SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1996
Or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to__________
-------------------
INNOVIR LABORATORIES, INC.
(Exact name of Registrant as specified in its Charter)
Commission File Number 0-21972
Delaware 13-3536290
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
510 East 73rd Street (212) 249-4703
New York, NY 10021 (Registrant's telephone number)
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports 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 the Registrant's common stock outstanding as of May 8,
1996 was: 5,630,671.
Table of contents is located on page 2.
INNOVIR LABORATORIES, INC.
CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1996 and
September 30, 1995 3
Condensed Statements of Operations for the three
months and the six months ended March 31, 1996 and
1995 and for the period from September 1, 1989
(inception) to March 31, 1996 5
Condensed Statement of Stockholders' Equity for the six
months ended March 31, 1996 6
Condensed Statements of Cash Flows for the six months
ended March 31, 1996 and 1995 and for the period from
September 1, 1989 (inception) to March 31, 1996 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED BALANCE SHEETS
(unaudited)
March 31, September 30,
1996 1995
------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $2,834,240 $1,836,984
Prepaid expenses and other current assets 102,319 178,833
------------- ------------
Total current assets 2,936,559 2,015,817
Fixed assets, less accumulated depreciation and
amortization of $775,508 at March 31, 1996 and
$575,864 at September 30, 1995 1,031,730 846,344
Other assets 294,184 342,724
------------- ------------
Total assets $4,262,473 $3,204,885
============= ============
(continued)
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED BALANCE SHEETS (continued)
(unaudited)
March 31, September 30,
1996 1995
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $570,012 $660,256
Accrued interest - warrantholder 10,503 13,003
Term note payable - warrantholder; current portion 125,000 62,500
Capital leases - current portion 224,957 173,627
------------- ------------
Total current liabilities 930,472 909,386
Term note payable - warrantholder; includes accrued interest 162,845 225,345
Capital leases 406,751 458,435
------------- ------------
Total liabilities 1,500,068 1,593,166
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.06; 15,000,000 shares authorized:
Class B Convertible Preferred Stock; 2,500,000 shares
designated; shares issued and outstanding - 297,000 at
March 31, 1996 and 427,500 at September 30, 1995
(liquidation value, $1,485,000 and $2,137,500 respectively) 17,820 25,650
Class C Convertible Preferred Stock; 1,000,000 shares
designated; shares issued and outstanding - 505,000 at
March 31, 1996 (liquidation value, $2,614,993) 30,300
Common stock, par value $.013; 35,000,000 shares
authorized; shares issued and outstanding - 5,468,614 at
March 31, 1996 and 3,986,339 at September 30, 1995 71,092 51,822
Additional paid-in capital 24,139,892 17,628,038
Unearned compensation (1,829,215) (177,083)
Deficit accumulated during the development stage (19,667,484) (15,916,708)
------------- ------------
Total stockholders' equity 2,762,405 1,611,719
------------- ------------
Total liabilities and stockholders' equity $4,262,473 $3,204,885
============= ============
See accompanying notes to the financial statements
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Cumulative
For the three months ended For the six months ended Since
March 31: March 31: September 1,
----------------------------- --------------------------- 1989
1996 1995 1996 1995 (inception)
----------------------------- --------------------------- -------------
Revenues:
Interest income $44,221 $13,049 $79,673 $29,524 $326,862
----------------------------- --------------------------- -------------
Expenses:
Research and development 983,872 682,992 1,831,295 1,378,171 10,322,719
General and administrative 557,472 418,210 1,113,602 863,192 7,171,488
Compensation expense incurred in
connection with the issuance of
warrants and stock options
(non-cash charge) 530,212 808,993 881,910
Interest 38,709 24,866 76,559 50,946 1,211,067
----------------------------- --------------------------- -------------
Total expenses 2,110,265 1,126,068 3,830,449 2,292,309 19,587,184
----------------------------- --------------------------- -------------
Loss before extraordinary item (2,066,044) (1,113,019) (3,750,776) (2,262,785) (19,260,322)
Extraordinary item: loss on early
extinguishment of debt (407,162)
----------------------------- --------------------------- -------------
Net loss ($2,066,044) ($1,113,019) ($3,750,776) $2,262,785) ($19,667,484)
============================= =========================== =============
Loss per share data:
Weighted average number of common
shares outstanding 4,783,152 3,460,558 4,494,224 3,340,963
============================= ===========================
Net loss per share ($0.43) ($0.32) ($0.83) ($0.68)
============================= ===========================
See accompanying notes to the financial statements
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended March 31, 1996
(unaudited)
Class B Convertible Class C Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
-------- -------- -------- --------- ---------- --------
Balance, September 30, 1995 427,500 $25,650 3,986,339 $51,822
Exercise of warrants ($.05 per share) 525,000 6,825
Sale of Class C Convertible Preferred Stock in
November and December 1995 for cash ($5.00 per
preferred share) 960,000 $57,600
Costs incurred in connection with issuances of equity securities
Issuance of warrants in November 1995 and January 1996
in connection with consulting agreements and finders'
fee arrangements
Amortization of unearned compensation
Compensation expense in connection with the issuance
of stock options
Conversions of Class B Preferred Stock into common stock (130,500) (7,830) 164,871 2,144
Conversions of Class C Preferred Stock into common stock (455,000) (27,300) 792,404 10,301
Net loss for the six months ended March 31, 1996
-------- -------- -------- -------- --------- ---------
Balance, March 31, 1996 297,000 $17,820 505,000 $30,300 5,468,614 $71,092
======== ======== ======== ======== ========= ========
See accompanying notes to the financial statements
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended March 31, 1996
(unaudited)
Deficit
Accumulated
Additional Unearned During the
Paid-in Compen- Development
Capital sation Stage Total
----------- ---------- ------------ ----------
Balance, September 30, 1995 $17,628,038 ($177,083) ($15,916,708) $1,611,719
Exercise of warrants ($.05 per share) 19,425 26,250
Sale of Class C Convertible Preferred Stock in
November and December 1995 for cash ($5.00 per
preferred share) 4,742,400 4,800,000
Costs incurred in connection with issuances of equity securities (733,781) (733,781)
Issuance of warrants in November 1995 and January 1996
in connection with consulting agreements and finders'
fee arrangements 2,443,125 (2,443,125)
Amortization of unearned compensation 790,993 790,993
Compensation expense in connection with the issuance
of stock options 18,000 18,000
Conversions of Class B Preferred Stock into common stock 5,686
Conversions of Class C Preferred Stock into common stock 16,999
Net loss for the six months ended March 31, 1996 (3,750,776) (3,750,776)
----------- ----------- ------------ ----------
Balance, March 31, 1996 $24,139,892 ($1,829,215) ($19,667,484) $2,762,405
=========== =========== ============ ==========
See accompanying notes to the financial statements
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
For the six months ended Cumulative
March 31 Since
-------------------------------- September 1,
1996 1995 1989
---- ---- ----
Cash flows from operating activities:
Net loss during development stage ($3,750,776) ($2,262,785) ($19,667,484)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 277,644 119,907 979,581
Amortization of deferred financing costs 15,100 7,692 276,250
Amortization of note payable discounts 79,947
Other non-cash expenses including compensation expense 808,993 35,000 1,428,387
Loss on early extinguishment of debt 407,162
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets 76,514 37,653 (102,319)
(Increase) in other assets (44,560) (787) (160,925)
(Decrease) increase in accounts payable and accrued expenses (106,756) 33,271 910,141
-------------------------------- --------------
Net cash used in operating activities (2,723,841) (2,030,049) (15,849,260)
-------------------------------- --------------
Cash flows from investing activities:
Capital expenditures (291,516) (31,050) (1,203,928)
-------------------------------- --------------
Net cash used in investing activities (291,516) (31,050) (1,203,928)
-------------------------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 5,755,205
Principal payments under capital lease obligations (88,905) (46,713) (232,072)
Increase in deferred financing costs (8,711) (7,500) (555,577)
Repayment of notes payable (2,597,216)
Proceeds from issuance of equity securities, less offering expenses 4,110,229 1,011,710 17,518,539
Purchase of treasury stock (1,451)
-------------------------------- --------------
Net cash provided by financing activities 4,012,613 957,497 19,887,428
-------------------------------- --------------
Net increase (decrease) in cash and cash equivalents 997,256 (1,103,602) 2,834,240
Cash and cash equivalents, beginning of period 1,836,984 1,908,983
-------------------------------- --------------
Cash and cash equivalents, end of period $2,834,240 $805,381 $2,834,240
=========== ============ ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $79,058 $53,546 $352,642
=========== ============ ==============
See accompanying notes to the financial statements
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The condensed interim financial statements of Innovir Laboratories, Inc.
(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 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 fiscal year ended September
30, 1995.
2. Statements of Cash Flows - Supplemental schedule of noncash activities:
Included in accounts payable were approximately $63,000 and $81,000 of
costs incurred in connection with the Company's issuance of equity
securities, and approximately $12,000 and $8,000 of fixed assets, at March
31, 1996 and 1995, respectively.
Capital lease obligations of approximately $89,000 and $38,000 were
incurred during the six months ended March 31, 1996 and 1995, respectively,
when the Company leased new equipment.
During the six months ended March 31, 1996, the Company amended 250,000
previously issued warrants, and issued an additional 915,000 warrants, to
purchase common stock in connection with various consulting agreements and
finders' fee arrangements entered into by the Company. The fair market
value of such warrants at the date of amendment or issuance was
approximately $2,443,000.
3. In November 1995, the Company commenced a private placement of its
securities to raise equity financing (the "95 Offering"). In connection
with the 95 Offering, the Company's Board of Directors designated one
million shares of preferred stock as Class C Convertible Preferred Stock
("C Preferred Stock"). Holders of C Preferred Stock have no voting rights
and are not entitled to receive dividends. C Preferred Stockholders have a
liquidation preference, in the event of a liquidation, dissolution, or
winding down of the Company, equal to the sum of $5.00 per share (the "C
Issue Price") plus an amount equal to 10% of the C Issue Price, per annum,
for the period that has passed since their respective date of issuance. The
liquidation preference is on a parity with the Class B Convertible
Preferred Stockholders. The C Preferred Stock's conversion feature provides
for each share of C Preferred Stock to be converted into shares of the
Company's common stock at a floating rate equal to the result of dividing:
(i) the sum of the C Issue Price plus an amount equal to 10% of the C Issue
Price, per annum, for the number of days between the date of issuance, as
defined, and the date of conversion, as defined, of each share of C
Preferred Stock by (ii) the lesser of: (a) the average closing bid price of
the Company's common stock for the five trading days ending on November 17,
1995
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
(which was $3.4375), or (b) 85% of the average closing bid price of the
Company's common stock for the five trading days immediately preceding the
date of conversion, as defined. Each share of C Preferred Stock that
remains outstanding on November 17, 1997 will automatically be converted to
common stock in accordance with the formula above. The Company has the
right to redeem, in whole or in part, any C Preferred Stock submitted for
conversion, in cash, in accordance with a defined formula. During November
and December 1995, the Company raised approximately $4 million, after
expenses, from the sale of 960,000 shares of C Preferred Stock at $5 per
share.
In connection with the 95 Offering, the Company paid fees to a Placement
Agent and issued 139,636 warrants (the "Placement Warrants") to purchase an
equal number of shares of the Company's common stock at $3.78 per share.
The number of shares of common stock to be issued upon exercise of the
Placement Warrants may be reduced, as defined, in the event the Placement
Agent elects a cashless exercise option. The Placement Warrants are fully
vested and expire on December 1, 2000. The Placement Warrants contain
antidilution and other defined adjustment provisions.
4. In March 1995, the Company entered into a two year consulting agreement
(the "Baron Agreement") with Baron Financial Services, Inc. ("Baron"), an
affiliate of A.R. Baron & Co., Inc., the Company's underwriter and
principal market maker, to provide financial and other advisory services.
As compensation for the Baron Agreement, the Company issued to Baron
250,000 warrants (the "Baron Warrants") to purchase an equal number of
shares of common stock at $7.38 per share. The Baron Warrants expire on
March 8, 2000, and contain anti-dilution and other defined adjustment
provisions. As consideration for an extension of the term of the Baron
Agreement, during November 1995, the Company amended the Baron Warrants to
reduce the exercise price to $.05 per share and issued to Baron 100,000
additional warrants (the "New Baron Warrants") with terms and provisions
identical to the amended Baron Warrants except that the New Baron Warrants
expire on November 9, 2000. On November 20, 1995, Baron exercised all
250,000 of the amended Baron Warrants.
In addition, during January 1996, the Company entered into a second
consulting agreement with Baron. Pursuant to this agreement, Baron has
agreed to provide certain business development advice to the Company. In
consideration for these services, the Company made a $400,000 non-interest
bearing loan to Baron (the "Loan") and issued a warrant to purchase 250,000
shares of the Company's common stock at $.05 per share. (the "January Baron
Warrant"). On February 13, 1996, Baron repaid the loan and exercised the
January Baron Warrant.
The fair market value of the Baron Warrants, the amended Baron Warrants,
the New Baron Warrants and the January Baron Warrant will be recognized as
an expense as the
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
services are rendered. The unamortized amount (unearned compensation) has
been included as a reduction in stockholders' equity.
5. In November 1995, the Company entered into consulting agreements with two
investment banking companies (the "Investment Agreements") to provide
financial and other advisory services through November 1997. In
consideration for these services, the Company issued warrants (the
"Investment Warrants") to purchase 500,000 shares of the Company's common
stock at per share prices of $2.80 or $3.00. The number of shares issuable
to one investment company upon the exercise of their warrants is subject to
reduction, as defined, in the event the investment company elects a
cashless exercise option. The Investment Warrants vest at various dates
over the next twelve months and expire on November 9, 2000. The Investment
Warrants contain antidilution provisions, as defined. In addition, as
consideration for the extension of the term of one Investment Agreement,
during January 1996, the Company issued to the investment banking company
warrants (the "New Investment Warrants") to purchase 25,000 shares of the
Company's common stock at $.05 per share. During February and March 1996,
all of the New Investment Warrants were exercised.
In connection with the Investment Agreements, the Company, as finders'
fees, issued 40,000 warrants (the "Finders' Warrants") to two individuals.
Each Finders' Warrant entitles the holder to purchase an equal number of
shares of the Company's common stock at per share prices of $2.80 or $3.00.
The number of shares issuable to one individual upon the exercise of their
warrants is subject to reduction, as defined, in the event the individual
elects a cashless exercise option. The Finders' Warrants vest at various
dates over the next six months and expire on November 9, 2000. The Finders'
Warrants contain antidilution provisions, as defined. One of the recipients
of the Finders' Warrants is an insurance broker for the Company, who is
also a shareholder and warrantholder.
The fair market value of the Investment Warrants and the Finders' Warrants
will be recognized as an expense over the life of the related consulting
agreements. The unamortized amount (unearned compensation) has been
included as a reduction in stockholders' equity.
6. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") in October 1995. FAS 123 requires companies to estimate the
fair value of common stock, stock options, or other equity instruments
("Equity Instruments") issued to employees using pricing models which take
into account various factors such as current price of the common stock,
volatility and expected life of the Equity Instrument. FAS 123 permits
companies to either provide pro forma note disclosure or adjust operating
results for the amortization of the estimated value of the Equity
Instrument, as compensation expense, over the vesting period of the Equity
INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
Instrument. The Company has elected to provide pro forma note disclosure
which will appear in its financial statements for the year ending September
30, 1997 and, therefore, there will be no effect on the Company's financial
position or results of operations.
7. As part of the Company's private placement in November 1995, the Company
sold 90,000 shares of C Preferred Stock to an investor. On February 1,
1996, the investor delivered to the Company a notice (the "Notice of
Conversion") requesting that the Company convert 60,000 shares of C
Preferred Stock into 147,594 shares of the Company's common stock, in
accordance with the formula as defined by the C Preferred Stock. The
Company declined to comply with the Notice of Conversion on the grounds,
among others, that the Company believed the investor was seeking to deliver
the shares of common stock to be obtained upon such conversion to cover a
short position in direct violation of the subscription agreement with the
Company executed by the investor at the time it acquired the C Preferred
Stock. On February 28, 1996, the Company was named as a defendant in an
action filed by the investor alleging that the Company wrongfully refused
to honor the investor's Notice of Conversion, demanding conversion of the C
Preferred Stock held by the investor and seeking damages which the investor
alleges may be in excess of $1,000,000. On March 20, 1996, the Company and
the investor agreed that the Company would honor the Notice of Conversion
and a second notice of conversion for the remaining 30,000 shares of C
Preferred Stock held by the investor and convert all 90,000 shares of C
Preferred Stock into 192,557 shares of common stock, 54,000 shares of which
would be held in escrow pending further agreement between the parties or a
final adjudication of the investor's claim. In accordance with a
stipulation and order entered by the court on that date, the Company
delivered to the plaintiff 138,557 shares of common stock and delivered
into escrow 54,000 shares of common stock. On April 10, 1996, the Company
filed an answer to the investor's complaint, denying liability, asserting
affirmative defenses and asserting a counterclaim for damages suffered as a
result of the investor's actions. The investor is moving for summary
judgment, and the Company is preparing its response. The ultimate
resolution of this matter cannot presently be determined. Accordingly, no
provision for any liability that may result upon the resolution of this
matter has been made in the accompanying financial statements.
8. Certain reclassifications have been made to the financial statements for
1995 and the cumulative period since September 1, 1989 (inception) to March
31, 1996 in order to conform with the current period's presentation.
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 ability of the Company 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
Post-Effective Amendment No. 3 to Form S-1 Registration Statement (Reg. No.
33-63142).
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto contained herein.
RESULTS OF OPERATIONS
Since its inception, substantially all of the Company's resources have been
applied to research and development, patent and licensing matters and other
general and administrative matters. The Company has no commercially viable
products and does not anticipate having any for several years.
The independent accountant's report on the Company's financial statements for
the year ended September 30, 1995, included in Form 10-K, contains explanatory
language with regard to substantial doubt about the Company's ability to
continue as a going concern.
THREE MONTHS ENDED MARCH 31, 1996 VS. MARCH 31, 1995
The Company has had no operating revenues to date and has sustained net losses
of $2,066,044 and $1,113,019 for the three months ended March 31, 1996 and 1995,
respectively. The increase in losses, period to period, primarily reflects the
increased levels of research and development and general and administrative
expenses, and an increase in non-cash consulting fee expense with respect to
financial and business development advice. In the future, the Company intends to
increase its research and development activities, and accordingly, its rate of
operating expenditures and losses. The Company expects losses to continue for
the foreseeable future.
Interest income increased from $13,049 in 1995 to $44,221 in 1996, an increase
of $31,172 or 239%, resulting primarily from earnings on the cash proceeds
received during November and December 1995 from the Company's private placement
of Class C Convertible Preferred Stock.
Research and development costs increased from $682,992 in 1995 to $983,872 in
1996, an increase of $300,880 or 44%. This increase was principally due to
hiring additional research staff, more sophisticated experiments involving
higher usage levels of reagents and laboratory supplies in 1996, additional
depreciation expense resulting from equipment purchased during 1995 and 1996,
rental charges from expanded facilities in 1995 to increase the Company's level
of research activities, the start of animal trials for Hepatitis B Virus in
1996, and increased collaborative research.
General and administrative costs increased from $418,210 in 1995 to $557,472 in
1996, an increase of $139,262 or 33%. This increase is due to increased
promotional efforts and other stockholder related expenses, legal fees incurred
in 1996 relating to litigation with a shareholder (see Note 7 to the Condensed
Financial Statements included herein), additional expenses incurred to protect
intellectual property and higher insurance premiums.
The Company has entered into consulting agreements with two investment banking
companies and Baron Financial Services, Inc., an affiliate of A.R. Baron & Co.
Inc., the Company's underwriter and principal market maker, to provide financial
and other advisory services. As compensation for these agreements, the Company
issued warrants to purchase an equal number of shares of the Company's common
stock. The fair market value of these warrants is being recognized as an expense
as the services are rendered to the Company. Compensation expense incurred in
connection with the issuance of warrants and stock options of $530,212 in 1996
primarily results from expense recognition relating to these consulting
agreements.
Interest expense increased from $24,866 in 1995 to $38,709 in 1996, an increase
of $13,843 or 56%. This increase was due to new equipment financed under various
leasing arrangements.
SIX MONTHS ENDED MARCH 31, 1996 VS. MARCH 31, 1995
The Company has had no operating revenues to date and has sustained net losses
of $3,750,776 and $2,262,785 for the six months ended March 31, 1996 and 1995,
respectively. The increase in losses, period to period, primarily reflects the
increased levels of research and development and general and administrative
expenses, and an increase in non-cash consulting fee expense with respect to
financial and business development advice. In the future, the Company intends to
increase its research and development activities, and accordingly, its rate of
operating expenditures and losses. The Company expects losses to continue for
the foreseeable future.
Interest income increased from $29,524 in 1995 to $79,673 in 1996, an increase
of $50,149 or 170%, resulting primarily from earnings on the cash proceeds
received during November and December 1995 from the Company's private placement
of Class C Convertible Preferred Stock.
Research and development costs increased from $1,378,171 in 1995 to $1,831,295
in 1996, an increase of $453,124 or 33%. This increase was principally due to
hiring additional research staff, more sophisticated experiments involving
higher usage levels of reagents and laboratory supplies in 1996, additional
depreciation expense resulting from equipment purchased during 1995 and 1996,
rental charges from expanded facilities in 1995 to increase the Company's level
of research activities, the start of animal trials for Hepatitis B Virus in 1996
and increased collaborative research.
General and administrative costs increased from $863,192 in 1995 to $1,113,602
in 1996, an increase of $250,410 or 29%. This increase is due to increased
promotional efforts and other stockholder related expenses, legal fees incurred
in 1996 relating to litigation with a shareholder (see Note 7 to the Condensed
Financial Statements included herein), additional expenses incurred to protect
intellectual property and higher insurance premiums.
The Company has entered into consulting agreements with two investment banking
companies and Baron Financial Services, Inc., an affiliate of A.R. Baron & Co.
Inc., the Company's underwriter and principal market maker, to provide financial
and other advisory services. As compensation for these agreements, the Company
issued warrants to purchase an equal number of shares of the Company's common
stock. The fair market value of these warrants is being recognized as an expense
as the services are rendered to the Company. Compensation expense incurred in
connection with the issuance of warrants and stock options of $808,993 in 1996
primarily results from expense recognition relating to these consulting
agreements. Interest expense increased from $50,946 in 1995 to $76,559 in 1996,
an increase of $25,613 or 50%. This increase was due to new equipment financed
under various leasing arrangements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash and cash equivalents of $2,834,240 as
compared to $1,836,984 at September 30, 1995. The Company had working capital of
$2,006,087 at March 31, 1996, as compared to working capital of $1,106,431 at
September 30, 1995. The increased cash and working capital positions were a
result of the proceeds received from the private placement completed in December
1995, offset by the Company's operations for the six months ended March 31,
1996. The Company has funded its operations to date primarily from the proceeds
received from the issuance of securities to private and public investors.
In August 1995, the Company filed a registration statement on Form S-4 with the
Securities and Exchange Commission (the "SEC") providing for the solicitation of
an offer (the "offer") to exercise all outstanding Class A Warrants. Such offer
is to issue up to one Class B Warrant (the exact amount to be determined based
upon current market conditions) to each holder of a Class A Warrant of the
Company who exercises such Class A Warrant, in accordance with its terms, to
purchase shares of the Company's common stock, $.013 par value per share, during
the offer period. There are approximately 1.8 million Class A Warrants
outstanding; if all such warrantholders accept the offer, the Company would
issue approximately 1.8 million shares of common stock and up to 1.8 million
Class B Warrants, and realize gross proceeds of approximately $7.4 million.
While the Company has not withdrawn such registration statement, the Company
does not currently intend to proceed with such offering.
In November and December 1995, the Company completed a private placement of its
securities to raise equity financing (the "95 Offering"); the 95 Offering was
conducted pursuant to the provisions of Regulation S as promulgated under the
Securities Act of 1933, as amended. In connection with the 95 Offering, the
Company sold 960,000 shares of its Class C Convertible Preferred Stock ("C
Preferred Stock") and raised approximately $4 million, after expenses, from such
sale. Holders of C Preferred Stock have no voting rights and are not entitled to
receive dividends. C Preferred Stockholders have a liquidation preference, in
the event of a liquidation, dissolution, or winding down of the Company, equal
to the sum of $5.00 per share (the "C Issue Price") plus an amount equal to 10%
of the C Issue Price, per annum, for the period that has passed since the dates
of issuance to such stockholders. The liquidation preference is on a parity with
the holders of Class B Convertible Preferred Stock. The C Preferred Stock's
conversion feature provides for each share of C Preferred Stock to be converted
into shares of the Company's common stock at a floating rate equal to the result
of dividing: (i) the sum of the C Issue Price plus an amount equal to 10% of the
C Issue Price, per annum, for the number of days between the date of issuance,
as defined, and the date of conversion, as defined, of each share of C Preferred
Stock by (ii) the lesser of: (a) the average closing bid price of the Company's
common stock for the five trading days ending on November 17, 1995 (the "Fixed
Conversion Price") (which was $3.4375), or (b) 85% of the average closing bid
price of the Company's common stock for the five trading days immediately
preceding the date of conversion, as defined. Each share of C Preferred Stock
that remains outstanding on November 17, 1997 will automatically be converted to
common stock in accordance with the formula above. The Company has the right to
redeem, in whole or in part, any C Preferred Stock submitted for conversion,
in cash, in accordance with a defined formula. As of March 31, 1996, based on a
conversion price at such date of $3.4375, the Company has reserved approximately
764,000 shares of Common Stock for issuance upon conversion of the issued and
outstanding C Preferred Stock; in the event the price of the Company's Common
Stock decreases, the number of shares held in reserve with respect to the C
Preferred Stock would increase.
On January 26, 1996, the Company and Baron Financial Services, Inc. entered into
an agreement pursuant to which Baron Financial Services, Inc will provide
certain business development services to the Company. As consideration for these
services, the Company made an interest free loan of $400,000 to Baron Financial
Services, Inc. and issued to Baron Financial Services Inc. a warrant to purchase
250,000 shares of the Company's common stock at an exercise price of $.05 per
share. On February 13, 1996, Baron Financial Services, Inc. repaid the loan and
exercised the warrant.
In August 1995, the Company was granted a leasing commitment (the "Lease Line")
by a finance company which provides for up to $300,000 to finance laboratory
equipment acquisitions. The Company may utilize the Lease Line in increments
("Leases"). The Leases are for 36-month periods with a purchase option at the
end of each lease or an option to extend the lease for a one-year term. The
Company must provide security deposits of 35% of the cost of the equipment
financed. As of March 31, 1996, the Company had utilized approximately $222,000
of the Lease Line. In connection with the Lease Line, the Company issued to the
lessor a seven-year warrant to purchase 2,526 shares of Common Stock at $9.50
per share. The fair market value of such warrant on the date of issuance was
deemed to be $24,000.
Planned operations for 1996 currently contemplate expenditures for capital
assets of approximately $850,000, mainly consisting of laboratory equipment and
leasehold improvements as the Company expands into, and renovates, additional
office and laboratory space which it has leased effective in December 1995. As a
result of the Company's intention to continue increasing its research and
development activities, the Company expects that more office and laboratory
space will eventually be necessary, for which renovations may be required, and
an additional lease line may need to be negotiated. The Company will finalize
plans for such additional capital expenditures when, and if, these leasing
arrangements are consummated. However, there can be no assurance that the
Company will successfully enter into such new arrangements.
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and commercialization of its proposed products
and the upgrading of its laboratory facilities. The Company's management
believes that, based upon its current business plans, liquid assets will be
sufficient to fund its operations through July 1996. Thereafter, the Company
will require additional funds, which it is seeking 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. No
other sources of financing are currently available. In addition, the Company has
been named as a defendant in an action alleging that the Company wrongfully
declined to honor the plaintiff's notice of conversion with respect to the C
Preferred Stock held by the plaintiff. The plaintiff is seeking damages which
the plaintiff alleges may be in excess of $1,000,000. While the Company believes
that the ultimate resolution of the litigation will 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 of or the costs in defending
this litigation. Such costs and monetary damages awarded to the plaintiff, if
any, would accelerate the exhaustion of the Company's cash and cash equivalents.
IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("FAS
123") in October 1995. FAS 123 requires companies to estimate the fair value of
common stock, stock options, or other equity instruments ("Equity Instruments")
issued to employees using pricing models which take into account various factors
such as current price of the common stock, volatility and expected life of the
Equity Instrument. FAS 123 permits companies to either provide proforma note
disclosure or adjust operating results for the amortization of the estimated
value of the Equity Instrument, as compensation expense, over the vesting period
of the Equity Instrument. The Company has elected to provide pro forma note
disclosure which will appear in its financial statements for the year ending
September 30, 1997 and therefore, there will be no effect on the Company's
financial position or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has been named as a defendant in an action captioned Mifal
Klita v. Innovir Laboratories, Inc., Swartz Investments, LLC f/k/a Swartz
Investments, Inc., and Registrar and Transfer Company, filed on February 28,
1996 in the Supreme Court of the State of New York in the County of New York,
alleging that the Company wrongfully refused to honor the plaintiff's notice of
conversion with respect to C Preferred Stock held by the plaintiff and seeking
damages which the plaintiff-investor alleges may be in excess of $1,000,000. On
February 1, 1996, the plaintiff, an investor in the Company's private placement
of C Preferred Stock, delivered to the Company a notice (the "Notice of
Conversion") requesting that the Company convert 60,000 shares of C Preferred
Stock into 147,594 shares of Common Stock, based upon the five-day average
closing bid price of the Common Stock immediately preceding the date of the
Notice of Conversion; at the Fixed Conversion Price, the plaintiff's C Preferred
Stock would be converted into 88,851 shares of Common Stock. The Company
declined to comply with the Notice of Conversion on the grounds, among others,
that the Company believed the plaintiff was seeking to deliver the shares of
Common Stock to be obtained upon such conversion to cover a short position in
direct violation of the subscription agreement with the Company executed by the
plaintiff at the time it acquired the C Preferred Stock. On March 20, 1996, the
Company and the plaintiff agreed that the Company would honor the Notice of
Conversion and a second notice of conversion for the remaining 30,000 shares of
C Preferred Stock held by the plaintiff and convert all 90,000 shares of C
Preferred Stock into 192,557 shares of Common Stock, 54,00 shares of which would
be held in escrow pending further agreement between the parties or a final
adjudication of the plaintiff's claim. In accordance with the stipulation and
order entered by the court, the Company delivered to the plaintiff 138,557
shares of Common Stock and delivered into escrow 54,000 shares of Common Stock.
On April 10, 1996, the Company filed an answer to the plaintiff's complaint,
denying liability, asserting affirmative defenses and asserting a counterclaim
for damages suffered as a result of plaintiff's actions. Plaintiff is moving for
summary judgment, and the Company is preparing its response. The Company intends
to vigorously defend against the claims asserted against it. While the Company
believes that the litigation will 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 of or the costs in defending this litigation.
Item 2. Changes in Securties.
In connection with the Company's private placement completed in May 1995,
the Company's Board of Directors designated 2,500,000 shares of preferred stock
as Class B Convertible Preferred Stock ("B Preferred Stock"). Holders of B
Preferred Stock have no voting rights and are entitled to receive dividends
equal to common stockholders on a per share basis as if the B Preferred Stock
had been converted into Common Stock. Holders of B Preferred Stock also have a
liquidation preference of $5.00 per share, or such greater amount as determined
by the Board of Directors, in the event of a liquidation, dissolution, or
winding up of the Company. The conversion feature of the B Preferred Stock
provides for each share of B Preferred Stock to be converted into shares of
Common Stock at a floating rate equal to the product of dividing $5.00 by 65% of
the average of the closing bid price of the Common Stock for the five days
preceding conversion, as defined. The average closing bid price per share for
the purposes of such calculation shall not be less than $5.00. An aggregate of
824,000 shares of B Preferred Stock were sold and issued in connection with this
private placement.
In connection with the Company's private placement completed in December
1995, the Company's Board of Directors designated 1,000,000 shares of preferred
stock as C Preferred Stock. Holders of C Preferred Stock have no voting rights
and are not entitled to receive dividends. Holders of C Preferred Stock also
have a liquidation preference, in the event of a liquidation, dissolution, or
winding up of the Company, equal to the sum of $5.00 per share (the "C Issue
Price") plus an amount equal to 10% of the C Issue Price, per annum, for the
period that has passed since their respective date of issuance. The conversion
feature of the C Preferred Stock provides for each share of C Preferred Stock to
be converted into shares of Common Stock at a floating rate equal to the result
of dividing: (i) the sum of $5.00 per share (the "C Issue Price") plus an amount
equal to 10% of the C Issue Price, per annum, for the number of days between the
date of issuance, as defined, and the date of conversion, as defined, of each
share of C Preferred Stock by (ii) the lesser of: (a) the average closing bid
price of the Common Stock for the five trading days ending on November 17, 1995
or (b) 85% of the average closing bid price of the Common Stock for the five
trading days immediately preceding the date of conversions, as defined. Each
share of C Preferred Stock that remains outstanding on November 17, 1997 will
automatically be converted to common stock in accordance with the formula above.
An aggregate of 960,000 shares of C Preferred Stock were sold and issued in
connection with this private placement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1: Certificate of Incorporation, as amended.
(b) Exhibit 11.1: Statement of Computation of Per Share Data for the three
months ended March 31, 1996 and 1995.
(c) Exhibit 11.2: Statement of Computation of Per Share Data for the six
months ended March 31, 1996 and 1995.
(d) Exhibit 27: Financial Data Schedule
(e) No reports on Form 8-K were filed during the quarter ended March 31,
1996.
All other Items of this report are inapplicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 13, 1996
INNOVIR LABORATORIES, INC.
By: /s/ ALLAN R. GOLDBERG
-----------------------------------------
Allan R. Goldberg
Chairman and Chief Executive Officer
(Principal executive officer)
By: /s/ GARY POKRASSA
-------------------------------------------------
Gary Pokrassa
Vice President - Finance
(Principal financial and accounting officer)