UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
on
FORM 10-Q/A
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
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. 0-24241
V.I. TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 11-3238476 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 134 Coolidge Avenue, Watertown, Massachusetts | 02472 | |
| (Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number, including area code: (617) 926-1551
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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the Registrant’s classes of common stock as of July 15, 2005:
| Title of Class |
Shares Outstanding | |
| Common Stock, $0.01 par value | 39,509,667 |
Explanatory Note
This Amendment No. 1 on Form 10-Q/A to V.I. Technologies, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005, filed on August 12, 2005, is filed solely to correct a typographical error in footnote 5 of the Notes to Consolidated Financial Statements. The correction replaces the $5.6 million with $6.5 million in the first paragraph of the Footnote No. 5.
INDEX
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
(in thousands, except for per share data)
(unaudited)
| June 30, 2005 |
December 31, 2004 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 15,323 | $ | 4,879 | ||||
| Restricted cash |
250 | — | ||||||
| Other receivables, net |
232 | 280 | ||||||
| Prepaid expenses and other current assets |
579 | 62 | ||||||
| Total current assets |
16,384 | 5,221 | ||||||
| Property and equipment, net |
2,561 | 310 | ||||||
| Restricted cash |
546 | 125 | ||||||
| Other assets, net |
90 | 675 | ||||||
| Total assets |
$ | 19,581 | $ | 6,331 | ||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK AND WARRANTS, AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 5,727 | $ | 2,613 | ||||
| Capital lease obligation, current |
6 | 7 | ||||||
| Current portion of notes payable and advances |
907 | 122 | ||||||
| Total current liabilities |
6,640 | 2,742 | ||||||
| Notes payable, less current portion |
— | 30 | ||||||
| Capital lease obligation, less current portion |
3 | 5 | ||||||
| Deferred rent |
114 | 81 | ||||||
| Total liabilities |
6,757 | 2,858 | ||||||
| Warrants to purchase Redeemable Series B Preferred Stock |
— | 22 | ||||||
| Redeemable Series C Preferred Stock, $0.001 per share, 24,138 shares authorized, issued and outstanding at December 31, 2004 |
— | 19,199 | ||||||
| Redeemable Series B Preferred Stock, $0.001 par value per share; 10,115 shares were authorized, and 7,392 shares were issued and outstanding at December 31, 2004 |
— | 10,698 | ||||||
| Stockholders’ equity (deficit): |
||||||||
| Preferred stock, par value $0.01 per share; authorized 1,000 shares at June 30, 2005; no shares issued and outstanding |
— | — | ||||||
| Common stock, par value $0.01 per share; authorized 550,000 shares; issued and outstanding 39,507 shares at June 30, 2005; authorized 15,000 shares, 1,453 shares issued and outstanding at December 31, 2004 |
395 | 15 | ||||||
| Additional paid-in capital |
83,430 | 670 | ||||||
| Deferred compensation |
(676 | ) | (1,790 | ) | ||||
| Deficit accumulated during the development stage |
(70,325 | ) | (25,341 | ) | ||||
| Total stockholders’ equity (deficit) |
12,824 | (26,446 | ) | |||||
| Total liabilities, redeemable preferred stock and warrants, and stockholders’ equity (deficit) |
$ | 19,581 | $ | 6,331 | ||||
See accompanying notes to the unaudited consolidated financial statements.
2
Consolidated Statements of Operations
(in thousands, except for per share data)
(unaudited)
| Three Months Ended |
Six Months Ended |
Inception from 1999 (inception) to June 30, 2005 |
||||||||||||||||||
| June 30, 2005 |
June 30, 2004 |
June 30, 2005 |
June 30, 2004 |
|||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Research funding |
$ | 281 | $ | 271 | $ | 733 | $ | 494 | $ | 4,862 | ||||||||||
| Operating expenses: |
||||||||||||||||||||
| Research and development |
4,622 | 2,767 | 8,912 | 4,266 | 32,213 | |||||||||||||||
| General and administrative |
2,347 | 643 | 3,717 | 1,045 | 8,896 | |||||||||||||||
| In-process research and development |
— | — | 19,417 | — | 19,417 | |||||||||||||||
| Impairment charges |
1,650 | — | 13,773 | — | 13,773 | |||||||||||||||
| Total operating expenses |
8,619 | 3,410 | 45,819 | 5,311 | 74,299 | |||||||||||||||
| Loss from operations |
(8,338 | ) | (3,139 | ) | (45,086 | ) | (4,817 | ) | (69,437 | ) | ||||||||||
| Interest (income) expense, net |
(95 | ) | (15 | ) | (122 | ) | 103 | (12 | ) | |||||||||||
| Other expense (income) |
7 | — | (15 | ) | — | (15 | ) | |||||||||||||
| Net loss |
(8,250 | ) | (3,124 | ) | (44,949 | ) | (4,920 | ) | (69,410 | ) | ||||||||||
| Accretion of preferred stock dividends |
— | 542 | — | 782 | 4,050 | |||||||||||||||
| Net loss available to common stockholders |
$ | (8,250 | ) | $ | (3,666 | ) | $ | (44,949 | ) | $ | (5,702 | ) | $ | (73,460 | ) | |||||
| Basic and diluted net loss per share |
$ | (0.21 | ) | $ | (7.41 | ) | $ | (1.83 | ) | $ | (12.21 | ) | ||||||||
| Weighted average shares used in calculation of basic and diluted net loss per share |
38,966 | 495 | 24,576 | 467 | ||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
3
(A Development Stage Company)
Consolidated Statements of Redeemable Preferred Stock and Stockholders’ (Deficit) Equity
For the Period from September 29, 1999 (inception) to June 30, 2005
(in thousands, except per share date)
(unaudited)
| Stockholders’ (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||
| Series C Redeemable |
Series B Redeemable |
Series A Preferred Stock |
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Deferred sation |
Deficit Accumulated During the Development Stage |
Total Equity |
|||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||||||
| Balance at September 29, 1999 (inception) |
— | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Balance at December 31, 1999 |
— | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Issuance of founder shares during January 2000; $0.033 per share |
— | — | — | — | — | — | 226 | 2 | — | — | 9 | — | — | 11 | |||||||||||||||||||||||||||
| Issuance of Series A preferred stock |
— | — | — | — | 1,500 | 2 | — | — | — | — | (2 | ) | — | — | — | ||||||||||||||||||||||||||
| Contribution by a Series A stockholder |
— | — | — | — | — | — | — | — | — | — | 1,052 | — | — | 1,052 | |||||||||||||||||||||||||||
| Exercise of stock options March through November; $0.033 per share |
— | — | — | — | — | — | 36 | 1 | — | — | 1 | — | — | 2 | |||||||||||||||||||||||||||
| Issuance of Series B redeemable preferred stock; $1.116 per share, net of issuance costs of $30,000 |
— | — | 2,688 | 2,970 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Accretion of stock issuance costs |
— | — | — | 1 | — | — | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||||||||
| Accretion of dividends |
— | — | — | 30 | — | — | — | — | — | — | (30 | ) | — | — | (30 | ) | |||||||||||||||||||||||||
| Deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | 2 | (2 | ) | — | — | ||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (1,269 | ) | (1,269 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2000 |
— | — | 2,688 | 3,001 | 1,500 | 2 | 262 | 3 | — | — | 1,031 | — | (1,269 | ) | (233 | ) | |||||||||||||||||||||||||
| Exercise of stock options in January and May; $0.033 per share |
— | — | — | — | — | — | 38 | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||
| Issuance of Series B redeemable preferred stock; $1.116 per share |
— | — | 224 | 250 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Accretion of redeemable preferred stock issuance costs |
— | — | — | 5 | — | — | — | — | — | — | (5 | ) | — | — | (5 | ) | |||||||||||||||||||||||||
| Accretion of dividends |
— | — | — | 261 | — | — | — | — | — | — | (261 | ) | — | — | (261 | ) | |||||||||||||||||||||||||
| Deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | 2 | (2 | ) | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (2,184 | ) | (2,184 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2001 |
— | — | 2,912 | 3,517 | 1,500 | 2 | 300 | 3 | — | — | 768 | (2 | ) | (3,453 | ) | (2,682 | ) | ||||||||||||||||||||||||
| Issuance of Series B redeemable preferred stock in January; $1.116 per share |
— | — | 4,480 | 4,969 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Exercise of stock options in March and April; $0.033 per share |
— | — | — | — | — | — | 30 | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||
| Accretion of redeemable preferred stock issuance costs |
— | — | — | 11 | — | — | — | — | — | — | (11 | ) | — | — | (11 | ) | |||||||||||||||||||||||||
| Accretion of dividends |
— | — | — | 649 | — | — | — | — | — | — | (649 | ) | — | — | (649 | ) | |||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (4,461 | ) | (4,461 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2002 |
— | — | 7,392 | 9,146 | 1,500 | 2 | 330 | 3 | — | — | 109 | (1 | ) | (7,914 | ) | (7,801 | ) | ||||||||||||||||||||||||
| Issuance of Common stock |
— | — | — | — | — | — | 54 | 1 | — | — | 8 | — | — | 9 | |||||||||||||||||||||||||||
| Exercise of stock options in February through July; $0.033 per share |
— | — | — | — | — | — | 38 | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||
| Exercise of stock options in February through December; $0.112 per share |
— | — | — | — | — | — | 16 | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||
| Accretion of stock issuance costs |
— | — | — | 11 | — | — | — | — | — | — | (11 | ) | — | — | (11 | ) | |||||||||||||||||||||||||
| Accretion of dividends |
— | — | — | 733 | — | — | — | — | — | — | (110 | ) | — | (623 | ) | (733 | ) | ||||||||||||||||||||||||
| Deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (4,508 | ) | (4,508 | ) | |||||||||||||||||||||||||
4
V.I. Technologies, Inc.
(A Development Stage Company)
Consolidated Statements of Redeemable Preferred Stock and Stockholders’ (Deficit) Equity
For the Period from September 29, 1999 (inception) to June 30, 2005
(in thousands, except per share date)
(unaudited)
| Series C Stock |
Series B Stock |
Series A Preferred Stock |
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Deferred sation |
Deficit Accumulated During the Development Stage |
Total Stockholders’ (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2003 |
— | — | 7,392 | 9,890 | 1,500 | 2 | 438 | 4 | — | — | — | (1 | ) | (13,045 | ) | (13,040 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of redeemable preferred stock during March and April: $0.759 per share |
24,138 | 18,033 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Exchange of common stock for Series A preferred stock in March |
— | — | — | — | (1,500 | ) | (2 | ) | 1,013 | 11 | — | — | 5 | — | (14 | ) | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options in April; $0.112 per share |
— | — | — | — | — | — | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Exercise of stock options in August; $0.0333 per share |
— | — | — | — | — | — | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Accretion of redeemable preferred stock issuance costs |
— | 36 | — | 12 | — | — | — | — | — | — | (43 | ) | — | (4 | ) | (47 | ) | ||||||||||||||||||||||||||||||||||
| Accretion of dividends |
— | 1,130 | — | 796 | — | — | — | — | — | — | (1,685 | ) | — | (240 | ) | (1,925 | ) | ||||||||||||||||||||||||||||||||||
| Deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | 2,388 | (2,388 | ) | — | — | ||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | 5 | 599 | — | 604 | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (12,038 | ) | (12,038 | ) | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2004 |
24,138 | 19,199 | 7,392 | 10,698 | — | — | 1,453 | 15 | — | — | 670 | (1,790 | ) | (25,341 | ) | (26,446 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and purchase plans |
— | — | — | — | — | — | 12 | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||||||||||||||
| Accretion of dividends |
— | 285 | — | 166 | — | — | — | — | — | — | (416 | ) | — | (35 | ) | (451 | ) | ||||||||||||||||||||||||||||||||||
| Accretion of stock issuance costs |
— | 8 | — | 2 | — | — | — | — | — | — | (10 | ) | — | — | (10 | ) | |||||||||||||||||||||||||||||||||||
| Acquisition of Vitex |
(24,138 | ) | (19,492 | ) | (7,392 | ) | (10,866 | ) | — | — | 27,177 | 271 | 438 | (4 | ) | 62,737 | (30 | ) | — | 62,974 | |||||||||||||||||||||||||||||||
| Issuance of common stock on March 11; $2.00 per share, net |
— | — | — | — | — | — | 10,000 | 100 | — | — | 18,022 | — | — | 18,122 | |||||||||||||||||||||||||||||||||||||
| Cancellation of treasury stock on April 29 |
— | — | — | — | — | — | (438 | ) | (4 | ) | (438 | ) | 4 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common Stock on April 29: $2.00 per share, net |
— | — | — | — | — | — | 1,231 | 12 | — | — | 2,175 | — | — | 2,187 | |||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock under option plan, net |
— | — | — | — | — | — | 72 | 1 | — | — | 228 | (229 | ) | — | — | ||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | — | — | 21 | 1,373 | — | 1,394 | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (44,949 | ) | (44,949 | ) | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2005 |
— | $ | — | — | $ | — | — | $ | — | 39,507 | $ | 395 | — | $ | — | $ | 83,430 | $ | (676 | ) | $ | (70,325 | ) | $ | 12,824 | ||||||||||||||||||||||||||
See accompanying notes to the unaudited Consolidated Financial Statements
5
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended |
Period from September 29, 1999 (inception) to June 30, 2005 |
|||||||||||
| June 30, 2005 |
June 30, 2004 |
|||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net loss |
$ | (44,949 | ) | $ | (4,920 | ) | $ | (69,410 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| In-process research and development |
19,417 | — | 19,417 | |||||||||
| Impairment charge |
13,773 | — | 13,773 | |||||||||
| Non-cash operating expenses |
— | 113 | 1,052 | |||||||||
| Depreciation and amortization |
337 | 40 | 621 | |||||||||
| Amortization of deferred financing costs |
1 | — | 178 | |||||||||
| Amortization of deferred stock compensation |
1,394 | 225 | 2,002 | |||||||||
| Gain on disposal of fixed assets |
10 | — | 10 | |||||||||
| Non-cash income |
(20 | ) | (20 | ) | ||||||||
| Changes in operating accounts, net of acquisition: |
||||||||||||
| Other receivables, net |
267 | (73 | ) | (12 | ) | |||||||
| Prepaid expenses and other current assets |
47 | (46 | ) | (16 | ) | |||||||
| Other assets |
— | 10 | (59 | ) | ||||||||
| Accounts payable and accrued expenses |
41 | 991 | 2,575 | |||||||||
| Deferred rent |
33 | 9 | 114 | |||||||||
| Net cash used in operating activities |
(9,649 | ) | (3,651 | ) | (29,775 | ) | ||||||
| Cash flows from investing activities: |
||||||||||||
| Cash paid for merger, net of cash received |
126 | (76 | ) | (325 | ) | |||||||
| Additions to property and equipment |
(43 | ) | (66 | ) | (528 | ) | ||||||
| Restricted cash |
174 | — | 48 | |||||||||
| Net cash provided by (used in) investing activities |
257 | (142 | ) | (805 | ) | |||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuances of preferred stock, net |
— | 14,888 | 23,076 | |||||||||
| Proceeds from issuances of common stock, net |
20,290 | — | 20,290 | |||||||||
| Proceeds from exercise of stock options |
3 | — | 33 | |||||||||
| Proceeds from borrowings on notes payable |
88 | 500 | 1,118 | |||||||||
| Proceeds from issuance of convertible debt, net |
— | — | 2,904 | |||||||||
| Repayment on advances, notes payable, and capital lease obligations |
(545 | ) | (594 | ) | (1,518 | ) | ||||||
| Net cash provided by financing activities |
19,836 | 14,794 | 45,903 | |||||||||
| Net increase in cash and cash equivalents |
10,444 | 11,001 | 15,323 | |||||||||
| Cash and cash equivalents, beginning of period |
4,879 | 477 | — | |||||||||
| Cash and cash equivalents, end of period |
$ | 15,323 | $ | 11,478 | $ | 15,323 | ||||||
See accompanying notes to the unaudited consolidated financial statements.
6
V. I. TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
On June 2, 2004, Panacos Pharmaceuticals, Inc. (“Panacos”) and V.I. Technologies, Inc. ( “Vitex”) entered into a merger agreement, as amended, for a transaction to be accounted for as a purchase under accounting principles generally accepted in the United States of America. The merger was approved by both Vitex and Panacos shareholders on March 10, 2005 and was consummated on March 11, 2005. For accounting purposes, the transaction is considered a “reverse merger” under which Panacos is considered the acquirer of Vitex. Accordingly, the purchase price was allocated among the fair values of the assets and liabilities of Vitex, while the historical results of Panacos are reflected in the results of the combined company (the “Company”).
The Company’s principal business involves the discovery and development of small molecule, orally available drugs for the treatment of HIV and other major human viral diseases. The Company’s proprietary discovery technologies focus on novel targets in the virus life cycle, including virus fusion and virus maturation, the first and last steps of viral infection. Prior to the merger, Panacos had initiated Phase II clinical testing of PA-457, the first in a new class of oral HIV drug candidates that inhibit virus maturation, a new drug target discovered by Panacos.
The Company faces certain risks and uncertainties similar to those faced by other biotechnology companies, including its ability to obtain additional funding; its future profitability; protection of patents and proprietary rights; uncertainties regarding the development of the Company’s technologies; the success of its clinical trials; competition and technological change; governmental regulations, including the need for FDA product and other approvals; and attracting and retaining key officers and employees.
The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of its assets and the satisfaction of its liabilities in the normal course of business. As shown in these consolidated financial statements, the Company has incurred recurring losses from operations and, as of June 30, 2004, has an accumulated deficit of $70.3 million. Management believes that its cash on hand at the end of the second quarter of $15.3 million will be sufficient to support the Company’s operations into the first quarter of 2006.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the audited financial statements and footnotes thereto of Panacos for the years ended December 31, 2004, 2003 and 2002 which are included in the Company’s final form of prospectus filed under Rule 424(b)(1) with the Securities and Exchange Commission on March 28, 2005. Additional information can also be found in the consolidated financial statements and footnotes thereto included in Vitex’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 3, 2005.
Development Stage Company
The Company is a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. The Company is considered a development stage entity because it is devoting substantially all of its efforts to raising capital and establishing its business and planned principal operations.
Revenue Recognition
The Company recognizes revenues under research collaborations, including grants received from the government, as the research costs eligible for reimbursement under the collaboration agreements are incurred. Research funding includes grants received from the National Institutes of Health plus pass-through funding from the University of North Carolina in the combined amount of $281,000 and $271,000 for the three months ended June 30, 2005 and 2004, respectively and $733,000 and $494,000 for the six months ended June 30, 2004, and 2004, respectively.
Basic and Diluted Net Loss Per Share
Net loss per share is computed based on the guidance of SFAS No. 128, Earnings Per Share (SFAS 128), requiring companies to report both basic net loss per common share, which is computed using the weighted average number of common shares outstanding during the period, and diluted net loss per common share, which is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method. However, for all periods presented, dilutive net loss per share is the same as basic net loss per share as the inclusion of weighted average shares of unvested restricted common stock and common stock issuable upon the exercise of stock options and warrants would be anti-dilutive. In addition, the weighted average number of shares of unvested restricted common stock is excluded from basic weighted average common shares outstanding.
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The following table summarizes securities outstanding at each of the periods presented which were not included in the calculation of diluted net loss per share since their inclusion would be anti-dilutive. (in thousands)
| June 30, | ||||
| 2005 |
2004 | |||
| Common stock options |
4,639 | 3,166 | ||
| Common stock warrants |
5,433 | 23 | ||
| Unvested restricted common stock |
75 | — | ||
Stock-based Compensation
The Company accounts for its stock-based compensation plans and employee stock purchase plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure. The Company recorded approximately $0.2 million and $1.4 million in stock compensation expense during the three and six months ending June 30, 2005 due to accelerated vesting of stock options in the first quarter and the issuance of restricted stock during the second quarter.
The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation. (in thousands)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, 2005 |
June 30, 2004 |
June 30, 2005 |
June 30, 2004 |
|||||||||||||
| Net loss available to Common Stockholders |
||||||||||||||||
| As reports |
$ | (8,250 | ) | $ | (3,666 | ) | $ | (44,949 | ) | $ | (5,702 | ) | ||||
| Add: Stock-based compensation expense determined under the fair value method |
82 | 466 | 1,625 | 471 | ||||||||||||
| Deduct: Stock-based compensation expense included in reported net loss |
229 | 225 | 1,395 | 225 | ||||||||||||
| Pro forma |
$ | (8,103 | ) | $ | (3,907 | ) | $ | (45,179 | ) | $ | (5,948 | ) | ||||
| Basic and diluted net loss per share: |
||||||||||||||||
| As reported |
$ | (0.21 | ) | $ | (7.41 | ) | $ | (1.83 | ) | $ | (12.21 | ) | ||||
| Pro forma |
$ | (0.21 | ) | $ | (7.89 | ) | $ | (1.84 | ) | $ | (12.74 | ) | ||||
Equity instruments issued to non-employees are accounted for in accordance with the provisions of SFAS 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (R) “Share Based Payment: an amendment of FASB Statements No. 123 and 95”. FASB Statement 123 (R) requires companies to recognize in the income statement, effective for annual periods beginning after December 15, 2005, the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. Our financial position and results of operations will be impacted in periods subsequent to 2005.
In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS No. 123R. This interpretation provides the Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS No. 123R and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS No. 123R.
In March 2005, the FASB issued Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations”. The Interpretation requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. The Interpretation is effective no later than the end of the fiscal year ending after December 15, 2005. The adoption of this interpretation is not expected to impact our financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting changes and error corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the accounting and reporting of a change in accounting principle. The Statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company is required to adopt this statement starting in its fiscal 2006 reporting period. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.
Reclassifications
Certain prior period balances have been reclassified to conform with 2005 financial statement presentation.
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2. Merger
On June 2, 2004, Panacos and Vitex entered into a merger agreement, subsequently amended on November 5, November 28, and December 8, 2004, and February 15, 2005, for a transaction to be accounted for as a purchase under accounting principles generally accepted in the United States of America. The merger was approved by both Vitex and Panacos shareholders on March 10, 2005 and was consummated on March 11, 2005. Under the terms of the transaction, Vitex issued 22.7 million shares of its common stock (as adjusted for Vitex’s recent 1:10 reverse stock split) for all of Panacos’ outstanding shares of preferred stock and common stock. For accounting purposes, the transaction is considered a “reverse merger” under which Panacos is considered the acquirer of Vitex. Accordingly, the purchase price was allocated among the fair values of the assets and liabilities of Vitex, while the historical results of Panacos are reflected in the results of the combined company. The 5.5 million (as adjusted for its recent reverse stock split) shares of Vitex common stock outstanding, and the outstanding Vitex options and warrants, are considered as the basis for determining the consideration in the reverse merger transaction. Based on the outstanding shares of Panacos capital stock on March 10, 2005, each share of Panacos preferred stock and common stock was exchanged for approximately 6.75275 (0.67528 as adjusted for the Company’s recent reverse stock split) shares of Vitex common stock.
In addition, each Panacos stock option and warrant that was outstanding on the closing date was converted to a Vitex option or warrant respectively, by multiplying the Panacos options and warrants by the same ratio described above. The new exercise price was determined by multiplying the old exercise price by the same ratio. Each of these options and warrants is subject to the same terms and conditions that were in effect for the related Panacos options and warrants, respectively. Further, as a result of the merger, options to purchase an aggregate of 2.0 million shares of Panacos common stock that were held by officers and directors of Panacos immediately vested (see Note 5).
Merger Purchase Price
The consolidated financial statements reflect the merger of Panacos with Vitex as a reverse merger wherein Panacos is deemed to be the acquiring entity from an accounting perspective. Under the purchase method of accounting, Vitex’s 5.5 million (as adjusted for its recent reverse stock split) outstanding shares of common stock and its stock options and warrants were valued using the average closing price on Nasdaq of $5.80 (as adjusted for its recent reverse stock split) per share for the two days prior to through the two days subsequent to the merger and financing announcement date of December 10, 2004. The fair values of the Vitex outstanding stock options and warrants were determined using the Black-Scholes option pricing model with the following assumptions: stock price of $5.80 (as adjusted for the recent reverse stock split), which is the value ascribed to the Vitex shares in determining the purchase price; volatility of 60%-72%; risk-free interest rate of 2.60%-4.03%; and an expected life of 0.1 years-4.0 years.
The purchase price is summarized as follows (in thousands):
| Fair value of Vitex outstanding common stock |
$ | 31,596 | ||
| Fair value of Vitex outstanding stock options |
122 | |||
| Fair value of Vitex outstanding warrants |
906 | |||
| Estimated merger costs |
1,160 | |||
| 33,784 | ||||
| Less: Amount related to unvested stock options and restricted stock allocated to deferred compensation, based on implicit value of unvested Vitex stock options and restricted stock. |
(31 | ) | ||
| Total purchase price |
$ | 33,753 | ||
Merger Purchase Price Allocation
The purchase price allocation is as follows (in thousands):
| Fair value of in-process research and development costs |
$ | 19,417 | ||
| Fair value of intangible asset – workforce |
5,437 | |||
| Tangible assets acquired, including $610 in cash and cash equivalents |
14,909 | |||
| Liabilities assumed |
(6,010 | ) | ||
| Net assets acquired |
$ | 33,753 | ||
For accounting purposes, the transaction is being treated as an acquisition of assets and not a business combination because Vitex did not meet the definition of a business under EITF 98-3, Determination Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business. The purchase price allocation was a two-step process in which management first determined the estimated fair value of the assets acquired and the liabilities assumed in the merger. The purchase price exceeded the estimated fair value of the net tangible and intangible assets acquired by approximately $26.5 million. In a business combination, this would result in the recognition of goodwill. However, because Vitex is not considered a “business” as defined by the applicable accounting rules in effect at the time of the merger, the remaining excess purchase price was allocated on a pro-rata basis to the individual assets acquired, excluding financial and other current assets.
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The estimated fair value and the recorded fair value of the net assets acquired is as follows:
(in thousands)
| Initial Fair Value |
Recorded Fair Value |
|||||||
| Net liabilities assumed, excluding long-lived assets |
$ | (1,991 | ) | $ | (1,991 | ) | ||
| Intangible asset – workforce |
1,400 | 5,437 | ||||||
| Property and equipment |
2,804 | 10,890 | ||||||
| In-process research and development costs |
5,000 | 19,417 | ||||||
| Excess purchase price |
26,540 | — | ||||||
| Net assets acquired |
$ | 33,753 | $ | 33,753 | ||||
The amount allocated to in-process research and development represents an estimate of the fair value of a purchased in-process technology research project that, as of the closing date of the merger, had not reached technological feasibility and has no alternative future use. Accordingly, the in-process research and development primarily represents the estimated fair value of INACTINE™, a Vitex system for pathogen inactivation of red blood cells, at the time of the merger. The initial value of the purchased in-process research and development from the merger was determined by estimating the projected net cash flows related to such products based upon management’s estimates of future revenues and operating profits to be earned upon commercialization of the products. These cash flows were discounted back to their net present value and were then adjusted by a probability of success factor. In-process research and development was expensed immediately upon the consummation of the merger.
The estimated initial fair value attributed to workforce was determined based on the estimated cost to recruit, hire, and train Vitex employees (See Note 4).
3. Equity
Private Placement
On December 9, 2004, Vitex entered into a Securities Purchase Agreement with a group of investors, including Ampersand Ventures, an existing investor in Vitex and Panacos, and A.M. Pappas & Associates, LLC, an existing investor in Panacos, and other Panacos investors. The closing of the $20 million financing was subject to the completion of the merger with Panacos. Upon the closing of the financing on March 11, 2005, the Company issued 10.0 million, shares of its common stock (as adjusted for its recent reverse stock split), at a per share price of $2.00 (as adjusted for its recent reverse stock split), and warrants to purchase 4.7 million shares of its common stock (as adjusted for its recent reverse stock split) to the investors in the financing. The shares issued in the financing represented 26% of the outstanding shares, after giving effect to the closing of the merger. In connection with the private placement, the Company filed a registration statement relating to the resale of the common stock sold in the private placement on April 4, 2005. In connection with the financing, the Company incurred approximately $1.9 million in transaction costs.
Reverse Split
At the close of business on March 14, 2005, the Company effected a 1-for-10 reverse split of its common stock, and shares began trading on a post-split basis on March 15, 2005. In addition, the reverse stock split resulted in a reclassification from common stock to additional paid-in capital to reflect the adjusted share amount as the par value of the Company’s common stock remained at $0.01. All share and per share amounts have been restated for all periods presented.
Rights Offering
On March 28, 2005, the SEC declared effective a registration statement for the offering of the Company’s common stock with a maximum value of $5.5 million through the distribution of subscription rights to Vitex’s stockholders. Under the terms of the rights offering, Vitex’s stockholders of record as of March 9, 2005 received 0.8 subscription rights for each share of common stock they owned, thereby entitling them to purchase a maximum of 2.7 million shares of its common stock at an exercise price of $2.00 per share. The rights offering closed on April 29, 2005 raising gross proceeds of $2.5 million. The Company issued 1.2 million shares of its common stock, at a per share price of $2.00 to the investors in the rights offering. Under the terms of the Securities Purchase Agreement, the Company’s stockholders, Ampersand Ventures and A.M. Pappas & Associates, LLC, were contractually obligated to refrain from exercising their subscription rights in the rights offering. In connection with the financing, the Company incurred approximately $0.3 million in transaction costs.
Redeemable Preferred Stock
In March and April 2004, Panacos issued approximately 20.0 million shares of Series C Redeemable Preferred Stock at $0.759 per share for gross cash proceeds of approximately $15.2 million. The Company also issued 4.1 million shares of Series C Redeemable Preferred Stock valued at $0.759 per share in satisfaction of principal of $3 million and related accrued interest of approximately $0.1 million on convertible secured notes payable held by certain stockholders. On March 11, 2005, the Panacos Series C Redeemable Preferred Stock were exchanged for 16.3 million shares of Vitex common stock as a result of the merger.
Dividends were cumulative and accrued on each outstanding share of Series C Redeemable Preferred Stock at 8% per annum. Upon the conversion of the Series C Redeemable Preferred Stock into common stock the accrued and unpaid dividends of $1.4 million on the Series C Redeemable Preferred Stock were not payable and thus were recorded to additional paid-in capital upon the merger with Vitex on March 11, 2005.
In November 2000, the Company issued approximately 2.7 million shares of Series B Redeemable Preferred Stock for $1.116 per share, for net proceeds of approximately $3.0 million. In January 2001, the Company issued 0.2 million shares of Series B Redeemable Preferred Stock for $1.116 per share, for net proceeds of $0.3 million. In January 2002, the Company issued 4.5 million shares of Series B Redeemable Preferred Stock for $1.116 per share, for net proceeds of $5.0 million. On March 11, 2005, the shares of Panacos Series B Redeemable Preferred Stock were exchanged for 5.0 million shares of Vitex common stock as a result of the merger.
Dividends were cumulative and accrued on each outstanding share of Series B Redeemable Preferred Stock at 8% per annum. Upon the conversion of the Series C Redeemable Preferred Stock into common stock the accrued and unpaid dividends of $2.6 million on the Series B Redeemable Preferred Stock were not payable and thus recorded to additional paid-in capital upon the merger with Vitex on March 11, 2005.
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Series A Preferred Stock
In January 2000, Panacos issued 1.5 million shares of Series A Preferred Stock in exchange for technology developed by Boston Biomedica, Inc., valued at $50,000. The technology was transferred at Boston Biomedica Inc.’s historical cost.
In conjunction with the Series C Redeemable Preferred Stock offering in 2003 discussed above, Panacos amended and restated its certificate of incorporation. This amendment included a mandatory conversion provision of the Series A Preferred Stock should the Series A Preferred Stockholder choose not to purchase its pro-rata share of a qualified financing. The Series C Redeemable Preferred Stock offering met the threshold of a qualified financing. The Series A Preferred Stockholder elected not to participate in this financing; therefore this stock was converted, on a one for one basis, to common stock.
4. Impairment of Long-Lived Assets
On March 11, 2005, the Company recorded an impairment charge of $8.1 million and $4.0 million on the property and equipment and the workforce intangible asset balances, respectively. Upon the completion of the merger, the Company completed an analysis to determine if it was able to recover the adjusted value of its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The Company determined that the carrying value of its long-lived assets (INACTINE™-specific property and equipment and workforce) exceeded the undiscounted future cash flows estimated to result from the use and eventual disposition of the assets and workforce, and therefore, wrote down the carrying value of the assets to their estimated fair values.
On June 30, 2005, as a result of the Company’s decision to discontinue its direct investment in the development of the INACTINE™ system for red blood cells (See Note 7), the Company recorded an impairment charge of $1.7 million. The impairment charge was comprised of $1.3 million and $0.4 million for the write-off of workforce intangible asset and equipment, respectively.
5. Potential Stock Compensation Charges
On March 11, 2005, in connection with the merger between Vitex and Panacos, 57% of Panacos’ unvested employee stock options accelerated. Under FASB Interpretation No. 44, the modification to accelerate vesting effectively renews an award if, absent the modification, the award would have expired unexercisable. The acceleration of the options results in a new measurement date with additional compensation cost measured by the difference between the intrinsic value of the award at the original measurement date and the intrinsic value immediately prior to the modification. The additional non-cash stock-based compensation cost of approximately $8.5 million will only be recognized for those employees who are able to exercise the award that would have expired unexercisable pursuant to its original terms. The Company has not recorded or accrued any compensation costs at this time as it is not able to estimate the potential benefit to employees. The potential stock compensation charge will decrease over time, through June 2007, the date all options would have been 100% vested had they not been accelerated. A non-cash charge will only occur in the period in which an “accelerated” employee’s employment is terminated. At June 30, 2005, the remaining potential non-cash stock compensation charge is $6.5 million.
On April 7, 2005, the Company granted 860,000 stock options to its Chief Executive Officer. Subsequent modifications to the vesting provisions of the original grant resulted in a modification of the award. The modification of the vesting provision results in a new measurement date with additional compensation cost measured by the difference between the intrinsic value of the award at the original measurement date and the intrinsic value immediately prior to the modification. The additional non-cash stock-based compensation cost of approximately $1.4 million will only be recognized if the officer is able to exercise the award that would have expired unexercisable pursuant to its original terms. The Company has not recorded or accrued any compensation costs at this time as it is not able to estimate the potential benefit to the officer. The potential stock compensation charge will terminate in April 2010, the date all options would have been 100% vested had they not been accelerated. A non-cash charge will only occur in the period in which the executive’s employment is terminated.
6. Executive Severance Charge
The Company recorded a severance charge of approximately $0.5 million during the quarter ended June 30, 2005 for an executive officer. Of the $0.5 million, $0.2 million related to a non-cash stock compensation charge. The Company will record a final charge of $0.2 million in July 2005 when the Executive completes the obligations under the applicable severance agreement.
7. INACTINE™ Update
Prior to the merger with Panacos, the INACTINE™ Pathogen Reduction system for red blood cells (the “INACTINE™ system”) was Vitex’s principal development-stage program. The INACTINE™ system is designed to inactivate a wide range of viruses, bacteria and lymphocytes from red blood cells and to remove soluble prion proteins with the goal of diminishing risk of transmission of pathogens in transfused blood. On June 30, 2005, the Company announced its discontinuation of its direct investment in the development of the INACTINE™ system while undertaking efforts to license the technology and intellectual property to potential partners. As a result of this announcement, the Company recorded an impairment charge of $0.4 million and $1.3 million on the property and equipment and the workforce intangible asset balances, respectively.
In November 2004, Vitex suspended enrollment in its Phase III surgical, or acute, study for the INACTINE™ system, following identification of an immune response to INACTINE™-treated red cells in one patient in the study during ongoing immunologic testing of subjects enrolled in the trial. The suspension in enrollment meant that both the Phase III trial of INACTINE™ for acute indications and the Phase III trial of INACTINE™ for chronic indications, described in more detail below, have been halted, in the case of the chronic trial, following a clinical hold by the FDA. Although no clinical consequences of the immune response in the acute trial are apparent based on review of available data, additional patients will not be enrolled in the trial. Vitex notified the FDA that they had suspended enrollment in the study. Since that time Vitex conducted a series of experiments designed to attempt to identify treatment conditions which reduce the likelihood of an immune response that was observed in the Phase III trials. Based on testing completed to date, Vitex was unable to identify a set of conditions that would result in a system that was both technically and commercially feasible. Vitex’s Phase III chronic study of INACTINE™ red cells was placed on clinical hold by the FDA due to the availability of insufficient safety information, and was subsequently halted by Vitex following a review by an independent data safety monitoring committee, or DSMC, in November 2003. The halting
11
of the study by Vitex was due to antibody formation in sickle cell anemia patients receiving repeat transfusions of INACTINE™ -treated red cells. The Phase III trial of INACTINE™ for chronic indications was designed to be conducted in two sequential parts, Part A and Part B. The purpose of Part A was to allow assessment of the safety of INACTINE™ -treated red cells in the patient population under study prior to proceeding to Part B. Enrollment in the chronic trial was stopped prior to initiation of Part B on the recommendation in November 2003 of the DSMC, which was charged with reviewing the data from Part A of the study, following the FDA’s clinical hold on the trial due to availability of insufficient safety information.
Prior to the suspension of the surgical trial, the FDA had expressed concerns regarding the licensing of the current INACTINE™ system for an acute indication in light of the presence of antibodies observed in the chronic trial, and has requested justification from Vitex for pursuit of an acute-only indication in the context of these findings. The FDA has also indicated that a control system with respect to an acute-only indication would be required to ensure that patients who have previously received red cells treated by the current INACTINE™ system do not receive INACTINE™ red cells in subsequent hospitalizations. Vitex presented proposals to the FDA on supplemental clinical trials. However, the FDA indicated that it would require the review of additional data, including the results of the Phase III trial for INACTINE™ in acute indications, before fully responding to our proposals for additional clinical trials. The occurrence of an immune response in the acute trial and the decision to suspend enrollment in it would have required the Company to present to the FDA a regulatory plan for approval of INACTINE™ that takes into account all findings to date, which would likely have significantly delayed determination of any acceptable regulatory pathway. The FDA has indicated that any such regulatory plan for the acute-only indication must address the development of a control system, as described above. In addition, we believe that modifications to the current INACTINE™ process that are designed to reduce the likelihood of an immunologic response to treated red cells would also likely have been required. Prior to the suspension of enrollment in the acute study, the FDA also directed Vitex to implement additional patient safety monitoring procedures in the Phase III acute trial. Vitex implemented these procedures and, until accrual into the trial was suspended, were periodically updating the FDA on the trial data. While the Company believes that the steps taken addressed the FDA recommendations prior to suspending enrollment in the acute trial, further steps would likely have been required by the FDA, should we have requested FDA approval to continue enrollment in this study. Vitex also received from the FDA a written request for further information relating to an August 2004 amendment to our IND. The amendment included responses to questions raised by the FDA relating to procedures for patient safety monitoring used in the Phase III chronic study, which had been placed on clinical hold by the FDA due to the availability of insufficient safety information, and subsequently halted by Vitex following a DSMC review. Vitex responded to the FDA’s request.
With the Phase III trial for INACTINE™ in chronic indications halted by Vitex, following the clinical hold by the FDA and the subsequent review by the DSMC, and enrollment suspended in the Phase III trial for INACTINE™ in acute indications, the Company’s ongoing development plan for INACTINE™ for chronic, acute or other indications was highly uncertain. We performed preclinical testing on modifications to the INACTINE™ process that were designed to reduce the likelihood of an immunologic response to treated red cells. However, to date we have not identified a set of conditions that result in a reduction in the likelihood of an immunologic response and that is both technically and commercially feasible. There can be no assurance, had we decided to continue development of the INACTINE™ system, that we would have been able to identify a set of conditions that would reduce the likelihood of an immune response that is also technically and commercially feasible. There was also no assurance that we could develop a control system that will be technically feasible, approved by the FDA, and economically viable. Based on the uncertainty in developing a technically and commercially feasible modification to the INACTINE™ system that the FDA would permit to restart clinical trials, as well as the associated investment in both development and clinical programs, Vitex decided to concentrate resources on the development and commercialization of the HIV therapeutics acquired as a result of the merger with Panacos Pharmaceuticals.
12
8. Legal Proceedings
Red Cell Processing Laboratory
In 2002, Vitex invested $1.1 million in build-out costs for a 16,500 sq. ft. laboratory near Boston, Massachusetts intended for use as a processing site for INACTINE™-treated red blood cells. In 2003, Vitex concluded that the second site was not required. In fiscal year 2003, Vitex recorded a non-cash charge of $1.4 million within research and development costs to write-off its capitalized build-out costs and to provide for estimated lease and associated carrying costs until the facility was sublet or the lease was terminated. The facility lease ran to 2008 and total remaining payments under the lease were approximately $1.0 million. Vitex anticipated subleasing the facility under terms similar to its primary lease obligations or reaching a satisfactory lease termination agreement with the landlord. In February 2004, the lease on that facility was terminated by the landlord who retained a twelve-month security deposit posted by Vitex in the amount of $0.17 million, which was charged against a reserve established in fiscal year 2003. In the fourth quarter of 2004, the landlord filed a complaint against Vitex seeking damages of not less than $531,905, plus attorneys’ fees, representing a claim for damages relating to re-rental of the facility at a lower rental rate plus associated costs. In late 2004, based on the evidence then provided, namely the landlord’s affidavits, the trial court issued an order preventing the Company from using up to $300,000 of our assets except in the ordinary course of business, and further, allowed an attachment of $250,000 of the Company’s funds as security, included in restricted cash within current assets on the accompanying consolidated balance sheet, for a potential future judgment in the landlord’s favor. Since the court’s orders, Vitex has sent certain discovery requests to the landlord, including a request for the production of documents to support the landlord’s claims. In response, the landlord has provided documents to support its calculations, however, certain of the damages calculations remain unsupported and are disputed by Vitex. The Company is vigorously defending against this claim. At June 30, 2005, the Company believes it has sufficient reserves to cover its litigation of this matter.
Former Employee Suits
On February 1, 2005, Vitex was served with a complaint filed in the United States District Court for the Eastern District of New York by a former employee of the Melville plasma processing plant which was divested to Precision Pharmaceuticals, Inc. (“Precision”) in August 2001. The complaint alleged that Vitex underpaid overtime pay to this employee while he was employed by Vitex in our Melville plant. On February 18, 2005, we filed a motion to dismiss the claim and, based on a review of the employee’s payroll records, believe that any overtime pay due to this employee would have been less than $1,000. On April 5, 2005, the court conditionally denied our motion to dismiss and granted the employee thirty days to file an amended complaint that more clearly specified the defendants responsible to pay him the overtime he alleged he was owed and the relevant time periods. On May 5, 2005, the employee filed his amended complaint in the United States District Court for the Eastern District of New York against us and Precision. The amended complaint included federal and state overtime claims, as well as an ERISA claim. The employee also alleged that we insufficiently funded his 401(k) account. On May 10, 2005, the employee filed a second amended complaint in the United States District Court for the Eastern District of New York against us and Precision. The second amended complaint contained the same claims as the amended complaint. In June 2005, the suit was discontinued with prejudice. The Company has reached agreement to settle the suit. The terms of the settlement are confidential and its amount is not material to the financial statements.
Also on February 2, 2005, Vitex was served with a complaint filed in New York State Court by another former employee of the Melville plant. Vitex divested the Melville plant to Precision in August 2001. Precision is also a party to the suit. The suit is a class action in which the lead plaintiff, representing the class, claims Vitex underpaid overtime to employees of the processing plant. The complaint alleges an amount in excess of $125,000 in unpaid overtime plus the costs of the action and reasonable attorney’s fees due from the two defendants. On February 23, 2005, we have also filed a motion to dismiss the class action allegations of the complaint. That motion is currently pending before the court. We are in the process of analyzing employee payroll records for the period in question, which, based on the statute of limitations, we believe to be from approximately February 1999 to August 2001, and we intend to contest the claim vigorously. At June 30, 2005, the Company believes it has sufficient reserves to cover its litigation of this matter.
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Exhibits
| 31.1 | Certification of Chief Executive Officer and Acting Chief Financial Officer under Section 302. Filed herewith. |
| 32 | Section 906 certification of periodic financial report by Chief Executive Officer and Acting Chief Financial Officer. Filed herewith. |
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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.
| V.I. TECHNOLOGIES, INC. | ||
| (Registrant) | ||
| Date: August 15, 2005 | /s/ Samuel K. Ackerman | |
| Samuel K. Ackerman, M.D. | ||
| President, Chief Executive Officer and Acting Chief Financial Officer | ||
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EXHIBIT INDEX
Exhibits
| 31.1 | Certification of Chief Executive Officer and Acting Chief Financial Officer under Section 302. Filed herewith. |
| 32 | Section 906 certification of periodic financial report by Chief Executive Officer and Acting Chief Financial Officer. Filed herewith. |