FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 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 NUMBER: 033-05384
IR BIOSCIENCES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3301899
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4021 N. 75th Street, Suite 201, Scottsdale, Arizona 85251
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (480) 922-3926
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether 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 twelve 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 a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
The number of shares outstanding of Registrant's common stock as of November 8,
2005 was 69,475,428.
IR BIOSCIENCES HOLDINGS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of
September 30, 2005 (unaudited)...............................F-1
Condensed Consolidated Statement of Operations for
the three months and nine months ended September 30, 2005
and 2004, and for the period of inception
(October 30, 2002) to September 30, 2005.....................F-2
Condensed Consolidated Statement of Deficiency in
Stockholders' Equity from date of inception
(October 30, 2002) to September 30, 2005.....................F-3
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2005 and 2004, and for
the period of inception (October 30, 2002) to
September 30, 2005...........................................F-8
Notes to Condensed Consolidated Financial Statements.........F-10
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation...............................3
Item 3. Controls and Procedures......................................21
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..21
Item 3. Defaults Upon Senior Securities..............................23
Item 4. Submission of Matters to a Vote of Securities Holders........23
Item 5. Other Information............................................23
Item 6. Exhibits.....................................................23
Signatures...................................................23
-2-
ITEM 1. FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
unaudited financial statements should be read in conjunction with the audited
financial statements of IR BioSciences Holdings, Inc. ("we," "us," or the
"Company") included in the Form 10-KSB for the fiscal year ended December 31,
2004.
IR BioSciences Holdings, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Balance Sheet as of September 30, 2005
(Unaudited)
Sept 30,
2005
-------------
Assets
Current assets
Cash and cash equivalents $ 667,041
Prepaid services and other current assets 15,713
------------
Total current assets 682,754
Licensed proprietary rights, net 6,624
Furniture and equipment, net 4,795
------------
Total assets $ 694,173
============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities 2,408,545
------------
Total current liabilities 2,408,545
Commitments and Contingencies
Stockholders' deficit Preferred stock, 0.001 par value:
10,000,000 shares authorized, no shares issued and outstanding --
Common stock, $0.001 par value; 100,000,000 shares authorized;
69,436,319 shares issued and outstanding at September 30, 2005 69,436
Additional paid-in capital 9,447,102
Deferred compensation (14,859)
Deficit Accumulated during the Development Stage (11,216,051)
------------
Total deficiency in stockholder's equity (1,714,372)
------------
Total liabilities and deficienty in stockholders' equity $ 694,173
============
F-1
IR BioSciences Holdings, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of Operations
For the three and nine months ended September 30, 2005 and 2004,
And for the period of inception
(October 30, 2002) to September 30, 2005
(Unaudited)
Cumulative
from
Inception
For the Three For the Three For the Nine For the Nine (October 30,
Months Ended Months Ended Months Ended Months Ended 2002) to
Sept 30, Sept 30, Sept 30, Sept 30, September 30,
2005 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
Revenues -- -- -- -- --
Operating expenses:
Selling, general and
administrative
expenses $ 507,445 $ 1,041,152 $ 1,939,800 $ 3,546,641 $ 7,529,684
Merger fees and costs -- -- -- -- 350,000
Financing cost 579,575 -- 2,072,831 -- 2,162,831
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,087,020 1,041,152 4,012,631 3,546,641 10,042,515
Operating loss (1,087,020) (1,041,152) (4,012,631) (3,546,641) (10,042,515)
Other expense:
Interest income (expense) 5,925 (70,612) 4,607 (506,427) (1,173,536)
------------ ------------ ------------ ------------ ------------
Total other expense
5,925 (70,612) 4,607 (506,427) (1,173,536)
Loss before income taxes (1,081,095) (1,111,764) (4,008,024) (4,053,068) (11,216,051)
Provision for income taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (1,081,095) $ (1,111,764) $ (4,008,024) $ (4,053,068) $(11,216,051)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.02) $ (0.04) $ (0.06) $ (0.15) $ (0.31)
Weighted average shares outstanding -
basic and diluted 69,337,210 29,040,133 67,103,634 27,129,221 36,302,076
============ ============ ============ ============ ============
F-2
IR Biosciences Holding, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of Deficiency in
Stockholders' Equity For the period from inception
(October 30, 2002) to September 30, 2005
(unaudited)
Deficit
Accumulated
Common Stock Additional Common During the
----------------------- Paid-In Deferred Stock Development
Shares Amount Capital Compensation Subscribed Stage Total
---------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at October 30, 2002 -- $ -- $ -- -- $ -- $ -- $ --
(date of inception)
Shares of common stock issued at
$0.0006 per share to founders
for license of proprietary
right in December 2002 16,612,276 16,612 (7,362) -- -- -- 9,250
Shares of common stock issued at
$0.0006 per share to founders
for services rendered in
December 2002 1,405,310 1,405 (623) -- -- -- 782
Shares of common stock issued at
$0.1671 per share to consultants
for services rendered in
December 2002 53,878 54 8,946 (9,000) -- -- --
Sale of common stock for cash
at $0.1671 per share in
December 2002 185,578 186 30,815 -- -- -- 31,001
Net loss for the period from
inception (October 30, 2002)
to December 31, 2002 -- -- -- -- -- (45,918) (45,918)
---------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2002
(reflective of stock splits) 18,257,042 18,257 31,776 (9,000) -- (45,918) (4,885)
Shares granted to consultants at
$0.1392 per share for services
rendered in January 2003 98,776 99 13,651 -- -- -- 13,750
Sale of shares of common stock
for cash at $0.1517 per share
in January 2003 329,552 330 49,670 -- -- -- 50,000
Shares granted to consultants at
$0.1392 per share for services
rendered in March 2003 154,450 154 21,346 -- -- -- 21,500
Conversion of notes payable to
common stock at $0.1392 per share
in April 2003 1,436,736 1,437 198,563 -- -- -- 200,000
Shares granted to consultants at
$0.1413 per share for services
rendered in April 2003 14,368 14 2,016 -- -- -- 2,030
Sale of shares of common stock
for cash at $0.2784 per share
in May 2003 17,960 18 4,982 -- -- -- 5,000
Sales of shares of common stock
for cash at $0.2784 per share
in June 2003 35,918 36 9,964 -- -- -- 10,000
Conversion of notes payable to
common stock at $0.1392 per share
in June 2003 718,368 718 99,282 -- -- -- 100,000
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-3
IR Biosciences Holding, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of Deficiency in Stockholders' Equity
For the period from inception (October 30, 2002) to September 30, 2005
(unaudited)
Deficit
Accumulated
Common Stock Additional Common During the
----------------------- Paid-In Deferred Stock Development
Shares Amount Capital Compensation Subscribed Stage Total
---------- ----------- ----------- ------------ ----------- ----------- -----------
Beneficial conversion feature
associated with notes issued in
June 2003 -- -- 60,560 -- -- -- 60,560
Amortization of deferred
compensation -- -- -- 9,000 -- -- 9,000
Costs of GPN Merger in July 2003 2,368,130 2,368 (123,168) -- -- -- (120,799)
Value of warrants issued with
extended notes payable in
October 2003 -- -- 189,937 189,937
--
Value of Company warrants
issued in conjunction with
fourth quarter notes payable
issued October through December 2003 -- -- 207,457 -- -- -- 207,457
Value of warrants contributed
by founders in conjunction with
fourth quarter notes payable
issued October through
December 2003 -- -- 183,543 -- -- -- 183,543
Value of warrants issued for
services in October through
December 2003 -- -- 85,861 -- -- -- 85,861
Net loss for the twelve month
period ended December 31, 2003 -- -- -- -- -- (1,856,702) (1,856,702)
--
---------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2003 23,431,300 23,431 1,035,441 -- -- (1,902,620) (843,748)
Shares granted at $1.00 per
share pursuant to the Senior
Note Agreement in January 2004 600,000 600 599,400 (600,000) -- -- --
Shares issued at $1.00 per
share to a consultant for
services rendered in January 2004 800,000 800 799,200 (800,000) -- -- --
Shares issued to a consultant at
$0.62 per share for services
rendered in February 2004 40,000 40 24,760 (24,800) -- -- --
Shares issued to a consultant
at $0.40 per share for services
rendered in March 2004 1,051,600 1,051 419,589 (420,640) -- -- --
Shares issued to a consultant
at $0.50 per share for services
rendered in March 2004 500,000 500 249,500 (250,000) -- -- --
Shares sold for cash at $0.15
per share in March, 2004 8,000 8 1,192 -- -- -- 1,200
Shares issued at $0.50 per
share to consultants for
services rendered in March 2004 20,000 20 9,980 -- -- -- 10,000
Shares issued to a consultant
at $0.40 per share for services
rendered in March 2004 2,000 2 798 -- -- -- 800
Shares issued to consultants at
$0.32 per share for services
rendered in March 2004 91,600 92 29,220 -- -- -- 29,312
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-4
IR Biosciences Holding, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of Deficiency in Stockholders' Equity
For the period from inception (October 30, 2002) to September 30, 2005
(unaudited)
Deficit
Accumulated
Common Stock Additional Common During the
----------------------- Paid-In Deferred Stock Development
Shares Amount Capital Compensation Subscribed Stage Total
---------- ----------- ----------- ------------ ----------- ----------- -----------
Shares to be issued to
consultant at $0.41 per share in
April 2004 for services to be
rendered through March 2005 -- -- -- (82,000) -- -- (82,000)
Shares granted pursuant to the
New Senior Note Agreement
in April 2004 600,000 600 149,400 (150,000) -- -- --
Shares issued to officer at
$0.32 per share for services
rendered in April 2004 200,000 200 63,800 -- -- -- 64,000
Conversion of Note Payable to
common stock at $0.10 per share
in May 2004 350,000 350 34,650 -- -- -- 35,000
Beneficial Conversion Feature
associated with note payable in
May 2004 -- -- 35,000 -- -- -- 35,000
Issuance of warrants to officers
and founder for services
rendered in May 2004 -- -- 269,208 -- -- -- 269,208
Shares to a consultant at $0.20
per share as a due diligence fee
in May 2004 125,000 125 24,875 -- -- -- 25,000
Shares issued to a consultant at
$1.00 per share for services
to be rendered over twelve
months beginning May 2004 500,000 500 499,500 (500,000) -- -- --
Beneficial Conversion Feature
associated with notes payable
issued in June 2004 -- -- 3,000 -- -- -- 3,000
Issuance of warrants to note
holders in April, May, and June 2004 -- -- 17,915 -- -- -- 17,915
Issuance of warrants to
employees and consultants for
services rendered in April
through June 2004 -- -- 8,318 -- -- -- 8,318
Shares issued in July to a
consultant at $0.10 for services
to be rendered through July 2005 250,000 250 24,750 (25,000) -- -- --
Shares issued to a consultant in
July and September at $0.41 per
share for services to be rendered
through April 2005 200,000 200 81,800 -- -- -- 82,000
Shares issued to a consultant in
September at $0.12 to $0.22 for
services rendered through September
2004 127,276 127 16,782 -- -- -- 16,909
Shares issued in July to
September 2004 as interest on
note payable 300,000 300 35,700 -- -- -- 36,000
Issuance of warrants with notes
payable in July and August 2004 -- -- 72,252 -- -- -- 72,252
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-5
IR Biosciences Holding, Inc. and Subsidiary
(A Development Stage Company) Condensed Consolidated Statement of
Deficiency in Stockholders' Equity
For the period from inception (October 30, 2002) to September 30, 2005
(unaudited)
Deficit
Accumulated
Common Stock Additional Common During the
----------------------- Paid-In Deferred Stock Development
Shares Amount Capital Compensation Subscribed Stage Total
---------- ----------- ----------- ------------ ----------- ----------- -----------
Accrued deferred compensation in
August 2004 to a consultant for
100,000 shares at $0.10 per share,
committed but unissued -- -- -- (10,000) -- -- (10,000)
Shares issued in August 2004 at
$0.14 to a consultant for
services to be performed
through October 2004 100,000 100 13,900 (14,000) -- -- --
Shares issued in August 2004 at
$0.125 per share for conversion
of $30,000 demand loan 240,000 240 29,760 -- -- -- 30,000
Shares issued in August 2004 at
$0.16 per share to a consultant
for services provided 125,000 125 19,875 -- -- -- 20,000
Shares issued to employees at
$0.16 to $0.25 per share 48,804 49 8,335 -- -- -- 8,384
Commitment to issue 100,000
shares of stock to a consultant
at $0.23 per share for services
to be provided through September 2005 -- -- -- (23,000) -- -- (23,000)
Sale of stock for cash in
October at $0.125 per share, net
of costs of $298,155 18,160,000 18,160 1,345,763 -- -- -- 1,363,923
Value of warrants issued with
sale of common stock in October,
net of costs -- -- 607,922 -- -- -- --
Issuance of warrant to officer
in October -- -- 112,697 -- -- -- 112,697
Issuance of stock to investment
bankers in October 2004 for
commissions earned 4,900,000 4,900 (4,900) -- -- -- --
Conversion of accounts payable
to stock in October at $0.125
per share 1,257,746 1,258 107,382 -- -- -- 108,640
Value of warrants issued with
accounts payable conversions -- -- 48,579 -- -- -- 48,579
Conversion of demand loan to
stock in October at $0.11 per
share 93,300 93 10,170 -- -- -- 10,263
Forgiveness of notes payable in
October 2004 -- -- 36,785 -- -- -- 36,785
Issuance of stock to officer and
director at $0.125 per share in
October for conversion of liability 1,440,000 1,440 122,493 -- -- -- 123,933
Value of warrants issued with
officer and director conversion
of liabilities -- -- 56,067 -- -- -- 56,067
Conversion of debt and accrued
interest to common stock
at $0.075 to $0.125 per share 6,703,151 6,703 417,514 -- -- -- 424,217
Value of warrants issued with
conversion of debt -- -- 191,111 -- -- -- 191,111
Conversion of note payable in
October into common stock at
$0.075 per share 67,613 68 4,932 -- -- -- 5,000
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-6
IR Biosciences Holding, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of Deficiency in
Stockholders' Equity For the period from inception
(October 30, 2002) to September 30, 2005
(unaudited)
Deficit
Accumulated
Common Stock Additional Common During The
----------------------- Paid-In Deferred Stock Development
Shares Amount Capital Compensation Subscribed Stage Total
---------- ----------- ----------- ------------ ----------- ----------- -----------
Issuance of warrants to note
holders in October 2004 -- -- 112,562 -- -- -- 112,562
Value of shares issued to CFO as
compensation 100,000 100 34,900 -- -- -- 35,000
Value of warrants issued to
members of advisory committees in
in November and December -- -- 16,348 -- -- -- 16,348
Beneficial conversion feature
associated with notes payable -- -- 124,709 -- -- -- 124,709
Shares issued in error to be
cancelled (9,002) (9) -- -- -- -- --
Amortization of deferred
compensation through
December 31, 2004 -- -- -- 2,729,454 -- -- 2,729,454
Loss for the twelve months ended
December 31, 2004 -- -- -- -- -- (5,305,407) (5,305,407)
---------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2004 62,423,388 62,423 7,922,943 (169,986) -- (7,208,027) 607,353
=========== =========== =========== ============ =========== =========== ===========
Sale of shares of common stock
for cash at $0.20 per share
in March 2005 for warrant
exercise, net of costs 6,600,778 6,601 1,184,256 -- -- -- 1,190,857
Value of warrants issued to members
of advisory commitee in March 2005 -- -- 137,049 -- -- -- 137,049
Accrued deferred compensation in
February, 2005 to a consultant
for 50,000 shares at $0.65 per
share. Committed but unissued -- -- -- (32,500) -- -- (32,500)
Amortization of deferred
compensation for the three months
ended March 31, 2005 -- -- -- 149,061 -- -- 149,061
Warrants exercised at $0.05
per share 80,000 80 3,920 -- -- -- 4,000
Value of warrants issued to
members of advisory committees
in June 2005 -- -- 70,781 -- -- -- 70,781
Value of warrants issued to
investors and service providers -- -- 32,991 -- -- -- 32,991
Amortization of deferred
compensation for the three months
ended June 30, 2005 -- -- -- 22,563 -- -- 22,563
Conversion of notes payable into
232,153 common stock not yet issued -- -- -- -- 65,003 -- 65,003
Issuance of 232,153 shares of common
stock for conversion of notes payable 232,153 232 64,771 -- (65,003) -- --
Issuance of 100,000 shares of common
stock to consultant for services
provided 100,000 100 9,900 -- -- -- 10,000
Amortization of deferred compensation
for the three months ended
September 30, 2005 -- -- -- 16,003 -- -- 16,003
Value of warrants issued to advisory
committee in September 2005 for services -- -- 20,491 -- -- -- 20,491
Loss for the nine months ended
September 30, 2005 -- -- -- -- -- (4,008,024) (4,008,024)
---------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at September 30, 2005 69,436,319 69,436 9,447,102 (14,859) -- (11,216,051) (1,714,372)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-7
IR BioSciences Holdings, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of
Cash Flows For the nine months ended
September 30, 2005 and 2004,
And for the period of inception
(October 30, 2002) to September 30, 2005
(Unaudited)
Cumulative
For the For the from Inception
Nine Months Nine Months (October 30,
Ended Ended 2002) to
September 30, September 30, September 30,
2005 2004 2005
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (4,008,024) $ (4,053,068) $(11,216,051)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation 462,773 2,636,280 3,862,773
Interest expense 4,007 74,517 156,407
Amortization of discount on notes payable -- 406,360 1,006,935
Depreciation and amortization 2,401 12,454 28,418
Changes in operating assets and liabilities: --
Prepaid services and other assets (9,000) 33,543 (15,712)
Accounts payable and accrued expenses 2,064,910 440,970 2,619,952
------------ ------------ ------------
Net cash used in operating activities (1,482,933) (448,944) (3,557,278)
Cash flows from investing activities:
Acquisition of property and equipment -- -- (8,087)
------------ ------------ ------------
Net cash used in investing activities -- -- (8,087)
Cash flows from financing activities:
Proceeds from notes payable -- 576,057 1,233,500
Principal payments on notes payable and demand loans (14,997) (174,000) (264,997)
Shares of stock sold for cash 1,190,857 31,200 3,259,903
Procees from exercised of warrants 4,000 -- 4,000
Officer repayment of amounts paid on his behalf -- -- 19,880
Cash paid on behalf of officer -- -- (19,880)
Cash paid on amount due to officer -- -- --
------------ ------------ ------------
Net cash provided by financing activities 1,179,860 433,257 4,232,406
Net increase in cash and cash equivalents (303,073) (15,687) 667,041
Cash and cash equivalents at beginning of period 970,114 10,534 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 667,041 $ (5,153) $ 667,041
============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-8
IR BioSciences Holdings, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statement of
Cash Flows For the nine months ended
September 30, 2005 and 2004,
And for the period of inception
(October 30, 2002) to September 30, 2005
(Unaudited) (continued)
Cumulative
For the For the from Inception
Nine Months Nine Months (October 30,
Ended Ended 2002) to
September 30, September 30, September 30,
2005 2004 2005
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Acquisition and capital restructure:
Assets acquired $ -- $ -- $ --
Liabilities assumed -- -- (120,799)
Common stock retained -- -- (2,369)
Adjustment to additional paid-in capital -- -- 123,168
Organization costs -- -- 350,000
------------- ------------- -----------
Total consideration paid $ -- $ -- $ 350,000
============= ============= ===========
Cash paid during the period for:
Interest $ 1,486 $ 4,553 $ 44,286
============= ============= ===========
Taxes $ -- $ -- $ --
============= ============= ===========
Common stock issued in exchange for proprietary rights $ -- $ -- $ 9,250.00
============= ============= ===========
Common stock issued in exchange for services $ 10,000 $ 2,095,240 $ 2,925,286
============= ============= ===========
Common stock issued in exchange for previously incurred
debt and accrued interest $ 65,003 $ 35,000 $ 1,060,594
============= ============= ===========
Common stock issued in exchange as interest $ -- $ -- $ 36,000
============= ============= ===========
Amortization of beneficial conversion feature $ -- $ -- $ 223,269
============= ============= ===========
Stock options and warrants issued in exchange for
services rendered $ 261,312 $ -- $ 762,744
============= ============= ===========
Debt and accrued interest forgiveness from note holders $ -- $ -- $ 36,875
============= ============= ===========
Common stock issued in satisfaction of accounts payable $ -- $ 29,132 $ 157,219
============= ============= ===========
Common stock issued in satisfaction of amounts due to
an Officer and a Director $ -- $ -- $ 180,000
============= ============= ===========
Amortization of deferred compensation $ 187,627 $ -- $ 187,627
============= ============= ===========
Fair value of common stock and warrants in
connection with the late filing of registration
statement. $ 2,072,831 $ -- $ 2,072,831
============= ============= ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-9
IR BIOSCIENCES HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
General
-------
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-QSB, and therefore, do not include
all the information necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America for a complete set of
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from operations for the nine-month periods ended September 30, 2005 and
2004 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with the December 31, 2004 financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB filed with the Securities and Exchange Commission on April 19, 2005 and
form 10-KSB/A filed with the Securities and Exchange Commission on May 2, 2005.
Business and basis of presentation
----------------------------------
IR BioSciences Holdings, Inc. (the "Company," "we," or "us") formerly GPN
Network, Inc. ("GPN") is currently a development stage company under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7. The
Company, which was incorporated under the laws of the State of Delaware on
October 30, 2002, is a biopharmaceutical company. Through our wholly owned
subsidiary, ImmuneRegen BioSciences, Inc., we are engaged in the research and
development of Homspera(TM), a proprietary compound that is derived from
homeostatic substance P, a naturally occurring peptide. Currently, the majority
of our development efforts are centered around two drug candidates derived from
Homspera, Radilex(TM) and Viprovex(TM). Radilex has been formulated specifically
for the indication of acute exposure to radiation. Viprovex was formulated
specifically for applications relating to the treatment of maladies caused by
exposure to various chemical and biological agents. Our research and development
efforts are at a very early stage and Radilex and Viprovex have only undergone
pre-clinical testing in mice. From its inception through the date of these
financial statements, the Company has recognized no revenues and has incurred
significant operating expenses.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, ImmuneRegen BioSciences, Inc. Significant
intercompany transactions have been eliminated in consolidation.
Reclassification
----------------
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
Stock based compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123,"Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2002 and for
the subsequent periods.
F-10
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The Company's pro forma
information was as follows:
Three months ended September 30, 2005:
2005 2004
----------- -----------
Net loss, as reported $(1,081,095) $(1,111,764)
Compensation recognized under
under APB 25 -- --
Compensation recognized under
SFAS 123 77,969 --
----------- -----------
Pro forma net loss $(1,159,064) $(1,111,764)
=========== ===========
Pro forma loss per share $ (0.02) $ (0.04)
=========== ===========
Nine months ended September 30, 2005:
2005 2004
----------- -----------
Net loss, as reported $(4,008,024) $(4,053,068)
Compensation recognized under
under APB 25 -- --
Compensation recognized under
SFAS 123 77,969 --
----------- -----------
Pro forma net loss $(4,085,993) $(4,053,068)
=========== ===========
Pro forma loss per share $ (0.06) $ (0.15)
=========== ===========
Interim financial statements
----------------------------
The accompanying balance sheet as of September 30, 2005, the statements of
operations for the three and nine months ended September 30, 2005 and 2004, and
for the period of inception (October 30, 2002) to September 30, 2005, and the
statements of cash flows for nine months ended September 30, 2005 and 2004, and
from the period of inception (October 30, 2002) to September 30, 2005 are
unaudited. These unaudited interim financial statements include all adjustments
(consisting of normal recurring accruals), which, in the opinion of management,
are necessary for a fair presentation of the results of operations for the
periods presented. Interim results are not necessarily indicative of the results
to be expected for a full year.
Use of estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
Long-lived assets
-----------------
The Company accounts for its long-lived assets under the provision of Statements
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." The Company's
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses, or a forecasted
Inablity to achieve break-even operating results over an extended period. The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should an impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset.
F-11
Prepaid services and other current assets
------------------------------------------
Prepaid services and other current assets consist of (i) salary advance to an
employee of $2,300; (ii) deposits of $2,260; and (iii) prepaid consulting and
legal fees of $11,153.
Licensed proprietary rights
---------------------------
The Company has licensed from its founders certain proprietary rights which the
Company intends to utilize in the execution of its business plan. These
proprietary rights are being amortized over the term of the license agreement,
or ten years. The amount amortized during the three months ended September 30,
2005 and 2004 was $232 during each period. The amount amortized during the nine
months ended September 30, 2005 and 2004 was $696 during each period. The
Company amortized $2,626 for the period from October 30, 2002 (inception) to
September 30, 2005.
Furniture and equipment
-----------------------
Furniture and equipment are valued at cost. Depreciation and amortization are
provided over the estimated useful lives up to seven years using the
straight-line method. The estimated service lives of property and equipment are
as follows:
Computer equipment 3 years
Furniture 7 years
The amounts depreciated for the three months ended September 30, 2005 and 2004
were $967 and $170, respectively. The amounts depreciated for the nine months
ended September 30, 2005 and 2004 were $1,705 and $510, respectively. The amount
depreciated from the date of inception (October 30, 2002) through September 30,
2005 was $3,293.
NOTE 2 - RELATED PARTY TRANSACTIONS
Proprietary rights agreements
-----------------------------
In December 2002, the Company entered into a royalty-free license agreement (the
"License Agreement") with its two founders and largest shareholders (the
"Licensors"). Under the terms of the License Agreement, the Licensors grant to
the Company an exclusive license to use and sublicense certain patents, medical
applications, and other technologies developed by the Licensors. The Company's
obligations under the License Agreement include (i) reasonable efforts to
protect any licensed patents or other associated property rights; (ii)
reasonable efforts to maintain confidentiality of any proprietary information;
(iii) upon the granting by the U. S. Food and Drug Administration to the Company
the right to market a product, the Company will maintain a broad form general
liability and product liability insurance.
In February 2005, Drs. Witten and Harris executed assignment documents in which,
for good and valuable consideration, patent applications and patents developed
by them were assigned to ImmuneRegen BioSciences, Inc. The assignment documents
included all of the patents and patent applications which were included in and
covered by the Licensing Agreement, as amended. Drs. Witten and Harris have also
assigned all proprietary technology developed at ImmuneRegen subsequent to the
execution of the February 2005 assignment documents.
Consulting agreements
---------------------
On December 16, 2002, the Company entered into consulting agreements (the
"Consulting Agreements") with its two founders and chief research scientists
(the "Consultants"). The Consulting Agreements were on a month-to-month basis.
Under the terms of the Consulting Agreements, the Consultants agreed to place at
the disposal of the Company their judgment and expertise in the area of acute
lung injury. In consideration for these services, the Company agreed to pay each
consultant a non-refundable fee of $5,000 per month, which shall accrue until
such time as the Company raises at least $2,000,000 in equity or debt financing
at which time such accrued amount will become due and payable. Pursuant to the
Consulting Agreements, during the period from January 1, 2003 to December 31,
2003, the Company accrued $120,000 in consulting fees. During the period from
January 1, 2004 to December 31, 2004, the Company accrued an additional $90,000
in consulting fees. The amounts due the Consultants at December 31, 2003 were
$125,000 and were included in accounts payable and accrued expenses.
F-12
In October 2004, the Company achieved the threshold amount of $2,000,000 in
equity or debt financing. As of October 2004, the aggregate amounts due the
Consultants under the Consulting Agreements was $215,000.
In October 2004, one of the Consultants elected to exchange 724,000 shares of
the Company's common stock and a warrant to purchase an additional 362,000
(post-split) shares of common stock at an exercise price of $0.50 (post-split)
in exchange for $90,500 of the $107,500 of the previously accrued and unpaid
fees due him under the Consulting Agreement, and the balance of $17,000 was paid
to the consultant. At December 31, 2004, there is no balance due to the
Consultant.
In October 2004, because the remaining Consultant had not taken an active role
in the management of the Company, he agreed that would forgive the amount
accrued to him under the Consulting agreement of $107,500. The Company accounted
for the transaction as a forgiveness of indebtedness under FAS No. 140 during
the year ended December 31, 2004.
In March 2005, Dr. Harris resigned as consultant to us and our subsidiaries.
During the three months ended September 30, 2005, the Company paid $24,000 in
consulting fees to the Consultant, and charged $19,000 of this amount to
operations and $5,000 to prepaid consulting fees; During the three months ended
September 30, 2004, the Company accrued the amount of $15,000 in consulting fees
payable to the Company's Founders. During the nine months ended September 30,
2005, the Company paid a total of $62,000 to the Consultant, charging $31,000 of
this amount to operations and the remaining $31,000 against the accrued
liability; also during the nine months ended September 30, 2005, the Company
accrued an additional $19,000 in consulting fees due to the Consultant. At
September 30, 2005, there is a prepaid asset of $9,153 relating to these fees.
During the nine months ended September 30, 2004, the Company accrued $90,000 in
consulting fees payable to the Consultants.
Employment agreements
---------------------
Pursuant to our employment agreement with Michael Wilhelm, our President and
Chief Executive Officer, dated December 16, 2002, we paid a salary of $125,000
and $175,000 to Mr. Wilhelm during the first and second years of his employment,
respectively. Thereafter we paid an annual salary of $250,000. On August 10,
2005, we entered into a new employment agreement with our President and Chief
Executive Officer, Michael K. Wilhelm. Pursuant to this new employment agreement
we shall pay an annual salary of $275,000 to Mr. Wilhelm through the term of his
employment. Mr. Wilhelm's salary is payable in regular installments in
accordance with the customary payroll practices of our company. Also on August
10, 2005, Mr. Wilhelm received an option to purchase 103,030 shares of the
Company's stock at a price of $0.33, which was 110% of the closing market price
on the date of the option grant. These options vested on September 10, 2005. The
Company valued these options using the intrinsic value method, and because the
option price was less than the closing market price of the Company's common
stock when the 103,030 options vested on August 10, 2005 there was no value
assigned to these options.
Pursuant to our employment agreement with John Fermanis, our Chief Financial
Officer, dated February 15, 2005, we paid a salary of $60,000 until the company
completed a financing of $500,000 or more. This occurred on March 4, 2005 when
the company completed a Tender Offer for warrants totaling $1,190,857 net of
fees. From March 4, 2005, until December 31, 2005, we will pay an annual salary
of $85,000. Thereafter, we will pay an annual salary of $98,000 for the second
year ending December 31, 2006 and an annual salary of $112,000 for the third
year ending December 31, 2007. Mr. Fermanis' salary is payable in regular
installments in accordance with the customary payroll practices of our company.
Mr. Fermanis also receives 100,000 shares of the Company's common stock, which
are earned at the rate of 1/12 or 8,333 per month beginning January 2005. The
Company charges to operations the market value of these shares as of the first
day of each month. For the three months ended September 30, 2005, the Company
charged $7,583 to operations for the issuance of 25,000 shares to Mr. Fermanis;
for the nine months ended September 30, 2005, the Company charged to operations
the amount of $31,916 for the issuance of 75,000 shares to Mr. Fermanis.
NOTE 3 - DEBT
During the nine months ended September 30, 2005, the Company paid two notes
payable in the aggregate amount of $80,000. Payment was made by cash in the
amount of $14,997, and by converting a note with a balance of $65,003 into
232,153 shares of the Company's common stock at a price of $0.28 per share.
These shares were issued in July 2005.
F-13
NOTE 4 - EQUITY
Common stock
------------
On January 24, 2005, the Company made a tender offer to certain of the Company's
shareholders whereby the exercise price of certain warrants issued in October
2004 (the "Warrants") would be reduced from $0.50 to $0.20 per share. In March
2005, 6,600,778 shares of common stock were sold pursuant to this offer for
aggregate proceeds of $1,320,156 less costs of $129,300.
In June 2005, the Company issued 80,000 shares of common stock pursuant to the
Exercise of a warrant at a price of $0.05 per share.
In July 2005, the Company issued 232,153 shares of common stock at a price of
$0.28 per share pursuant to the conversion of a note payable (see Note 5.)
In August 2005, the Company issued 100,000 shares of common stock pursuant to an
agreement with a service provider. The fair value of these shares of $10,000 was
amortized over the life of the contract, from July 2004 to July 2005.
Warrants
--------
During the three months ended March 31, 2005, the Company issued warrants to
purchase 268,033 shares of common stock at prices ranging from $0.125 to $1.00
to consultants for services performed. The Company valued these warrants using
the Black-Scholes valuation model, and charged the amount of $137,049 three
months ended March 31, 2005.
During the three months ended June 30, 2005, the Company issued warrants to
purchase 366,814 shares of common stock at prices ranging from $0.038 to $1.00
per share. The Company also cancelled warrants to purchase 123,530 shares of
common stock at a price of $2.00 per share. The Company valued these issuance
and cancellations using the Black-Scholes valuation model, and charged the
amount of $103,772 to operations during the three months ended June 30, 2005.
Also during the three months ended June 30, 2005, warrants to purchase 80,000
shares of common stock at a price of $0.05 per share were exercised.
During the three months ended September 30, 2005, the Company issued warrants to
purchase 77,250 shares of common stock at prices ranging from $0.125 to $1.00
per share. The Company valued these warrants using the Black-Scholes valuation
model, and charged the amount of $20,491 to operations during the three months
ended September 30, 2005.
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses and in connection with
placement of convertible debentures.
Warrants Outstanding Warrants Exercisable
--------------------------------------------- ----------------------------------------------
Weighted Average Weighed Weighted Average
Remaining Average Remaining
Exercise Number Contractual Life Exercise Number Contractual Life
Prices Outstanding (Years) Price Exercisable (Years)
---------------------------------------------------------------------------------------------------------
$0.01-0.10 519,780 3.64 $0.01-0.10 519,780 3.64
0.125-0.21 903,919 3.72 0.125-0.21 903,919 3.72
0.25-0.56 9,270,406 3.82 0.25-0.56 9,270,406 3.82
1.00 830,844 2.29 1.00 830,844 2.29
2.00 49,050 3.49 2.00 49,050 3.49
---------- ----- ---------- ----
11,573,999 3.69 11,573,999 3.69
========== ===== ========== ====
F-14
Transactions involving warrants are summarized as follows:
Weighted Average
Number of Shares Price Per Share
--------------- ---------------
Outstanding at January 1, 2005 17,666,210 $ .49
Granted 268,033 .48
Exercised (6,600,778) .50
Canceled or expired -- --
---------- --------
Outstanding at March 31, 2005 11,333,465 $ .47
Granted 366,814 .32
Exercised (80,000) .05
Cancelled or expired (123,530) 2.00
---------- ----------
Outstanding at June 30, 2005 11,496,749 $ .45
Granted 77,250 .56
Exercised -- --
Cancelled or expired -- --
---------- ----------
Outstanding at September 30, 2005 11,573,999 $ .46
========== ==========
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions:
2005
----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 3.69% to 4.00%
Expected stock price volatility 104% to 163%
Expected dividend payout --
Expected option life-years (a) 3 to 5
Options
-------
We granted, prior to the merger with ImmuneRegen BioSciences, Inc., options to
purchase 63,212 shares of our common stock at a weighted average exercise price
of $25.00 per share to certain employees and consultants that are exercisable
over various periods through March 2010. These stock options were granted
outside of our 2003 Stock Option, Deferred Stock and Restricted Stock Plan.
During the three months ended September 30, 2005, the Company issued options to
an employee to purchase 103,030 shares of the Company's common stock at a price
equal to 110% of the closing price of the Company's common stock on the date of
issuance. The options have an exercise price of $0.33 and a term of five years.
The Company valued these options using the intrinsic value method. Since the
exercise price of the options was greater than the market value of the Company's
stock at the date of issuance, the Company assigned $0 value to these options.
Also during the three months ended September 30, 2005, the Company granted
150,000 discretionary incentive stock options to our Chief Executive Officer,
Michael K. Wilhelm, per his employment agreement. The options have an exercise
price of $0.44 and a term of five years. The Company valued these options using
the intrinsic value method. Since the exercise price of the options was greater
than the market value of the Company's stock at the date of issuance, the
Company assigned $0 value to these options.
The following table summarizes the changes in stock options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company.
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------------------------
Weighted Average Weighed Weighted Average
Remaining Average Remaining
Exercise Number Contractual Life Exercise Number Contractual Life
Prices Outstanding (Years) Price Exercisable (Years)
--------------------------------------------------------------------------------------------------------
$0.33 103,030 4.86 $0.33 103,030 4.86
$0.44 150,000 4.59 $0.44 150,000 4.59
$25.00 63,212 4.50 $25.00 63,212 4.50
---------- ----- ---------- ----
316,242 4.66 316,242 4.66
========== ===== ========== ====
F-15
Transactions involving options are summarized as follows:
Weighted Average
Number of Shares Price Per Share
--------------- ---------------
Outstanding at January 1, 2005 63,212 $ 25.00
Granted -- --
Exercised -- --
Canceled or expired -- --
---------- --------
Outstanding at March 31, 2005 63,212 $ 25.00
Granted -- --
Exercised -- --
Cancelled or expired -- --
---------- ----------
Outstanding at June 30, 2005 63,212 $ 25.00
Granted 253,030 $ 0.40
Exercised -- --
Cancelled or expired -- --
---------- ----------
Outstanding at September 30, 2005 316,242 $ 5.31
========== ==========
Shares and warrants issuable due to late filing of registration statement
-------------------------------------------------------------------------
In October 2004, the Company completed a private placement sale of shares of its
common stock and warrants to purchase additional shares of common stock. The
Company agreed to register these shares along with the shares underlying these
warrants within ninety days from the closing date of the transaction, or the
Company would incur a penalty equivalent to an additional 2% of the shares and
warrants to be registered for every 30 days that the Company fails to complete
this registration. This penalty amounts to an aggregate of 461,200 shares and
181,600 warrants per 30 day period until such a time as this registration
Statement is made effective. As of September 30, 2005, the Company is required
to issue additional 3,827,960 shares of common stock and warrants to purchase an
additional 1,507,280 shares of common stock. These shares have been valued at
the market price of the common stock at the time each 30 day period, for a total
of $1,539,331 at September 30, 2005; the warrants have been valued at $533,500
at September 30, 2005 utilizing the Black-Scholes valuation model. The total
value of the common stock and warrants issuable pursuant to this late filing
penalty at September 30, 2005 is $2,072,831. This amount was charged to finance
cost during the nine months ended September 30, 2005 and are included in the
Company's balance sheet at September 30, 2005 as accounts payable and accrued
liabilities.
The Company anticipates completing the registration of these shares during the
quarter ended December 31, 2005, but expects that an obligation to issue
approximately 1,245,240 additional shares and 490,320 additional warrants at an
aggregate cost of approximately $649,367 will be incurred.
NOTE 5 - SUBSEQUENT EVENTS
None.
F-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Special Note Regarding Forward-looking Statements
Some of the statements under "Risk Factors," "Business" and elsewhere in this
Quarterly Report on Form 10-QSB constitute forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those described under
"Risk Factors" and elsewhere in this Quarterly Report on Form 10-QSB.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.
-3-
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this report.
The following information should be read in conjunction with the financial
statements and the notes thereto. The analysis set forth below is provided
pursuant to applicable Securities and Exchange Commission regulations and is not
intended to serve as a basis for projections of future events.
Overview
--------
IR BioSciences Holdings, Inc. is a development-stage biopharmaceutical company.
Through our wholly owned subsidiary, ImmuneRegen BioSciences, Inc.
("ImmuneRegen"), we are engaged in the research and development of Homspera(TM),
a proprietary compound that is derived from homeostatic substance P, a naturally
occurring peptide. Currently, the majority of our development efforts are
centered around two drug candidates derived from Homspera, Radilex(TM) and
Viprovex(TM). Radilex has been formulated specifically for the indication of
acute exposure to radiation. Viprovex was formulated specifically for
applications relating to the treatment of maladies caused by the exposure to
various chemical and biological agents. Our research and development efforts are
at a very early stage and Radilex and Viprovex have only undergone pre-clinical
testing in mice.
We own 2 issued U.S. and 2 issued foreign patents and 5 pending Patent
Cooperation Treaty (PCT) applications, 6 pending U.S. applications and 15
pending foreign patent applications.
Our therapies and technologies utilizing Radilex, Viprovex and Homspera are at
early stages of development and may not be shown to be safe or effective and may
never receive regulatory approval. Our technologies utilizing Radilex, Viprovex
and Homspera have not yet been tested in humans. Regulatory authorities may not
permit human testing of potential products based on these technologies. Even if
human testing is permitted, any potential products based on Homspera may not be
successfully developed or shown to be safe or effective.
The results of our preclinical studies and clinical trials may not be indicative
of future clinical trial results. A commitment of substantial resources to
conduct time-consuming research, preclinical studies and clinical trials will be
required if we are to develop any products. Delays in planned patient enrollment
in our clinical trials may result in increased costs, program delays or both.
None of our potential products may prove to be safe or effective in clinical
trials. Approval of the Unites States Food and Drug Administration, the FDA, or
other regulatory approvals, including export license permissions, may not be
obtained and even if successfully developed and approved, our potential products
may not achieve market acceptance. Any products resulting from our programs may
not be successfully developed or commercially available for a number of years,
if at all.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005
Revenue
-------
We are in the development stage and have no revenue.
Sales, general, and administrative expenses
-------------------------------------------
Sales, general, and administrative expenses ("SG&A") were $507,445 for the three
months ended September 30, 2005, a decrease of $533,707 or approximately 51%
compared to SG&A of $1,041,152 during the three months ended September 30, 2004.
The decrease is primarily due to lower costs of non-cash compensation. For the
three months ended September 30, 2005, this amount consisted primarily of
officer compensation of $95,846, research and development of $83,020, legal and
accounting fees of $79,085, other consulting fees of $73,621, payroll and
related costs of $55,355, public relations and marketing of $30,164, and
non-cash compensation costs of $23,586.
The Company expects SG&A to increase during the coming twelve months as we
continue to utilize non-cash compensation in order to conserve cash, build out
the Company's infrastructure, and continue to develop the Company's line of
potential products.
-4-
Late filing of registration statement
-------------------------------------
In October 2004, the Company completed a private placement sale of shares of its
common stock and warrants to purchase additional shares of common stock. The
Company agreed to register these shares along with the shares underlying these
warrants within ninety days from the closing date of the transaction, or the
Company would incur a penalty equivalent to an additional 2% of the shares and
warrants to be registered for every 30 days that the Company fails to complete
this registration. This penalty amounts to an aggregate of 461,200 shares and
181,600 warrants per 30 day period until such a time as this registration
Statement is made effective. During the three months ended September 30, 2005,
the Company incurred additional penalties in the amount of $579,575. As of
September 30, 2005, the Company is required to issue additional 3,827,960 shares
of common stock and warrants to purchase an additional 1,507,280 shares of
common stock. These shares have been valued at the market price of the common
stock at the time each 30 day period, for a total of $1,539,331 at September 30,
2005; the warrants have been valued at $533,500 at September 30, 2005 utilizing
the Black-Scholes valuation model. The total value of the common stock and
warrants issuable pursuant to this late filing penalty at September 30, 2005 is
$2,072,831. This amount was charged to finance cost during the nine months ended
September 30, 2005 and are included in the Company's balance sheet at September
30, 2005 as accrued penalty for late registration of shares.
The Company anticipates completing the registration of these shares during the
quarter ended December 31, 2005, but expects that an obligation to issue
approximately 1,245,240 additional shares and 490,320 additional warrants at an
aggregate cost of approximately $649,367 will be incurred.
Interest income / expense
-------------------------
Interest income (net) for the three months ended September 30, 2005 was $5,925,
a decrease of $76,537 compared to interest expense (net) of $70,612 for the
three months ended September 30, 2004. The decrease is due to a higher cash
balances and a decrease in debt.
Net loss
--------
For the reasons above, primarily lower SG&A expenses and lower interest expenses
offset by the late registration penalty, the net loss for the three months ended
September 30, 2005 was $1,081,095, an decrease of $30,669 or approximately 3%
compared to a net loss of $1,111,764 for the three months ended September 30,
2004.
The Company expects losses to increase during the coming twelve months. The
Company does not expect to begin to generate revenue in the coming twelve
months, and our costs are likely to increase as we move our line of potential
products through the testing and approval phases, and as we build out our
corporate infrastructure.
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 AND
2004
Revenue
-------
We are in the development stage and have no revenue.
Selling, general and administrative expenses
--------------------------------------------
Selling, general and administrative expenses were $1,939,800 for the nine months
ended September 30, 2005 which is a decrease of $1,606,841 or approximately 45%
compared to SG&A of $3,546,641 for the nine months ended September 30, 2004. The
decrease is primarily due to lower costs of non-cash compensation. This expense
is primarily comprised of non-cash compensation of $460,364, legal and
accounting fees of $408,109, consulting fees of $268,598, officer compensation
of $212,838, payroll and related costs of $149,809,, research and development of
$108,439, public relation and marketing of $95,047, travel and entertainment of
$82,546, and rent of $23,043.
-5-
Late filing of registration statement
-------------------------------------
In October 2004, the Company completed a private placement sale of shares of its
common stock and warrants to purchase additional shares of common stock. The
Company agreed to register these shares along with the shares underlying these
warrants within ninety days from the closing date of the transaction, or the
Company would incur a penalty equivalent to an additional 2% of the shares and
warrants to be registered for every 30 days that the Company fails to complete
this registration. This penalty amounts to an aggregate of 461,200 shares and
181,600 warrants per 30 day period until such a time as this registration
Statement is made effective. As of September 30, 2005, the Company is required
to issue additional 3,827,960 shares of common stock and warrants to purchase an
additional 1,507,280 shares of common stock. These shares have been valued at
the market price of the common stock at the time each 30 day period, for a total
of $1,539,332 at September 30, 2005; the warrants have been valued at $533,500
at September 30, 2005 utilizing the Black-Scholes valuation model. The total
value of the common stock and warrants issuable pursuant to this late filing
penalty at September 30, 2005 is $2,072,831. This amount was charged to finance
cost during the nine months ended September 30, 2005 and are included in accrued
penalty for late registration of shares in the Company's balance sheet at
September 30, 2005.
The Company anticipates completing the registration of these shares during the
quarter ended December 31, 2005, but expects that an obligation to issue
approximately 1,245,240 additional shares and 490,320 additional warrants at an
aggregate cost of approximately $649,367 will be incurred.
Interest expense (net)
----------------------
Interest income (net) was $4,607 for the nine months ended September 30, 2005, a
decrease of $511,034 compared to interest expense of $506,427 for the nine
months ended September 30, 2004. The decrease is due to a decrease in debt along
with an increase cash balances.
Net loss
--------
For the reasons above, primarily lower SG&A expenses and lower interest expenses
offset by the late registration penalty, the net loss for the nine months ended
September 30, 2005 was $4,008,024, a decrease of $45,044 or approximately 1%
compared to a net loss of $4,053,068 for the nine months ended September 30,
2004.
PLAN OF OPERATION
We expect to continue to incur increasing operating losses for the foreseeable
future, primarily due to our continued research and development activities
attributable to new and existing products and general and administrative
activities.
Product Research and Development
--------------------------------
We incurred an expense of $83,020 for the three months ended September 30, 2005
in research and development activities related to the development of Radilex and
Viprovex versus an expense of $22,709 for the three months ended September 30,
2004. Due to our liquidity and limited cash available, our spending on research
and development activities was limited. From our inception in October 2002, we
have spent $301,123 in research and development activities. These costs include
the manufacture and delivery of our drug by third party manufacturers, payments
to Contract Research Organizations ("CRO") for consulting related to our studies
and costs of performing such studies.
If we are successful in obtaining additional funding through grants or
investment capital, we anticipate that during the next 12 months we will
increase our research and development activities by approximately $450,000 to a
total of approximately $600,000 in an effort to further develop Radilex and
Viprovex, excluding a radiation study on primates which we estimate will cost
$1,500,000. If we are unable to raise additional capital, our research and
development activities may be lessened. The drug development, clinical trial and
regulatory process is lengthy, expensive and uncertain and subject to numerous
risks.
-6-
Our major research and development projects include:
RESEARCH AND DEVELOPMENT OF RADILEX IN RADIOLOGICAL EXPOSURE APPLICATIONS.
---------------------------------------------------------------------------
We have commenced initial testing of Radilex to record its potential therapeutic
effects on the treatment of toxic radiation exposure. Our initial testing has
been limited to seven prior mouse studies.
We are currently preparing the protocols for a radiation sensitivity study on
rodents in which we will further validate our prior studies. We expect to begin
the study within the next 60 days. We estimate that the study will be completed
within 3 months upon commencement at an estimated cost of $100,000. Upon
completion of the aforementioned study we will prepare the protocols necessary
for a non-human primate study to test the efficacy of Radilex as a treatment to
acute radiation sickness. We expect this study to begin within the next twelve
months. We believe that preliminary results will be available within 90 days
from beginning of study, with analysis within an additional 60 to 90 days. We
expect an additional $1,500,000 will be required to complete the primate study
in 2006.
If we are successful in completing the study and achieve the desired results, we
intend to submit the necessary documentation to the FDA and other regulatory
agencies for approval. If approval for Radilex is granted, we expect to begin
efforts to commercialize our product immediately thereafter. We are anticipating
revenues from the sale of Radilex beginning in calendar year 2008 as a treatment
to the effects caused by irradiation.
If product development or approval does not occur as scheduled our time to reach
market will be lengthened and our costs will substantially increase.
Additionally, we may be requested to expand our findings to gather additional
data or we may not achieve the desired results. If so, we may have to design new
protocols and conduct additional studies. This will increase our costs and delay
the time to market for Radilex as a possible therapeutic for radiation exposure.
Any of these occurrences would have a material negative impact on our business
and our liquidity as it may cause us to seek additional capital sooner than
expected and allow our competitors to successfully enter the market ahead of us.
RESEARCH AND DEVELOPMENT OF VIPROVEX IN CHEMICAL AND BIOLOGICAL EXPOSURE
------------------------------------------------------------------------
APPLICATIONS.
-------------
We are currently continuing to conduct preliminary research and development on
the efficacy of Viprovex as a potential treatment for toxic chemical and
biological exposure. Our initial testing has been limited to early preclinical
studies on rodent models. We estimate approximately $120,000 for additional
studies related to the use of Viprovex in these areas over the next twelve
months. We anticipate additional studies to begin in the fourth quarter of
calendar 2005 and continue on an ongoing basis over the next three years. If we
are successful in achieving desirable results, we intend to design the protocols
and begin studies for these indications, when capital is available. As we have
only collected preliminary data and additional studies are required, we cannot
predict when, if ever, a viable treatment can be commercialized. If we do not
observe significant results or we lack the capital to further the development,
we may abandon such research and development efforts; thereby limiting our
future potential revenues.
RESEARCH AND DEVELOPMENT OF HOMSPERA IN WOUND HEALING APPLICATIONS.
-------------------------------------------------------------------
Within the next three months we plan to begin preclinical studies to determine
if Homspera could become a compound that would be used in wound healing. We
expect to begin studies in the first quarter of calendar 2006. We do not have
any research and development expenses associated with the use of Homspera in
wound healing in 2005, 2004 or 2003. We estimate approximately $120,000 for the
costs of such studies over the next twelve months. We anticipate the completion
of such studies within eight months of commencement of the studies. If we
achieve desirable results, we will design the protocols and begin studies for
these indications when capital is available. As we have only collected
preliminary data and additional studies are required, we cannot predict when, if
ever, a viable product can be commercialized. If we do not observe significant
results or we lack the capital to further the development, we may abandon such
research and development efforts thereby limiting our future potential revenues.
-7-
We will need to generate significant revenues from product sales and or related
royalties and license agreements to achieve and maintain profitability. Through
September 30, 2005, we had no revenues from any product sales, royalties or
licensing fees, and have not achieved profitability on a quarterly or annual
basis. Our ability to achieve profitability depends upon, among other things,
our ability to develop products, obtain regulatory approval for products under
development and enter into agreements for product development, manufacturing and
commercialization. Moreover, we may never achieve significant revenues or
profitable operations from the sale of any of our products or technologies.
REVENUES
We have not generated any revenues from operations from our inception. We
believe we will begin generating revenues from operations during calendar year
2008 as we transition from a development stage company to that of an active
growth and acquisition stage company.
COSTS AND EXPENSES
From our inception through September 30, 2005, we have incurred losses of
$11,216,051. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had current assets of $682,754 consisting of cash of
$667,041 and other current assets of $15,713. At September 30, 2005, we also had
current liabilities of $2,408,545, consisting accrued penalty for late
registration of $2,072,831 and accounts payable and accrued liabilities of
$335,714. This resulted in net working deficit at September 30, 2005 of
$(1,725,791). During the nine months ended September 30, 2005, the Company used
cash in operating activities of $1,482,933. From the date of inception (October
30, 2002) to September 30, 2005, the Company has had a net loss of $11,216,051
and has used cash of $3,557,278 in operating activities.
The Company currently has no revenue. There is no guarantee that our business
model will be successful, or that we will be able to generate sufficient revenue
to fund future operations. As a result, we expect our operations to continue to
use net cash, and that we will be required to seek additional debt or equity
financings during the coming quarters. Since inception, the Company has financed
its operations through debt and equity financing. While we have raised capital
to meet our working capital and financing needs in the past, additional
financing is required in order to meet our current and projected cash flow
deficits from operations and development of our product line. We met our cash
requirements from our inception through September 30, 2005 via the private
placement of $3,263,903 of our common stock.
In January 2005, we made a tender offer to temporarily reduce the exercise price
of certain warrants issued in October 2004 from $0.50 to $0.20 per share. The
tender offer expired on March 4, 2005. We accepted for exercise a total of
6,600,778 warrants validly tendered and not withdrawn pursuant to the terms of
the tender offer, which represents approximately 48% of the aggregate 13,780,449
warrants that were subject to the offer. We raised an aggregate of $1,190,857
from the tender offer, net of costs.
Since our inception, we have been seeking additional third-party funding. During
such time, we have retained a number of different investment banking firms to
assist us in locating available funding; however, we have not yet been
successful in obtaining any of the long-term funding needed to make us into a
commercially viable entity. During the period of inception from October 30, 2002
to September 30, 2005, we were able to obtain financing of $4,232,406 from a
series of private placements of our securities. Included in this amount was the
conversion of $180,000 of accrued salary and consulting fees due to an officer
and a director of the company. Based on our current plan of operations all of
our current funding is expected to be depleted by the end of January 2006.
Although we are continuing with our efforts to obtain funding to maintain our
operations, we cannot assure you that we will be successful or that any funding
we receive will be received timely or on commercially reasonable terms. Due to
our working capital deficiency, and if we do not receive adequate financing, we
will be unable to pay our vendors, lenders and other creditors if we cease our
operations, since the net realizable value of our non-current assets will not
generate adequate cash. We currently have no commitments for financing. There is
no guarantee that we will be successful in raising the funds required.
In the event that we are successful in obtaining third-party funding, we do not
expect to generate a positive cash flow from our operations for at least several
years, if at all, due to anticipated expenditures for research and development
activities, administrative and marketing activities, and working capital
requirements and expect to continue to attempt to raise further capital through
one or more further private placements.
-8-
While we have successfully raised capital to meet our working capital and
financing needs in the past through debt and equity financings, additional
financing will be required in order to implement our business plan and to meet
our current and projected cash flow deficits from operations and development.
There can be no assurance that we will be able to consummate future debt or
equity financings in a timely manner on a basis favorable to us, or at all. If
we are unable to raise needed funds, we will not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. A material shortage of capital will
require us to take drastic steps such as reducing our level of operations,
disposing of selected assets or seeking an acquisition partner. We believe that
we have sufficient capital resources to meet projected cash flow deficits
through the end of December 2005. However, if thereafter, we are not successful
in generating sufficient liquidity from operations or in raising sufficient
capital resources, this would have a material adverse effect on our business,
results of operations, liquidity and financial condition. While we have raised
capital to meet our working capital and financing needs in the past, additional
financing is required in order to meet our current and projected cash flow
deficits from operations and development of our product line.
During the nine months ended September 30, 2005, the Company paid off two notes
payable, $14,997 in cash and $65,003 by converting into 232,153 shares of common
stocks at $0.28 per share. These shares of common stock were issued in July,
2005.
Pursuant to our employment agreement with Michael Wilhelm, our President and
Chief Executive Officer, dated December 16, 2002, we paid a salary of $125,000
and $175,000 to Mr. Wilhelm during the first and second years of his employment,
respectively. Thereafter we paid an annual salary of $250,000. On August 10,
2005, we entered into a new employment agreement with our President and Chief
Executive Officer, Michael K. Wilhelm. Pursuant to this new employment agreement
we shall pay an annual salary of $275,000 to Mr. Wilhelm through the term of his
employment. Mr. Wilhelm's salary is payable in regular installments in
accordance with the customary payroll practices of our company.
Pursuant to our employment agreement with John Fermanis, our Chief Financial
Officer, dated February 15, 2005, we paid a salary of $60,000 until the company
completed a financing of $500,000 or more. This occurred on March 4, 2005 when
the company completed a Tender Offer for warrants totaling $1,190,856 net of
fees. From March 4, 2005, until December 31, 2005, we will pay an annual salary
of $85,000. Thereafter, we will pay an annual salary of $98,000 for the second
year ending December 31, 2006 and an annual salary of $112,000 for the third
year ending December 31, 2007. Mr. Fermanis' salary is payable in regular
installments in accordance with the customary payroll practices of our company.
On December 16, 2002 we entered into a consulting agreement on a month-to-month
basis with Dr. Mark Witten, our chief research scientist and director. Under the
terms of this agreement, Dr. Witten agrees to place at the disposal of us his
judgment and expertise in the area of acute lung injury. In consideration for
these services, we agree to pay Dr. Witten a non-refundable fee of $5,000 per
month. Under the terms of our consulting agreement with Dr. Mark Witten, he is
to receive a non-refundable fee equal to $5,000 per month. The consulting
agreement is on a month-to-month basis.
Acquisition or disposition of plant and equipment
-------------------------------------------------
We did not dispose or acquire any significant property, plant or equipment
during the three months ended September 30, 2005.
We do not anticipate the sale of any significant property, plant or equipment
during the next twelve months.
Number of employees
-------------------
From our inception through the period ended September 30, 2005, we have relied
on the services of outside consultants for services and currently have six total
employees, two contract employees and four full-time employees. Our full-time
employees are Michael K. Wilhelm, our Chief Executive Officer; John Fermanis,
our Chief Financial Officer; and, the third and fourth serve in an
administrative role. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. We do
not anticipate our employment base will significantly change during the next
twelve months, other than the addition of one senior level appointment to the
position of Senior Vice President of Scientific Development. As we continue to
expand, we will incur additional cost for personnel. This projected increase in
personnel is dependent upon our generating revenues and obtaining sources of
financing. There is no guarantee that we will be successful in raising the funds
required or generating revenues sufficient to fund the projected increase in the
number of employees.
-9-
Trends, risks and uncertainties
-------------------------------
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our common stock.
RISK FACTORS
The actual results of the combined company may differ materially from those
anticipated in these forward-looking statements. The Company operates in a
market environment that is difficult to predict and that involves significant
risks and uncertainties, many of which will be beyond the Company's control. If
any of the following risks actually occur, our business, financial condition and
results of operations could be harmed.
WE HAVE LIMITED CASH RESOURCES, AN ACCUMULATED DEFICIT, ARE NOT CURRENTLY
PROFITABLE AND EXPECT TO INCUR SIGNIFICANT EXPENSES IN THE NEAR FUTURE.
As of September 30, 2005, the Company had a working capital deficit of
$1,725,791. This amount consists of cash and current assets of $682,754,
accounts payable of $170,909, accrued current liabilities of $164,805 and an
accrued current liability of $2,072,831 related to a penalty for the late
registration of the securities sold in the Company's recent private placement.
The Company anticipates settling this late registration penalty in additional
shares of common stock and warrants to purchase additional shares of common
stock. If this non-cash liability were to be removed from the Company's working
capital position, the Company would have working capital of $347,040. We have
incurred a substantial net loss for the period from our inception in October
2002 to September 30, 2005, and are currently experiencing negative cash flow.
We expect to continue to experience negative cash flow and operating losses
through at least 2008 and possibly thereafter. As a result, we will need to
generate significant revenues to achieve profitability.
WE MAY FAIL TO BECOME AND REMAIN PROFITABLE OR WE MAY BE UNABLE TO FUND OUR
CONTINUING LOSSES, IN WHICH CASE OUR BUSINESS MAY FAIL.
We are focused on product development and have not generated any revenue to
date. We have incurred operating losses since our inception. Our net loss for
the nine months ended September 30, 2005 and for fiscal year 2004 was $4,008,024
and $5,305,407, respectively. As of September 30, 2005, we had an accumulated
deficit of $11,216,051.
OUR OPERATING EXPENSES ARE UNPREDICTABLE, WHICH MAY ADVERSELY AFFECT OUR
BUSINESS, OPERATIONS AND FINANCIAL CONDITION.
As a result of our limited operating history and because of the emerging nature
of the markets in which we will compete, our financial data is of limited value
in planning future operating expenses. To the extent our operating expenses
precede or are not rapidly followed by increased revenue, our business, results
of operations and financial condition may be materially adversely affected. Our
expense levels will be based in part on our expectations concerning future
revenues. A significant portion of our revenue is anticipated to be derived from
Radilex, Viprovex and Homspera; however the size and extent of such revenues are
wholly dependent upon the choices and demand of individuals, which are difficult
to forecast accurately. We may be unable to adjust our operations in a timely
manner to compensate for any unexpected shortfall in revenues. Further, business
development and marketing expenses may increase significantly as we expand our
operations.
WE MAY EXPERIENCE FLUCTUATION OF QUARTERLY OPERATING RESULTS WHICH MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
-10-
Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside our control. These
factors include: the level of demand for Radilex, Viprovex, Homspera and any
other products; our ability to attract and retain personnel with the necessary
strategic, technical and creative skills required for effective operations; the
amount and timing of expenditures by customers; the amount and timing of capital
expenditures and other costs relating to the expansion of our operations;
government regulation and legal developments regarding the use of Homspera; and
general economic conditions. As a strategic response to changes in the
competitive environment, we may from time to time make certain pricing, service,
technology or marketing decisions that could have a material adverse effect on
our quarterly results. Due to all of these factors, our operating results may
fall below the expectations of securities analysts, stockholders and investors
in any future quarter.
IF OUR PLAN IS NOT SUCCESSFUL OR MANAGEMENT IS NOT EFFECTIVE, THE VALUE OF OUR
COMMON STOCK MAY DECLINE.
Our operating subsidiary, ImmuneRegen BioSciences, Inc., was founded in October
2002. As a result, we are a development stage company with a limited operating
history that makes it impossible to reliably predict future growth and operating
results. Our business and prospects must be considered in light of the risks and
uncertainties frequently encountered by companies in their early stages of
development. In particular, we have not demonstrated that we can
o ensure that our products function as intended in human clinical
applications;
o obtain the regulatory approvals necessary to commercialize products that we
may develop in the future;
o manufacture, or arrange for third-parties to manufacture, future products
in a manner that will enable us to be profitable;
o establish many of the business functions necessary to operate, including
sales, marketing, administrative and financial functions, and establish
appropriate financial controls;
o make, use, and sell future products without infringing upon third party
intellectual property rights; or,
o respond effectively to competitive pressures.
We cannot be sure that we will be successful in meeting these challenges and
addressing these risks and uncertainties. If we are unable to do so, our
business will not be successful.
WE WILL BE REQUIRED TO RAISE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS. IF WE
CANNOT RAISE NEEDED ADDITIONAL CAPITAL IN THE FUTURE, WE WILL BE REQUIRED TO
CEASE OPERATIONS.
Based on our current plans, we believe our existing financial resources, and
interest earned thereon, will be sufficient to meet our operating expenses and
capital requirements through January 2006. However, changes in our research and
development plans or other events affecting our operating expenses may result in
the expenditure of such cash before that time. We may require substantial
additional funds in order to finance our drug discovery and development
programs, fund operating expenses, pursue regulatory clearances, develop
manufacturing, marketing and sales capabilities, and prosecute and defend our
intellectual property rights. We may seek additional funding through public or
private financing or through collaborative arrangements with strategic partners.
-11-
You should be aware that in the future:
o we may not obtain additional financial resources when necessary or on terms
favorable to us, if at all; and,
o any available additional financing may not be adequate.
If we cannot raise additional funds when needed, or on acceptable terms, we will
not be able to continue to develop our drug candidates. We require substantial
working capital to fund our operations. Since we do not expect to generate
significant revenues in the foreseeable future, in order to fund operations, we
will be completely dependent on additional debt and equity financing
arrangements. There is no assurance that any financing will be sufficient to
fund our capital expenditures, working capital and other cash requirements
beyond January 2006. Our working capital as of September 30, 2005 was $347,040
net of the accrual of securities pursuant to the penalty provision of our
October 2004 private placement. No assurance can be given that any such
additional funding will be available or that, if available, can be obtained on
terms favorable to us. If we are unable to raise needed funds on acceptable
terms, we will not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements. A material shortage of capital will require us to take drastic
steps such as reducing our level of operations, disposing of selected assets or
seeking an acquisition partner. If cash is insufficient, we will not be able to
continue operations.
IF WE DO NOT OBTAIN GOVERNMENT REGULATORY APPROVAL FOR OUR PRODUCTS, WE CANNOT
SELL OUR PRODUCTS AND WE WILL NOT GENERATE REVENUES.
Our principal development efforts are currently centered around a class of drug
candidates based on Homspera, a synthesized version of Substance P, a naturally
occurring peptide. We believe that these candidates show promise for the
treatment of diseases and disorders in which the body is unable to mount an
appropriate immune response. However, all drug candidates require U.S. Food and
Drug Administration ("FDA") and foreign government approvals before they can be
commercialized. These regulations change from time to time and new regulations
may be adopted. None of our drug candidates have been approved for commercial
sale. We may incur significant additional operating losses over the next several
years as we fund development, clinical testing and other expenses while seeking
regulatory approval. To date we have conducted limited preclinical studies of
our potential drug candidates using various small animal models, significant
additional trials are required, and we may not be able to demonstrate that these
drug candidates are safe or effective. If we are unable to demonstrate the
safety and effectiveness of a particular drug candidate to the satisfaction of
regulatory authorities, the drug candidate will not obtain required government
approval. If we do not receive FDA or foreign approvals for our products, we
will not be able to sell our products and will not generate revenues. If we
receive regulatory approval of a product, such approval may impose limitations
on the indicated uses for which we may market the product, which may limit our
ability to generate significant revenues.
WE WILL NEED TO CONDUCT SIGNIFICANT ADDITIONAL RESEARCH, PRECLINICAL TESTING AND
CLINICAL TESTING BEFORE WE CAN FILE APPLICATIONS WITH THE FDA FOR APPROVAL OF
OUR PRODUCT CANDIDATES.
To date we have not yet made applications with the FDA or any other governmental
regulatory agency for approval for our product candidates. Until such as time as
our New Drug Application (NDA) is filed and subsequently approved, we will not
be able to manufacture products.
Our research and preclinical testing is currently directed in developing
products candidates based on our proprietary compound, Homspera. We have
demonstrated in early preclinical studies evidence that may suggest that varying
formulations of Homspera may be used to treat the suppression of the body's
immune system caused by exposure to various forms of radiation, toxic inhalants
and viral infectious diseases. As a research and development company, we may,
from time to time, pursue the development of other products based on discoveries
made during our studies. To differentiate from these other potential future
applications, we are developing specific candidates under the name Radilex as a
potential treatment for maladies caused by exposure to various forms of
radiation, and Viprovex, as a potential treatment to various toxic inhalants and
viral infectious diseases.
We are currently conducting formulation, toxicity and stability studies on
Homspera, Radilex and Viprovex. We anticipate that these studies will be
completed in 6 to 9 months.
Also in conjunction with these studies, we plan to begin a rodent study using
Radilex. We expect the study to be completed within 6 to nine months. In
parallel with the rodent study, we intend to begin our preparations for the
filing of an Investigational New Drug Application (IND). We expect the IND to be
filed with the FDA within the next 12 months. At the conclusion of the rodent
study, we anticipate commencing a study in non-human primates. We expect this
study to be completed within 16 months. Based on positive study results, we
expect to file a New Drug Application (NDA) with the FDA in 24 to 36 months.
-12-
We are currently conducting a pre-clinical study on the efficacy of Viprovex as
a treatment for exposure to anthrax with the Air Force School of Aeronautical
Medicine. We expect this study to conclude within the next 45 to 60 days. In
addition, we have recently prepared the protocol for a pre-clinical study using
Viprovex in the treatment of influenza. We expect this study to begin in the
first quarter of 2006 to be completed within 120 days. After the conclusion of
these aforementioned studies, we expect to design and perform additional studies
in order to ascertain if filing an IND for Viprovex is warranted.
ALL OUR APPLICATIONS ARE ALL DERIVED FROM THE USE OF HOMSPERA. IF HOMSPERA IS
FOUND TO BE UNSAFE OR INEFFECTIVE, OUR BUSINESS WOULD BE MATERIALLY HARMED.
All our product candidates are derived from the use of Homspera. In addition, we
expect to utilize Homspera in the development of any future products we market.
If these current or future product candidates are found to be unsafe or
ineffective due to the use of Homspera, we may have to modify or cease
production of the products. As all of our applications utilize or will utilize
Homspera, any findings that Homspera is unsafe or ineffective would severely
harm our business operations, since all of our primary revenue sources would be
negatively affected by such findings.
IF WE FAIL TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS, WE WILL HAVE TO
CEASE OPERATIONS.
Our failure to develop and commercialize products successfully will cause us to
cease operations. Our potential therapies utilizing Homspera, or more
specifically Radilex and Viprovex, will require significant additional research
and development efforts and regulatory approvals prior to potential
commercialization in the future. We cannot guarantee that we, or our corporate
collaborators, if any, will ever obtain any regulatory approvals of Homspera. We
currently are focusing our core competencies on the development of Radilex and
Viprovex although there may be no assurance that we will be successful in so
doing.
Our therapies and technologies utilizing Homspera, including but not limited to
Radilex and Viprovex, are at an early stage of development and may not be shown
to be safe or effective and may never receive regulatory approval. Our
technologies utilizing Homspera have not yet been tested in humans. Regulatory
authorities may not permit human testing of potential products based on these
technologies. Even if human testing is permitted, any potential products based
on Homspera may not be successfully developed or shown to be safe or effective.
The results of our preclinical studies may not be indicative of future
preclinical or clinical trial results. A commitment of substantial resources to
conduct time-consuming research, preclinical studies and clinical trials will be
required if we are to develop any products. Delays in planned patient enrollment
in our clinical trials may result in increased costs, program delays or both.
None of our potential products may prove to be safe or effective in clinical
trials. Approval of the Unites States Food and Drug Administration, the FDA, or
other regulatory approvals, including export license permissions, may not be
obtained and even if successfully developed and approved, our potential products
may not achieve market acceptance. Any products resulting from our programs may
not be successfully developed or commercially available for a number of years,
if at all.
Moreover, unacceptable toxicity or side effects could occur at any time in the
course of human clinical trials or, if any products are successfully developed
and approved for marketing, during commercial use of any of our proposed
products. The appearance of any unacceptable toxicity or side effects could
interrupt, limit, delay or abort the development of any of our proposed products
or, if previously approved, necessitate their withdrawal from the market.
THE MARKET FOR TREATING ASPECTS OF ACUTE RADIATION SYNDROME AND EXPOSURE TO
VARIOUS BIOLOGICAL AGENTS IS UNCERTAIN AND IF WE ARE UNABLE TO SUCCESSFULLY
COMMERCIALIZE RADILEX OR VIPROVEX, WE WILL NOT RECOGNIZE A SIGNIFICANT PORTION
OF OUR FUTURE REVENUES, IF ANY.
-13-
We do not believe any drug has ever been approved and commercialized for the
treatment of severe acute radiation injury. In addition, the incidence of
large-scale exposure to nuclear, radiological or biological agents has been low.
Accordingly, even if Radilex, our leading drug candidate to treat aspects of
Acute Radiation Syndrome (ARS) and Viprovex, our leading candidate to treat
exposure to various biological and chemical agents, are approved by the FDA, we
cannot predict with any certainty the size of this market. The potential market
for Radilex and Viprovex is largely dependent on the size of stockpiling orders,
if any, procured by the U.S. and foreign governments. While a number of
governments have historically stockpiled drugs to treat indications such as
smallpox, anthrax exposure, plague, tularemia and certain long-term effects of
radiation exposure, we are unaware of any significant stockpiling orders for
drugs to treat ARS. While we have filed a formal response to the U.S. Department
of Health and Human Services Request for Information (RFI) for therapeutics to
treat ARS, at least one other company has responded to this RFI, and we cannot
guarantee that our response to this RFI will result in a U.S. Department of
Health and Human Services Request for Proposal (RFP) or any stockpiling orders.
A decision by the U.S. Government to enter into a commitment to purchase Radilex
or Viprovex prior to FDA approval is largely out of our control. Our development
plans and timelines may vary substantially depending on whether we receive such
a commitment and the size of such commitment, if any. In addition, even if
Radilex or Viprovex is approved by regulatory authorities, we cannot guarantee
that we will receive any stockpiling orders for Radilex or Viprovex, that any
such order would be profitable to us or that Radilex or Viprovex will achieve
market acceptance by the general public.
IF WE DO NOT OBTAIN GOVERNMENT REGULATORY APPROVAL FOR OUR PRODUCTS, WE CANNOT
SELL OUR PRODUCTS AND WE WILL NOT GENERATE REVENUES.
Our principal development efforts are currently centered around a class of drug
candidates based on Homspera, a synthesized, modified analog of Substance P, a
naturally occurring peptide. We believe that these candidates show promise for
the treatment of diseases, conditions and situation in which the body's immune
system is compromised or unable to respond appropriately. However, all drug
candidates require U.S. Food and Drug Administration ("FDA") and foreign
government approvals before they can be commercialized. These regulations change
from time to time and new regulations may be adopted. None of our drug
candidates have been approved for commercial sale. We may incur significant
additional operating losses over the next several years as we fund development,
clinical testing and other expenses while seeking regulatory approval. To date
we have conducted limited preclinical studies of our potential drug candidates
using various small animal models, significant additional studies as well as
clinical trials are required, and we may not be able to demonstrate that these
drug candidates are likely to be safe and effective for human use. If we are
unable to demonstrate the safety and effectiveness of a particular drug
candidate to the satisfaction of regulatory authorities, the drug candidate will
not obtain required government approval. If we do not receive FDA or foreign
approvals for our products, we will not be able to sell our products and will
not generate revenues. If we receive regulatory approval of a product, such
approval may impose limitations on the indicated uses for which we may market
the product, which may limit our ability to generate significant revenues.
THE LENGTHY PRODUCT APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PROPOSED PRODUCTS, AND
THEREFORE ADVERSELY AFFECT THE TIMING AND LEVEL OF FUTURE REVENUES, IF ANY.
The process of obtaining FDA and other regulatory approvals is time consuming,
expensive and difficult to design and implement. Clinical trials are required
and the marketing and manufacturing of our applications are subject to rigorous
testing procedures. Significant delays in clinical trials will impede our
ability to commercialize our applications and generate revenue and could
significantly increase our development costs. The commencement and completion of
clinical trials for our Homspera-based applications or any of our applications
could be delayed or prevented by a variety of factors, including:
o delays in obtaining regulatory approvals to commence a study;
o delays in identifying and reaching agreement on acceptable terms with
prospective clinical trial sites;
o delays in the enrollment of patients;
o lack of efficacy during clinical trials; or
o unforeseen safety issues.
-14-
Even if marketing approval from the FDA is received, the FDA may impose
post-marketing requirements, such as:
o labeling and advertising requirements, restrictions or limitations,
including the inclusion of warnings, precautions, contra-indications or use
limitations that could have a material impact on the future profitability
of our applications;
o testing and surveillance to monitor our future products and their continued
compliance with regulatory requirements;
o submitting products for inspection and, if any inspection reveals that the
product is not in compliance, prohibiting the sale of all products;
o suspending manufacturing; or
o withdrawing marketing clearance.
Additionally, the FDA's policies may change and additional government
regulations may be enacted which could prevent or delay regulatory approval of
our applications. We cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or administrative
action, either in the United States or abroad. If we are not able to maintain
regulatory compliance, we might not be permitted to market our future products
and our business could suffer.
Even if human clinical trials of Radilex, Viprovex and Homspera are initiated
and successfully completed, the FDA may not approve Radilex, Viprovex and
Homspera for commercial sale. We may encounter significant delays or excessive
costs in our efforts to secure necessary approvals. Regulatory requirements are
evolving and uncertain. Future United States or foreign legislative or
administrative acts could also prevent or delay regulatory approval of our
products. We may not be able to obtain the necessary approvals for clinical
trials, manufacturing or marketing of any of our products under development.
Even if commercial regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed.
The FDA has not designated expanded access protocols for Radilex, Viprovex and
Homspera as "treatment" protocols. The FDA may not determine that Radilex,
Viprovex and Homspera meet all of the FDA's criteria for use of an
investigational drug for treatment use. Even if Radilex, Viprovex and Homspera
are allowed for treatment use, third party payers may not provide reimbursement
for the costs of treatment with Radilex, Viprovex and Homspera. The FDA also may
not consider Radilex, Viprovex and Homspera to be an appropriate candidate for
acceptance as Emergency Use Authorization for Promising Medical Countermeasures
Under Development, accelerated approval, expedited review or fast track
designation.
IF WE FAIL TO OBTAIN APPROVAL FROM FOREIGN REGULATORY AUTHORITIES, WE WILL NOT
BE ALLOWED TO MARKET OR SELL OUR PRODUCTS IN OTHER COUNTRIES, WHICH WOULD
ADVERSELY AFFECT OUR LEVELS OF FUTURE REVENUES, IF ANY.
Marketing any drug products outside of the United States will subject us to
numerous and varying foreign regulatory requirements governing the design and
conduct of human clinical trials and marketing approval. Additionally, our
ability to export drug candidates outside the United States on a commercial
basis will be subject to the receipt from the FDA of export permission, which
may not be available on a timely basis, if at all.
Approval procedures vary among countries and can involve additional testing, and
the time required to obtain approval may differ from that required to obtain FDA
approval. Foreign regulatory approval processes include all of the risks
associated with obtaining FDA approval set forth above, and approval by the FDA
does not ensure approval by the health authorities of any other country.
CLINICAL TRIALS MAY FAIL TO DEMONSTRATE THE SAFETY AND EFFICACY OF OUR
APPLICATIONS, THE EFFECT OF WHICH COULD PREVENT OR SIGNIFICANTLY DELAY
REGULATORY APPROVAL AND THEREFORE ADVERSELY AFFECT THE TIMING AND LEVEL OF
FUTURE REVENUES, IF ANY.
Prior to receiving approval to commercialize any of our applications or
therapies, we must demonstrate with substantial evidence from well-controlled
clinical trials, and to the satisfaction of the FDA and other regulatory
authorities in the United States and abroad, that our applications are both safe
and effective. We will need to demonstrate our applications' efficacy and
monitor their safety throughout the process. If any future clinical trials are
unsuccessful, our business and reputation would be harmed and our stock price
would be adversely affected.
-15-
All of our applications are prone to the risks of failure inherent in biologic
development. The results of early-stage clinical trials of our applications do
not necessarily predict the results of later-stage clinical trials. Applications
in later-stage clinical trials may fail to show desired safety and efficacy
traits despite having progressed through initial clinical testing. Even if we
believe the data collected from clinical trials of our applications is
promising, this data may not be sufficient to support approval by the FDA or any
other U.S. or foreign regulatory approval. Preclinical and clinical data can be
interpreted in different ways. Accordingly, FDA officials could interpret such
data in different ways than we do, which could delay, limit or prevent
regulatory approval. The FDA, other regulatory authorities, or we may suspend or
terminate clinical trials at any time. Any failure or significant delay in
completing clinical trials for our applications, or in receiving regulatory
approval for the sale of any products resulting from our applications, may
severely harm our business and reputation.
DELAYS IN THE CONDUCT OR COMPLETION OF OUR PRECLINICAL OR CLINICAL STUDIES OR
THE ANALYSIS OF THE DATA FROM OUR PRECLINICAL OR CLINICAL STUDIES MAY RESULT IN
DELAYS IN OUR PLANNED FILINGS FOR REGULATORY APPROVALS OR ADVERSELY AFFECT OUR
ABILITY TO ENTER INTO COLLABORATIVE ARRANGEMENTS.
We may encounter problems with some or all of our completed or ongoing studies
that may cause us or regulatory authorities to delay or suspend our ongoing
studies or delay the analysis of data from our completed or ongoing studies. If
the results of our ongoing and planned studies for our drug candidates are not
available when we expect or if we encounter any delay in the analysis of the
results of our studies for our drug candidates:
o we may not have the financial resources to continue research and
development of any of our drug candidates; and,
o we may not be able to enter into collaborative arrangements relating to any
drug candidate subject to delay in regulatory filing.
Any of the following reasons, among others, could delay or suspend the
completion of our ongoing and future studies:
o delays in enrolling volunteers;
o interruptions in the manufacturing of our drug candidates or other delays
in the delivery of materials required for the conduct of our studies;
o lower than anticipated retention rate of volunteers in a trial;
o unfavorable efficacy results;
o serious side effects experienced by study participants relating to the drug
candidate;
o new communications from regulatory agencies about how to conduct these
studies; or,
o failure to raise additional funds.
IF THE MANUFACTURERS OF OUR PRODUCTS DO NOT COMPLY WITH CURRENT GOOD
MANUFACTURING PRACTICES REGULATIONS, OR CANNOT PRODUCE THE AMOUNT OF PRODUCTS
NEED TO CONTINUE OUR DEVELOPMENT, WE WILL FALL BEHIND ON OUR BUSINESS
OBJECTIVES.
Manufacturers producing our drug candidates must follow current Good
Manufacturing Practices, or GMP, regulations enforced by the FDA and foreign
equivalents. If a manufacturer of our drug candidates does not conform to the
GMP regulations and cannot be brought up to such a standard, we will be required
to find alternative manufacturers that do conform. This may be a long and
difficult process, and may delay our ability to receive FDA or foreign
regulatory approval of our products.
We also rely on our manufacturers to supply us with a sufficient quantity of our
drug candidates to conduct clinical trials. If we have difficulty in the future
obtaining our required quantity and quality of supply, we could experience
significant delays in our development programs and regulatory process.
OUR LACK OF COMMERCIAL MANUFACTURING, SALES, DISTRIBUTION AND MARKETING
EXPERIENCE MAY PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS WHICH WOULD
ADVERSELY AFFECT OUR LEVEL OF FUTURE REVENUES, IF ANY.
-16-
The manufacturing process of our proposed products is expected to involve a
number of steps and requires compliance with stringent quality control
specifications imposed by us and by the FDA. We have no experience in the sales,
marketing and distribution of pharmaceutical or biotechnology products. We have
not manufactured any of our products. We may not successfully arrange for
contract manufacturing of our products in production quantities and this could
prevent us from commercializing products or limit our profitability from our
products.
WE RELY ON THIRD PARTY MANUFACTURERS FOR THE MANUFACTURE OF RADILEX, VIPROVEX
AND HOMSPERA. OUR INABILITY TO MANUFACTURE RADILEX, VIPROVEX AND HOMSPERA, AND
OUR DEPENDENCE ON SUCH MANUFACTURERS, MAY DELAY OR IMPAIR OUR ABILITY TO
GENERATE REVENUES, OR ADVERSELY AFFECT OUR PROFITABILITY.
We may enter into arrangements with contract manufacturing companies in order to
meet requirements for our products or to attempt to improve manufacturing
efficiency. If we choose to contract for manufacturing services, we may
encounter costs, delays and/or other difficulties in producing, packaging and
distributing our clinical trials and finished product. Further, contract
manufacturers must also operate in compliance with the GMP requirements; failure
to do so could result in, among other things, the disruption of our product
supplies. Our potential dependence upon third parties for the manufacture of our
proposed products may adversely affect our profit margins and our ability to
develop and deliver proposed products on a timely and competitive basis.
For the manufacture of the applications under development, we obtain synthetic
peptides from third party manufacturers. A synthesized version of substance P is
readily available at low cost from several life science and technology companies
that provide biochemical and organic chemical products and kits used in
scientific and genomic research, biotechnology, pharmaceutical development and
the diagnosis of disease and chemical manufacturing. If any of these proposed
manufacturing operations prove inadequate, there may be no assurance that any
other arrangements may be established on a timely basis or that we could
establish other manufacturing capacity on a timely basis. Although, we believe
that the synthetic substance P and other materials necessary to produce Radilex,
Viprovex and Homspera are readily available from various sources, and several
suppliers are capable of supplying substance P in both clinical and commercial
quantities, our dependence on such manufacturers, may delay or impair our
ability to generate revenues, or adversely affect our profitability.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING RADILEX, VIPROVEX AND
HOMSPERA WHICH WOULD ADVERSELY AFFECT OUR LEVEL OF FUTURE REVENUES, IF ANY.
Our ability to earn sufficient revenue on Radilex, Viprovex and Homspera or any
other proposed products will depend in part on the extent to which reimbursement
for the costs of such products and related treatments will be available from
government health administration authorities, private health coverage insurers,
managed care organizations and other organizations. Failure to obtain
appropriate reimbursement may prevent us from successfully commercializing
Radilex, Viprovex and Homspera or any proposed products. Third-party payers are
increasingly challenging the prices of medical products and services. If
purchasers or users of Radilex, Viprovex and Homspera or any such other proposed
products are not able to obtain adequate reimbursement for the cost of using
such products, they may forego or reduce their use. Significant uncertainty
exists as to the reimbursement status of newly approved health care products and
whether adequate third party coverage will be available.
THE MEDICAL COMMUNITY MAY NOT ACCEPT AND UTILIZE RADILEX, VIPROVEX AND HOMSPERA,
THE EFFECT OF WHICH WOULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING THE
PRODUCT AND ADVERSELY AFFECT OUR LEVEL OF FUTURE REVENUE, IF ANY.
Our ability to market and commercialize Radilex, Viprovex and Homspera depends
on the acceptance and utilization of Homspera by the medical community. We will
need to develop commercialization initiatives designed to increase awareness
about us and Homspera among targeted audiences, including public health
activists and community-based outreach groups in addition to the investment
community. Currently, we have not developed any such initiatives. Without such
acceptance of Homspera, the product upon which we expect to be substantially
dependent, we may not be able to successfully commercialize Homspera or generate
revenue.
-17-
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY OR COSTS WHICH
WOULD ADVERSELY IMPART OUR FUTURE OPERATING RESULTS AND DIVERT FUNDS FROM THE
OPERATION OF OUR BUSINESS.
We face an inherent business risk of exposure to product liability and other
claims and lawsuits in the event that the development or use of our technology
or prospective products is alleged to have resulted in adverse effects. We may
not be able to avoid significant liability exposure. We may not have sufficient
insurance coverage, and we may not be able to obtain sufficient coverage at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of our products. A product
liability claim could hurt our financial performance. Even if we avoid liability
exposure, significant costs could be incurred that could hurt our financial
performance.
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS, THE
EFFECT OF WHICH COULD ADVERSELY AFFECT ANY COMPETITIVE ADVANTAGE WE MAY HAVE.
We own or have obtained a license to 2 issued U.S. and 2 issued foreign patents
and 5 pending Patent Cooperation Treaty (PCT) applications, 6 pending U.S.
applications and 15 pending foreign patent applications. Our success will depend
in part on our ability to obtain additional United States and foreign patent
protection for our drug candidates and processes, preserve our trade secrets and
operate without infringing the proprietary rights of third parties. We place
considerable importance on obtaining patent protection for significant new
technologies, products and processes.
Our long-term success largely depends on our ability to market technologically
competitive processes and products. If we fail to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. Our currently pending or future patent applications may not
result in issued patents. In the United States, patent applications are
confidential until patent applications are published or the patent is issued,
and because third parties may have filed patent applications for technology
covered by our pending patent applications without us being aware of those
applications, our patent applications may not have priority over any patent
applications of others. In addition, our issued patents may not contain claims
sufficiently broad to protect us against third parties with similar technologies
or products or provide us with any competitive advantage. If a third party
initiates litigation regarding our patents, and is successful, a court could
revoke our patents or limit the scope of coverage for those patents.
Legal standards relating to the validity of patents covering pharmaceutical and
biotechnology inventions and the scope of claims made under such patents are
still developing. In some of the countries in which we intend to market our
products, pharmaceuticals are either not patentable or have only recently become
patentable. Past enforcement of intellectual property rights in many of these
countries has been limited or non-existent. Future enforcement of patents and
proprietary rights in many other countries may be problematic or unpredictable.
Moreover, the issuance of a patent in one country does not assure the issuance
of a similar patent in another country. Claim interpretation and infringement
laws vary by nation, so the extent of any patent protection is uncertain and may
vary in different jurisdictions. The U.S. Patent and Trademark Office, commonly
referred to as the USPTO, and the courts have not consistently treated the
breadth of claims allowed in biotechnology patents. If the USPTO or the courts
begin to allow broader claims, the incidence and cost of patent interference
proceedings and the risk of infringement litigation will likely increase. On the
other hand, if the USPTO or the courts begin to allow narrower claims, the value
of our proprietary rights may be limited. Any changes in, or unexpected
interpretations of the patent laws may adversely affect our ability to enforce
our patent position.
We also rely upon trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. We protect this information with
reasonable security measures, including the use of confidentiality agreements
with our employees, consultants and corporate collaborators. It is possible that
these individuals will breach these agreements and that any remedies for a
breach will be insufficient to allow us to recover our costs. Furthermore, our
trade secrets, know-how and other technology may otherwise become known or be
independently discovered by our competitors.
OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT BE ENFORCEABLE AND THE PATENTS
AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM COMMERCIALIZING
PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR LEVEL OF FUTURE REVENUES, IF ANY.
Although we believe our inventions to be protected and our patents enforceable,
the failure to obtain meaningful patent protection products and processes would
greatly diminish the value of our potential products and processes.
In addition, whether or not our applications are issued, or issued with limited
coverage, others may receive patents, which contain claims applicable to our
products. Patents we are not aware of may adversely affect our ability to
develop and commercialize products.
-18-
The patent positions of biotechnology and pharmaceutical companies are often
highly uncertain and involve complex legal and factual questions. Therefore, the
breadth of claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. We also rely upon non-patented trade secrets and know how, and others
may independently develop substantially equivalent trade secrets or know how. We
also rely on protecting our proprietary technology in part through
confidentiality agreements with our current and former corporate collaborators,
employees, consultants and certain contractors. These agreements may be
breached, and we may not have adequate remedies for any such breaches.
Litigation may be necessary to defend against claims of infringement, to enforce
our patents or to protect trade secrets. Litigation could result in substantial
costs and diversion of management efforts regardless of the results of the
litigation. An adverse result in litigation could subject us to significant
liabilities to third parties, require disputed rights to be licensed or require
us to cease using certain technologies.
Our products could infringe on the intellectual property rights of others, which
may cause us to engage in costly litigation and, if not successful, could cause
us to pay substantial damages and prohibit us from selling our products. Because
patent applications in the United States are not publicly disclosed until the
patent application is published or the patent is issued, applications may have
been filed which relate to services similar to those offered by us. We may be
subject to legal proceedings and claims from time to time in the ordinary course
of our business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties.
If our products violate third-party proprietary rights, we cannot assure you
that we would be able to arrange licensing agreements or other satisfactory
resolutions on commercially reasonable terms, if at all. Any claims made against
us relating to the infringement of third-party propriety rights could result in
the expenditure of significant financial and managerial resources and
injunctions preventing us from providing services. Such claims could severely
harm our financial condition and ability to compete.
In addition, if another party claims the same subject matter or subject matter
overlapping with the subject matter that we have claimed in a United States
patent application or patent, we may decide or be required to participate in
interference proceedings in the United States Patent and Trademark Office in
order to determine the priority of invention. Loss of such an interference
proceeding would deprive us of patent protection sought or previously obtained
and could prevent us from commercializing our products. Participation in such
proceedings could result in substantial costs, whether or not the eventual
outcome is favorable. These additional costs could adversely affect our
financial results.
FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS OR REGULATIONS COULD EXPOSE US TO
SIGNIFICANT LIABILITY OR COSTS WHICH WOULD ADVERSELY IMPART OUR OPERATING
RESULTS AND DIVERT FUNDS FROM THE OPERATION OF OUR BUSINESS HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We may be required to incur significant costs to comply with current or future
environmental laws and regulations. Our research and development processes
involve the controlled storage, use and disposal of hazardous materials,
biological hazardous materials and radioactive compounds. We are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of these materials and some waste products.
Although we believe that our safety procedures for handling and disposing of
these materials comply with the standards prescribed by these laws and
regulations, the risk of contamination or injury from these materials cannot be
completely eliminated. In the event of an incident, IR BioSciences Holdings,
Inc. or ImmuneRegen BioSciences, Inc. could be held liable for any damages that
result, and any liability could exceed our resources. Current or future
environmental laws or regulations may have a material adverse effect on our
operations, business and assets.
WE DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE OFFICERS AND THE LOSS OF A
KEY EXECUTIVE COULD SEVERELY IMPACT OUR OPERATIONS.
The execution of our present business plan depends on the continued services of
Michael K. Wilhelm, our Chief Executive Officer and President, and Mark L.
Witten, Ph.D., our acting Chief Scientific Officer. We do not currently maintain
key-man insurance on their lives. While we have entered into employment
agreements with each of them, the loss of any of their services would be
detrimental to us and could have a material adverse effect on our business,
financial condition and results of operations.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS CONTROL OUR
BUSINESS AND MAY MAKE DECISIONS THAT ARE NOT IN OUR BEST INTERESTS.
Our officers, directors and principal stockholders, and their affiliates, in the
aggregate, own over a majority of the outstanding shares of our common stock. As
a result, such persons, acting together, have the ability to substantially
influence all matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets, and to control our management and affairs.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in discouraging a potential acquirer form
making a tender offer or otherwise attempting to obtain control of our business,
even if such a transaction would be beneficial to other stockholders.
-19-
A LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE
PRICE OF OUR COMMON STOCK AND THUS ADVERSELY AFFECT THE VALUE OF YOUR
INVESTMENT.
Our common stock is currently traded on a limited basis on the OTC Bulletin
Board (the "OTCBB") under the symbol "IRBO". The OTCBB is an inter-dealer,
Over-The-Counter market that provides significantly less liquidity than the
NASDAQ Stock Market. Quotes for stocks included on the OTCBB are not listed in
the financial sections of newspapers as are those for the NASDAQ Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain and holders of common stock may be unable to resell their securities at
or near their original offering price or at any price.
The NASD has enacted recent changes that limit quotations on the OTC Bulletin
Board to securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTC Bulletin Board of
these rule changes and other proposed changes cannot be determined at this time.
The quotation of our common stock on the OTCBB does not assure that a
meaningful, consistent and liquid trading market currently exists, and in recent
years such market has experienced extreme price and volume fluctuations that
have particularly affected the market prices of many smaller companies like us.
Our common stock is thus subject to this volatility.
SALES OR ISSUANCES OF ADDITIONAL EQUITY SECURITIES MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK AND YOUR RIGHTS IN US MAY BE REDUCED.
Certain of our stockholders have the right to register securities for resale
that they hold pursuant to registration rights agreements. We expect to continue
to incur product development and selling, general and administrative costs, and
in order to satisfy our funding requirements, we will need to sell additional
equity securities, which may be subject to similar registration rights. The sale
or the proposed sale of substantial amounts of our common stock in the public
markets may adversely affect the market price of our common stock. An aggregate
of 60,331,747 shares of our common stock are being registered with the SEC in a
registration statement. The registration and subsequent sales of such shares of
common stock will likely have an adverse effect on the market price of our
common stock.
The registration and subsequent sales of shares of our common stock will likely
have an adverse effect on the market price of our common stock. From time to
time, certain stockholders of our company may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Act ("Rule 144"),
subject to certain limitations. In general, pursuant to Rule 144, a stockholder
(or stockholders whose shares are aggregated) who has satisfied a one-year
holding periods may, under certain circumstances, sell within any three-month
period a number of securities which does not exceed the greater of 1% of the
then outstanding shares of our common stock or the average weekly trading volume
of the class during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of securities, without any
limitations, by a non-affiliate of our company who has satisfied a two-year
holding period. Any substantial sale of our common stock pursuant to Rule 144 or
pursuant to any resale prospectus may have an adverse effect on the market price
of our securities.
Our stockholders may experience substantial dilution and a reduction in the
price that they are able to obtain upon sale of their shares. Also, any new
equity securities issued, including any new series of preferred stock authorized
by our board of directors, may have greater rights, preferences or privileges
than our existing common stock. To the extent stock is issued or options and
warrants are exercised, holders of our common stock will experience further
dilution. In addition, as in the case of the warrants, in the event that any
future financing should be in the form of, be convertible into or exchangeable
for, equity securities and upon the exercise of options and warrants, security
holders may experience additional dilution.
-20-
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this Quarterly Report, we conducted an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act).
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of September 30, 2005, such disclosure controls
and procedures were effective in ensuring that required information will be
disclosed on a timely basis in our periodic reports filed under the Exchange
Act.
(b) Changes in internal controls
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended
September 30, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 13, 2001, service of process was effectuated upon GPN Network, Inc.
with regard to a fee agreement between GPN Network, Inc. and Silver & Deboskey,
a Professional Corporation located in Denver, Colorado. The complaint sought
compensation for legal services allegedly rendered to DermaRx Corp. On November
7, 2002, the District Court in Denver, Colorado rendered judgment in favor of
Silver & Deboskey in the amount of $28,091. At December 31, 2004, we had not
paid any of this amount. The judgment of $28,091 has been accrued and is
contained in the $2,408,545 of Accounts Payable and Accrued Liabilities on the
Company's condensed consolidated balance sheet of June 30, 2005.
The judgment was subsequently settled in full for a cash payment of $35,107 paid
on August 2, 2005 releasing the Company from all obligations under the judgment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2005, the Company issued options to
an employee to purchase 103,030 shares of the Company's common stock at a price
equal to 110% of the closing price of the Company's common stock on the date of
issuance. The options have an exercise price of $0.33 and a term of five years.
The Company valued these options using the intrinsic value method. Since the
exercise price of the options was greater than the market value of the Company's
stock at the date of issuance, the Company assigned $0 value to these options.
Also during the three months ended September 30, 2005, the Company granted
150,000 discretionary incentive stock options to our Chief Executive Officer,
Michael K. Wilhelm, per his employment agreement. The options have an exercise
price of $0.44 and a term of five years. The Company valued these options using
the intrinsic value method. Since the exercise price of the options was greater
than the market value of the Company's stock at the date of issuance, the
Company assigned $0 value to these options.
During the three months ended September 30, 2005, the Company issued warrants to
purchase 77,250 shares of common stock at prices ranging from $0.125 to $1.00
per share. The Company valued these warrants using the Black-Scholes valuation
model, and charged the amount of $20,491 to operations during the three months
ended September 30, 2005.
On September 28, 2001, the Company entered into a $50,000 Convertible Promissory
Note bearing 8% interest per month with an accredited investor. in accordance
with the terms of the Promissory Note, the outstanding principal and accrued
interest was converted into 232,153 shares of our common stock releasing the
Company from any further obligation under the Note. No general solicitation or
advertising was undertaken in connection with the offer and sale of the Note and
the shares. The investor represented to the Company that the investor was
purchasing the securities for the investor's own account and not with a present
view towards the distribution thereof. In addition, each investor acknowledged
and agreed that the note and the shares had not been registered under the
Securities Act and may not be offered or sold unless subsequently registered
and/or offered, sold or transferred pursuant to an exemption from the
registration requirements. Therefore, the Company believes that the securities
were offered and sold in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. in accordance with the terms of the Promissory Note, the
outstanding principal and accrued interest was converted into 232,153 shares of
our common stock releasing the Company from any further obligation under the
Note. No general solicitation or advertising was undertaken in connection with
the offer and sale of the Note and the shares. The investor represented to the
Company that the investor was purchasing the securities for the investor's own
account and not with a present view towards the distribution thereof. In
addition, each investor acknowledged and agreed that the note and the shares had
not been registered under the Securities Act and may not be offered or sold
unless subsequently registered and/or offered, sold or transferred pursuant to
an exemption from the registration requirements. Therefore, the Company believes
that the securities were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder.
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During the three months ended June 30, 2005, the Company issued a stock option
to its chief executive officer to purchase 150,000 shares of common stock at a
price of $0.44 per share.
During the three months ended September 30, 2005, the Company issued a stock
option to its chief executive officer to purchase 103,030 shares of common stock
at a price of $0.33 per share.
During the nine months ended September 30, 2005, the Company accrued the
issuance of 3,827,960 shares of common stock and warrants to purchase an
additional 1,507,280 shares of common stock pursuant to a penalty calculation
with regard to the late registration of shares sold in a private placement in
October 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Employment Agreement dated August 10, 2005 by and between the
Registrant and Michael K. Wilhelm.
10.2 Change of Control Agreement dated August 10, 2005 by and between the
Registrant and Michael K. Wilhelm.
10.3 Severance Agreement dated August 10, 2005 by and between the Registrant
and Michael K. Wilhelm.
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
* This exhibit shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934 or otherwise subject to the liabilities
of that section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any filings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 10, 2005.
IR BioSciences Holdings, Inc.
By: /S/ Michael K. Wilhelm
-----------------------------------
Michael K. Wilhelm
President, Chief Executive Officer
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