of goodwill relates to the asset recorded in the transaction with
VIMRX described under "Background" above.
Nine Month Period Ended September 30, 1997 vs. September 30, 1996
Research and development expenses increased $3,670,000 due to the acquisition of
Innovir's operations in December 1996 ($3,014,000) and increased spending in the
European operations ($656,000).
General and administrative expenses increased $1,977,000 due to the acquisition
of Innovir ($2,223,000) and a decrease in European expenses from 1996.
Amortization of goodwill relates to the asset recorded in the transaction with
VIMRX described under "Background" above.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash and cash equivalents of $1,775,000
as compared to $6,412,000 at December 31, 1996. The Company had working capital
of $258,000 at September
10
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development State Enterprise)
30, 1997, as compared to working capital of $4,788,000 at December 31, 1996. The
decrease in cash and working capital positions resulted from cash expended for
operations and capital assets, net of $2,000,000 provided by the exercise of
warrants.
The Company may be considered to be in violation of the terms of its sublease
for its principal office and laboratory space by not obtaining the required
approval from the owner of the property prior to the consummation of the
transactions with VIMRX in December 1996. See the notes to the Company's
financial statements. In addition, the owner of the property has alleged, and
the Company's sublandlord disputes, that the sublandlord may also be in breach
of its lease with the owner of the property. If the sublandlord is evicted, the
Company would lose its right to occupy its current space. While the Company
believes that these matters may be resolved without a materially adverse effect
on the Company's business or financial position, no assurances can be given as
to the ultimate outcome.
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and commercialization of its proposed products.
As of September 30, 1997, the Company had cash and cash equivalents of
approximately $1.8 million. Based on current projections, which are subject to
change (such change may be significant), the Company's management believes that
this and continued funding by VIMRX, will be sufficient to fund its operations
into the second quarter of the year ended December 31, 1998. Thereafter, the
Company will require additional funds, which it may seek to raise through public
or private equity or debt financings, collaborative or other arrangements with
corporate sources, or through other sources of financing. There can be no
assurance that such additional financing can be obtained on terms reasonable to
the Company, if at all. In the event the Company is unable to raise additional
capital, planned operations would need to be scaled back or discontinued during
1998.
11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
--------
10 Separation Agreement, dated September 1997, by and between the
Company and Allan R. Goldberg.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
-------------------
During the quarter for which this report is filed, the Company filed a
current report on Form 8-K, dated September 26, 1997 as filed on
October 3, 1997, regarding the appointment of the Company's new
President and Chief Executive Officer; no financial statements
were filed in connection with such report.
All other Items of this report are inapplicable.
12
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.
November 14, 1997
Innovir Laboratories, Inc.
By: /s/ THOMAS R. SHARPE
-----------------------------------------------
Name: Thomas R. Sharpe, Ph.D.
Title: President and Chief Executive Officer
(Principal executive officer)
By: /s/ FRANCIS M. O'CONNELL
-----------------------------------------------
Name: Francis M. O'Connell
Title: Chief Financial Officer
(Principal financial and accounting officer)
13