UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
AMENDMENT
NO. 3 TO FORM 10-QSB
(Mark
One)
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED: JULY 31, 2005
o
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 333-103083
XENOMICS,
INC.
(Name
of
small business issuer in its charter)
|
Florida
|
04-3721895
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
420
Lexington Avenue, Suite 1701, New York, New York 10170
(Address
of principal executive offices) (Zip Code)
(212)
297-0808
(Registrant's
telephone number)
(Former
Name, Former Address and Former Fiscal Year, if changed since last report)
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirements for past 90 days.
x
Yes o No
Indicate
by check mark whether registrant is a shell company (as defined in rule 12b-2
of
the Exchange Act):
o Yes
x
No
As
of
September 19, 2005, the registrant had 18,604,300 shares of common stock, par
value $0.0001, outstanding
XENOMICS,
INC.
(A
Development Stage Company)
Index
to Condensed Consolidated Financial Statements
|
PART
I - FINANCIAL INFORMATION
|
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Page
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Item
1.
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5
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6
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7
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9
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10
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Item
2.
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15
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Item
3.
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18
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PART
II - OTHER INFORMATION
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Item
6.
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19
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20
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2
INTRODUCTORY
NOTE
This
Report on Amendment No.3 to Form 10-QSB for Xenomics, Inc. (the "Company")
may
contain forward-looking statements. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
believe," "estimate" and "continue" or similar words. Forward-looking statements
include information concerning possible or assumed future business success
or
financial results. You should read statements that contain these words carefully
because they discuss future expectations and plans, which contain projections
of
future results of operations or financial condition or state other
forward-looking information. We believe that it is important to communicate
future expectations to investors. However, there may be events in the future
that we are not able to accurately predict or control. Accordingly, we do
not
undertake any obligation to update any forward-looking statements for any
reason, even if new information becomes available or other events occur in
the
future.
The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties set forth under "Risk Factors"
in our Annual Report on Amendment No.2 to Form 10-KSB for the year ended
January
31, 2005 and other periodic reports filed with the SEC. Accordingly, to the
extent that this Quarterly Report contains forward-looking statements regarding
the financial condition, operating results, business prospects or any other
aspect of the Company, please be advised that the Company's actual financial
condition, operating results and business performance may differ materially
from
that projected or estimated by the Company in forward-looking
statements.
3
Explanatory
Note
This
Form
10-QSB/A includes restated unaudited condensed consolidated financial statements
for the quarters ended July 31, 2005 and 2004, and for the period from inception
(August 4, 1999) to July 31, 2005, in response to comments received by us from
the Staff of the Securities and Exchange Commission. This Amendment speaks
as of the original filing date of our Form 10-QSB and has not been updated
to
reflect events occurring subsequent to the original filing date.
4
PART
I - FINANCIAL INFORMATION
Development
Stage Company)
AS
OF JULY 31, 2005
(Unaudited)
|
ASSETS
|
||||
|
Current
Assets:
|
|
|||
|
Cash
and cash equivalents
|
$
|
2,814,494
|
||
|
Marketable
investments
|
3,444,655
|
|||
|
Prepaid
expenses
|
127,748
|
|||
|
TOTAL
CURRENT ASSETS
|
6,386,897
|
|||
|
|
||||
|
Property
and equipment, net
|
96,525
|
|||
|
Security
deposits
|
55,608
|
|||
|
|
$
|
6,539,030
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
|
||||
|
Current
Liabilities:
|
||||
|
Accounts
payable
|
$
|
142,604
|
||
|
Accrued
expenses
|
125,676
|
|||
|
TOTAL
CURRENT LIABILITIES
|
268,280
|
|||
|
Derivative
financial instrument
|
598,137 | |||
|
|
||||
|
Stockholders'
equity:
|
||||
|
Preferred
stock, $.001 par value, 20,000,000 shares
|
||||
|
authorized,
277,100 shares outstanding, designated
|
||||
|
as
Series A Convertible Preferred Stock
|
2,771,000
|
|||
|
Common
stock, $.0001 par value, authorized 100,000,000
|
||||
|
shares,
18,604,300 issued at July 31, 2005
|
1,860
|
|||
|
Additional
paid-in-capital
|
17,590,422
|
|||
|
Unamortized
deferred stock based compensation
|
(1,368,887
|
)
|
||
|
Deficit
accumulated during the development stage
|
(13,321,782
|
)
|
||
|
|
5,672,613
|
|||
|
|
$
|
6,539,030
|
||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS - RESTATED
(UNAUDITED)
|
Three
Months Ended July 31,
|
Six
Months Ended July 31,
|
August
4, 1999
(Inception)
to
|
||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
July
31, 2005
|
||||||||||||
|
Revenues
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||
|
|
||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
|
||||||||||||||||
|
Research
and development
|
266,161
|
90,949
|
562,807
|
165,353
|
2,853,134
|
|||||||||||
|
|
||||||||||||||||
|
General
and administrative
|
982,897
|
2,004
|
1,558,181
|
4,824
|
2,224,423
|
|||||||||||
|
|
||||||||||||||||
|
Stock
based compensation
|
3,375,652
|
161,330
|
3,267,714
|
161,330
|
7,373,420
|
|||||||||||
|
|
||||||||||||||||
|
Loss
from operations
|
(4,624,711
|
)
|
(254,283
|
)
|
(5,388,701
|
)
|
(331,507
|
)
|
(12,450,977
|
)
|
||||||
|
|
||||||||||||||||
|
Interest
and investment income
|
33,686
|
0
|
45,810
|
0
|
65,845
|
|||||||||||
|
Other
expense
|
(16,304
|
)
|
0
|
(16,304
|
)
|
0
|
(16,304
|
)
|
||||||||
|
|
||||||||||||||||
| Derivative financial instrument income (expense) | (598,137 |
)
|
(598,137 |
)
|
|
(598,137 |
)
|
|||||||||
|
Net
loss
|
|
(5,205,466
|
)
|
|
(254,283
|
)
|
|
(5,957,333
|
)
|
|
(331,507
|
)
|
|
(12,999,573
|
)
|
|
| Accretion of dividend on Series A Preferred Stock | (322,209 |
)
|
— | (322,209 |
)
|
— | (322,209 |
)
|
||||||||
| Net Loss applicable to common shareholders |
$
|
(5,527,675 |
)
|
$
|
(254,283 |
)
|
$
|
(6,279,542 |
)
|
$
|
(331,507 |
)
|
$
|
(13,321,782 |
)
|
|
|
|
||||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
and diluted
|
18,933,648
|
14,000,318
|
18,335,109
|
13,590,320
|
12,514,245
|
|||||||||||
|
|
||||||||||||||||
|
Net
loss per common share:
|
||||||||||||||||
|
Basic
and diluted
|
$
|
(0.27
|
)
|
$
|
(0.02
|
)
|
$
|
(0.32
|
)
|
$
|
(0.02
|
)
|
$
|
(1.04
|
)
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
6
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -
RESTATED
|
Deficit
|
|||||||||||||||||||||||||
|
Deferred
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Unamortized
|
During
|
Total
|
||||||||||||||||||||||
|
Preferred
|
Common
Stock
|
Treasury
|
Paid
in
|
Stock-based
|
Development
|
Stockholders'
|
|||||||||||||||||||
|
Stock
|
Shares
|
Par
Value
|
Shares
|
Capital
|
Compensation
|
Stage
|
Equity
|
||||||||||||||||||
|
Balance
August 4, 1999 (Inception)
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
|
Sale
of common stock - founders
|
222,000,000
|
22,200
|
—
|
19,800
|
—
|
—
|
42,000
|
||||||||||||||||||
|
Net
loss for the period ended January 31, 2000
|
—
|
—
|
—
|
—
|
—
|
(14,760
|
) |
(14,760
|
)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2000
|
222,000,000
|
22,200
|
0
|
19,800
|
0
|
($14,760
|
) |
27,240
|
|||||||||||||||||
|
Net
loss for the period ended January 31, 2001
|
—
|
—
|
—
|
—
|
—
|
(267,599
|
) |
(267,599
|
)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2001
|
222,000,000
|
22,200
|
0
|
19,800
|
0
|
(282,359
|
) |
(240,359
|
)
|
||||||||||||||||
|
Capital
contribution cash
|
45,188
|
45,188
|
|||||||||||||||||||||||
|
Net
loss for the period ended January 31, 2002
|
—
|
—
|
—
|
—
|
—
|
(524,224
|
) |
(524,224
|
)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2002
|
222,000,000
|
22,200
|
0
|
64,988
|
0
|
(806,583
|
) |
(719,395
|
)
|
||||||||||||||||
|
Sale
of common stock
|
7,548,000
|
755
|
2,645
|
3,400
|
|||||||||||||||||||||
|
Capital
contribution cash
|
2,500
|
2,500
|
|||||||||||||||||||||||
|
Net
loss for the period ended January 31, 2003
|
—
|
—
|
—
|
—
|
—
|
(481,609
|
) |
(481,609
|
)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2003
|
229,548,000
|
22,955
|
0
|
70,133
|
0
|
(1,288,192
|
) |
(1,195,104
|
)
|
||||||||||||||||
|
Net
loss for the period ended January 31, 2004
|
—
|
—
|
—
|
—
|
—
|
(383,021
|
) |
(383,021
|
)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2004
|
229,548,000
|
$
|
22,955
|
$
|
0
|
$
|
70,133
|
0
|
($1,671,213
|
)
|
($1,578,125
|
)
|
|||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
7
XENOMICS,
INC.
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY- RESTATED (Continued)
|
Deficit
|
|||||||||||||||||||||||||
|
Deferred
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Unamortized
|
During
|
Total
|
||||||||||||||||||||||
|
Preferred
|
Common
Stock
|
Treasury
|
Paid
in
|
Stock-based
|
Development
|
Stockholders'
|
|||||||||||||||||||
|
Stock
|
Shares
|
Par
Value
|
Shares
|
Capital
|
Compensation
|
Stage
|
Equity
|
||||||||||||||||||
|
Balance,
January 31, 2004
|
|
229,548,000
|
$
|
22,955
|
$
|
0
|
$
|
70,133
|
$
|
0
|
$ |
(1,671,213
|
)
|
$ |
(1,578,125
|
)
|
|||||||||
|
|
|
||||||||||||||||||||||||
|
Founders
waive deferred compensation
|
|
1,655,029
|
1,655,029
|
||||||||||||||||||||||
|
Private
Placement common stock
|
|
2,645,210
|
265
|
2,512,685
|
2,512,950
|
||||||||||||||||||||
|
Redeemed
shares from Panetta Partners, Ltd
|
|
(218,862,474
|
)
|
(21,886
|
)
|
(478,114
|
)
|
(500,000
|
)
|
||||||||||||||||
|
Cost
associated with recapitalization
|
|
(301,498
|
)
|
(301,498
|
)
|
||||||||||||||||||||
|
Share
exchange with Xenomics Founders
|
|
2,258,001
|
226
|
(226
|
)
|
0
|
|||||||||||||||||||
|
Issuance
of treasury shares to escrow
|
|
350,000
|
35
|
(35
|
)
|
0
|
|||||||||||||||||||
|
Private
Placement common stock
|
|
1,368,154
|
136
|
2,667,764
|
2,667,900
|
||||||||||||||||||||
|
Issuance
of warrants to finders
|
|
403,038
|
403,038
|
||||||||||||||||||||||
|
Finders
warrants charged cost of capital
|
|
(403,038
|
)
|
(403,038
|
)
|
||||||||||||||||||||
|
Deferred
stock based compensation
|
|
1,937,500
|
(1,937,500
|
)
|
0
|
||||||||||||||||||||
|
Amortization
of deferred stock based compensation
|
|
245,697
|
245,697
|
||||||||||||||||||||||
|
Options
issued to consultants
|
1,068,238
|
1,068,238
|
|||||||||||||||||||||||
|
Warrants
issued to consultant
|
2,630,440
|
2,630,440
|
|||||||||||||||||||||||
|
Net
loss for the year ended January 31, 2005
|
|
—
|
—
|
—
|
—
|
—
|
(5,198,117
|
)
|
(5,198,117
|
)
|
|||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
January 31, 2005
|
|
17,306,891
|
$
|
1,731
|
$ |
(35
|
)
|
$
|
11,923,282
|
$ |
(1,691,803
|
)
|
$ |
(7,042,240
|
)
|
$
|
3,190,935
|
||||||||
| Private Placement common stock |
127,025
|
12
|
20,388
|
20,400
|
|||||||||||||||||||||
|
Private
Placement common stock
|
1,515,384
|
152
|
2,656,847
|
2,656,999
|
|||||||||||||||||||||
|
Private
Placement of preferred stock
|
2,448,791
|
(45,107
|
) |
2,493,102
|
|||||||||||||||||||||
| Accretion of dividend on Series A preferred stock |
322,209
|
(322,209
|
)
|
0
|
|||||||||||||||||||||
|
Retirement
of treasury shares
|
(350,000
|
) |
(35
|
) |
35
|
0
|
|||||||||||||||||||
|
Shares
issued for services rendered
|
5,000
|
0
|
16,500
|
16,500
|
|||||||||||||||||||||
|
Outstanding
options marked to market
|
2,928,298
|
2,928,298
|
|||||||||||||||||||||||
|
Amortization
of deferred stock based compensation
|
322,916
|
322,916
|
|||||||||||||||||||||||
|
Outstanding
options marked to market
|
(269,396
|
) | |||||||||||||||||||||||
|
Net
loss for the three month period ended July 31, 2005
|
(5,957,333
|
) |
(5,957,333
|
) | |||||||||||||||||||||
|
Balance,
July 31, 2005
|
2,771,000
|
$ |
18,604,300
|
$ |
1,860
|
($0
|
) | $ |
17,590,422
|
$ |
(1,368,887
|
) | $ |
(13,321,782
|
) | $ |
5,672,613
|
||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
8
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
(UNAUDITED)
|
Six
months ended July 31,
|
Period
from
August
4, 1999
(inception)
to
|
|||||||||
|
2005
|
2004
|
July
31, 2005
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(5,957,333
|
)
|
$
|
(331,507
|
)
|
$
|
(12,999,573
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
||||||||||
|
Depreciation
|
10,545
|
—
|
19,612
|
|||||||
|
Founders
compensation contributed to equity
|
0
|
74,404
|
1,655,029
|
|||||||
|
Stock
based compensation expense
|
3,267,714
|
161,330
|
7,373,420
|
|||||||
|
Amortization
of purchase discount on marketable investments
|
(1,695
|
)
|
—
|
(1,695
|
)
|
|||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Prepaid
expenses
|
(92,386
|
)
|
(16,490
|
)
|
(127,748
|
)
|
||||
|
Security
deposit
|
2,565
|
(50,617
|
)
|
(55,608
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
61,220
|
33,893
|
|
268,280
|
||||||
|
Patent
costs
|
—
|
(36,572
|
)
|
0
|
||||||
|
Total
adjustments
|
3,247,963
|
165,948
|
|
9,131,290
|
||||||
|
Net
cash used in operating activities
|
(2,709,370
|
)
|
(165,559
|
)
|
(3,868,283
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Acquisition
of equipment
|
(29,575
|
)
|
(41,137
|
)
|
(116,137
|
)
|
||||
|
Purchase
of marketable investments
|
(3,442,960
|
)
|
—
|
(3,442,960
|
)
|
|||||
|
Net
cash used in investing activities
|
(3,472,535
|
)
|
(41,137
|
)
|
(3,559,097
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of common stock
|
3,154,999
|
2,512,950
|
8,428,937
|
|||||||
|
Payment
of acquisition costs on common stock
|
(477,600
|
)
|
(301,498
|
)
|
(779,098
|
)
|
||||
|
Proceeds
from issuance of preferred stock
|
2,771,000
|
—
|
2,771,000
|
|||||||
|
Payment
of acquisition costs on preferred stock
|
(277,102
|
)
|
—
|
(277,102
|
)
|
|||||
|
Purchase
of common stock
|
—
|
(500,000
|
)
|
(500,000
|
)
|
|||||
|
Derivative
instrument expense
|
598,137 | — | 598,137 | |||||||
|
Net
cash provided by financing activities
|
5,769,434
|
1,711,452
|
10,241,874
|
|||||||
|
|
||||||||||
|
Net
(decrease)increase in cash and cash equivalents
|
(412,471
|
)
|
1,504,756
|
2,814,494
|
||||||
|
|
||||||||||
|
Cash
and cash equivalents at beginning of period
|
3,226,965
|
339
|
—
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
2,814,494
|
$
|
1,505,095
|
$
|
2,814,494
|
||||
|
|
||||||||||
|
Supplementary
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
9
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited
)
1.
BUSINESS OVERVIEW:
Xenomics,
Inc. (“Xenomics” or the “Company”) is considered to be in the development stage.
Since inception on August 4, 1999, Xenomics’ efforts have been principally
devoted to research and development, securing and protecting its patents
and
raising capital. From inception through July 31, 2005, Xenomics has sustained
cumulative net losses of $13,321,782. Xenomics's losses have resulted primarily
from expenditures incurred in connection with research and development
activities, application and filing for regulatory approval of its proposed
products, patent filing and maintenance expenses, purchase of in-process
research and development, outside accounting and legal services and regulatory,
scientific and financial consulting fees aggregating $5,948,362 and non-cash
stock based compensation expense of $7,373,420. From inception through July
31,
2005, Xenomics has not generated any revenue from operations, expects to
incur
additional losses to perform further research and development activities
and
does not currently have any commercial molecular diagnostic products approved
by
the Food and Drug Administration, and does not expect to have such for several
years, if at all.
Xenomics's
product development efforts are thus in their early stages and Xenomics cannot
make estimates of the costs or the time it will take to complete. The risk
of
completion of any program is high because of the many uncertainties involved
in
bringing new drugs to market including the long duration of clinical testing,
the specific performance of proposed products under stringent clinical testing
protocols, the extended regulatory approval and review cycles and the nature
and
timing of costs and competing technologies being developed by organizations
with
significantly greater resources.
2.
BASIS
OF PRESENTATION:
The
accompanying condensed consolidated financial statements of Xenomics, which
include the results of Xenomics, Inc. a Florida corporation and its wholly
owned
subsidiary Xenomics, a California corporation ("Xenomics Sub"), have been
prepared in accordance with (i) accounting principles generally accepted
in the
United States of America ("GAAP") for interim financial information and (ii)
the
rules of the Securities and Exchange Commission (the "SEC") for quarterly
reports on Form 10-QSB. All significant intercompany balances and transactions
have been eliminated in consolidation. These condensed consolidated financial
statements do not include all of the information and footnote disclosures
required by GAAP for complete financial statements. These statements should
be
read in conjunction with Xenomics’s audited financial statements and notes
thereto for the year ended January 31, 2005, included in Amendment No.2 to
Form
10-KSB filed with the SEC on January 10, 2006. In the opinion of management,
the
accompanying unaudited condensed consolidated financial statements include
all
adjustments, primarily consisting of normal adjustments, necessary for the
fair
presentation of the balance sheet and results of operations for the interim
periods. The results of operations for the six months ended July 31, 2005
are
not necessarily indicative of the results of operations to be expected for
the
full year ending January 31, 2006.
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
CASH,
CASH
EQUIVALENTS AND MARKETABLE INVESTMENTS - Xenomics considers all highly liquid
debt instruments, including treasury bills, purchased with original maturities
of three months or less to be cash equivalents.
Marketable
investments consisted of held to maturity debt investments that are reported
at
fair market value. As of July 31, 2005 approximately $3,444,655 was held
in US
Treasury Bills that had maturities ranging from three to six months. All
treasury bills are purchased at a discount to face value, which discount is
amortized until maturity, in accordance with Statement of Financial Accounting
Standard (“SFAS”) No. 115 “Accounting for Debt and Equity Securities”. The
amortization of a purchase discount of $1,695 on these investments
was recorded as interest income in Xenomics’s results of operations for the
six months ended July 31, 2005.
BUSINESS
CONCENTRATIONS AND CREDIT RISKS - All of Xenomics's cash and cash equivalents
and marketable investments as of July 31, 2005 are on deposit with a major
money
center financial institution, or invested in short term debt instruments,
principally U.S. Treasury Bills, not exceeding maturities of 120 days. Bank
deposits at any point in time may exceed federally insured limits.
10
NET
LOSS
PER SHARE - Basic and diluted net loss per share is presented in conformity
with
SFAS No. 128, "Earnings per Share," for all periods presented. In accordance
with SFAS No. 128, basic and diluted net loss per common share was determined
by
dividing net loss applicable to common stockholders by the weighted-average
common shares outstanding during the period. Diluted weighted-average shares
are
the same as basic weighted-average shares since the inclusion of issuable shares
pursuant to the conversion of preferred stock and the exercise of stock options
and warrants would have been antidilutive.
As
of July
31, 2005, Xenomics had 1,288,837 shares of common stock issuable upon conversion
of the 277,100 shares of Series A convertible preferred stock outstanding.
In
addition Xenomics had 2,503,501 and 20,000 common stock warrants outstanding
which were 100% vested as of July 31, 2005 and July 31, 2004 respectively.
Stock
options outstanding totaled 6,290,000 and 3,750,000 as of July 31, 2005 and
2004, respectively. All share and per share amounts have been restated to
reflect the 111 for 1 stock split which was effective July 26, 2004.
ACCOUNTING
FOR STOCK BASED COMPENSATION - Xenomics has adopted Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
As provided for by SFAS 123, Xenomics has elected to continue to account for
its
stock-based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees
("APB
25"). During the quarter ended July 31, 2005, Xenomics recorded $3,375,652
in
stock-based compensation expense.
A
total of
5,000,000 shares of common stock have been reserved for issuance under the
Xenomics Stock Option Plan, as amended (the "Plan"). As of July 31, 2005,
options for 6,290,000 shares were outstanding under the Plan. 1,290,000 of
such
options have been granted subject to stockholder approval of an increase in
the
number of shares that can be granted under the Plan. With respect to the options
granted prior to stockholder approval a measurement date has not occurred and
accordingly no compensation expense has been recorded. When such measurement
date does occur, stock based compensation expense will be recorded. During
the
six months ended July 31, 2005, Xenomics recorded $3,267,714 in stock-based
compensation expense associated with shareholder approved options and warrants
and had $1,368,887 of deferred stock based compensation as of July 31, 2005.
Had
the 1,290,000 options granted subject to shareholder approval been approved
on
July 31, 2005 (the measurement date, at which date the market price of the
Company’s stock was $2.50 per share) the Company would have recognized
approximately $85,000 of additional stock-based compensation during the quarter
and the six months ended July 31, 2005 and would have approximately $800,000
of
additional deferred stock based compensation as of July 31, 2005.
In
December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123," 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 Quarterly
and Annual financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
(See table below)
Had
compensation cost for stock options granted to employees and directors been
determined based upon the fair value at the grant date for awards, consistent
with the methodology prescribed under SFAS 123, Xenomics's net loss would have
been as follows:
|
Three
Months
Ended July 31,
|
Six
Months Ended July,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
|
|||||||||||||
|
Net
loss applicable to common share holders, as reported
|
$
|
(5,527,675
|
)
|
$
|
(254,283
|
)
|
$
|
(6,279,542
|
)
|
$
|
(331,507
|
)
|
|
|
Add:
Stock-based employee compensation expense
|
|||||||||||||
|
recorded under APB No. 25 intrinsic value method
|
161,458
|
—
|
322,917
|
—
|
|||||||||
|
Deduct:
Stock-based employee compensation
|
|||||||||||||
|
expense
determined under fair value method
|
(324,742
|
)
|
(149
|
)
|
(649,484
|
)
|
(149
|
)
|
|||||
|
|
|||||||||||||
|
Pro
forma net loss
|
$
|
(5,690,958
|
)
|
$
|
(254,432
|
)
|
$
|
(6,606,109
|
)
|
$
|
(331,656
|
)
|
|
|
|
|||||||||||||
|
Net
loss per share:
|
|||||||||||||
|
Basic
and diluted -as reported
|
$
|
(0.29
|
)
|
$
|
(0.02
|
)
|
$
|
(0.34
|
)
|
$ |
(0.02
|
)
|
|
|
|
|||||||||||||
|
Basic
and diluted -pro forma
|
$
|
(0.30
|
)
|
$
|
(0.02
|
)
|
$
|
(0.36
|
)
|
$ |
(0.02
|
)
|
|
|
Black-Scholes
Methodology Assumptions:
|
|||||||||||||
|
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
|||||
|
Risk
free interest rate
|
4.50
|
%
|
4.25
|
%
|
4.50
|
%
|
4.25
|
%
|
|||||
|
Expected
lives of options
|
7
to 10 years
|
7
to 10 years
|
7
to 10 years
|
7
to 10 years
|
|||||||||
Volatility
of 0% was used until Xenomics's common stock began to trade publicly on July
2,
2004. Since July 5, 2004 through July 31, 2005, Xenomics has used 80% volatility
to determine fair value of options granted to employees.
11
RECENT
ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY - In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard ("SFAS") No. 123 (Revised 2004), "Share-Based Payment."
SFAS
No 123R is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting
for
Stock Issued to Employees" and its related implementation guidance. SFAS
No.
123R focuses primarily on accounting for transactions in which an entity
obtains
employee services through share-based payment transactions. SFAS No 123R
requires a public entity to measure the cost of employee services received
in
exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The cost will be recognized over the period during
which an employee is required to provide services in exchange for the award.
SFAS No. 123R is effective as of the beginning of the first interim or Quarterly
reporting period that begins after December 15, 2005. While Xenomics cannot
precisely determine the impact on net loss as a result of the adoption of
SFAS
No 123R, estimated compensation expense related to prior periods can be found
in
the above table of this footnote.
4.
STOCKHOLDERS' EQUITY:
On
January
28, 2005, the Company closed the first traunche of a private placement selling
1,368,154 shares of common stock and 367,681 warrants to certain investors
(the
"Investors"). The securities were sold as a unit (the "Units") at a price
of
$1.95 per Unit for aggregate proceeds of $2,667,900. Each Unit consisted
of one
share of common stock and a warrant to purchase one quarter share of common
stock. The warrants are immediately exercisable at $2.95 per share and are
exercisable at any time within five years from the date of issuance. The
Company
issued an aggregate 123,659 warrants to purchase common stock to various
selling
agents, which are immediately exercisable at $2.15 per share and will expire
five years after issuance.
On
February 5, 2005 the Company completed the first traunche of the private
placement described above selling an additional 104,564 shares of its common
stock to the Investors at a price of $1.95 per share for aggregate proceeds
of
$200,000. In addition, the Company paid an aggregate $179,600 in cash and
issued
24,461 shares of common stock to certain selling agents, in lieu of cash.
In
connection with the offer and sale of securities to the Investors and the
Company also entered into a Registration Rights Agreement, dated as of January
28, 2005 (the "Registration Rights Agreement"), with the Investors pursuant
to
which the Company has agreed to file, within 120 days after the closing,
a
registration statement covering the resale of the shares of common stock
sold to
the Investors and the shares of common stock issuable upon exercise of the
Warrants issued to the Investors.
On
April
7, 2005, the Company closed the second and final traunche of the private
placement selling 1,515,384 shares of common stock and 378,846 warrants to
certain additional Investors for aggregate proceeds of $2,954,999. The Company
paid an aggregate $298,000 in fees and issued an aggregate 121,231 warrants
to
purchase common stock to selling agents. The warrants are immediately
exercisable at $2.15 per share and will expire five years after issuance.
These
April 7, 2005 Investors became parties to the same Registration Rights Agreement
as the January 28, 2005 Investors.
On
July
13, 2005, the Company closed a private placement of 277,100 shares of Series
A
Convertible Preferred Stock (the “Series A Preferred Stock”) and 386,651
warrants to certain investors for aggregate gross proceeds of $2,771,000
pursuant to a Securities Purchase Agreement dated as of July 13, 2005. The
warrants sold to the Investors are immediately exercisable at $3.25 per share
and are exercisable at any time within five years from the date of issuance.
These investor warrants had a fair value of $567,085 on the date of issuance
using a market price of $2.40 on that date. In addition the Company paid an
aggregate $277,102 and issued an aggregate 105,432 warrants to purchase common
stock to certain selling agents. The warrants issued to the selling agents
are
immediately exercisable at $2.50 per share and will expire five years after
issuance. The selling agent warrants had a fair value of $166,856 on the
date of
issuance and this amount was recorded as a cost of raising capital.
As
per
EITF 00-19, “Accounting for Derivative Financial Instruments Index to, and
Potentially Settled in, Company Stock” the Company calculated the value of the
warrants issued in connection with this transaction and recorded a charge
to
expense and a corresponding liability in the amount of $598,137. The value
of
these warrants will be marked-to-market and the liability will be adjusted
with
a corresponding charge or benefit recorded in the statement of
operations.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the preferred stock transaction and accordingly found that
there was an associated beneficial conversion feature. The cash purchase
and
existing conversion were found to contain a beneficial conversion feature
totaling $322,209 and the preferred stock was further discounted by this
amount.
The beneficial conversion amount was then accreted back to the preferred
stock
in accordance with the conversion provision which allowed for 100% to be
converted immediately. The total amount accreted back to the preferred and
charged to Deficit Accumulated During Development Stage was $322,209
as of July 13, 2005.
The
material terms of the Series A Preferred Stock consist of:
Dividends.
Holders
of
the Series A Convertible Preferred Stock shall be entitled to receive cumulative
dividends at the rate per share of 4% per annum, payable quarterly on March
31,
June 30, September 30 and December 31, beginning with September 30, 2005.
Dividends shall be payable, at the Company’s sole election, in cash or shares of
common stock.
12
Voting
Rights. Shares
of the
Series A
Convertible Preferred Stock shall have no voting rights. However, so long
as any
shares of Series A Convertible Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of the shares of Series
A
Convertible Preferred Stock then outstanding, (a) adversely change the powers,
preferences or rights given to the Series A Convertible Preferred Stock,
(b)
authorize or create any class of stock senior or equal to the Series A
Convertible Preferred Stock, (c) amend its articles of incorporation or other
charter documents, so as to affect adversely any rights of the holders of
Series
A Convertible Preferred Stock or (d) increase the authorized number of shares
of
Series A Convertible Preferred Stock.
Liquidation.
Upon any
liquidation, dissolution or winding-up of the Company, the holders of the
Series
A Convertible Preferred Stock shall be entitled to receive an amount equal
to
the Stated Value per share, which is $10 per share plus any accrued and unpaid
dividends.
Conversion
Rights.
Each
share of Series A Convertible Preferred Stock shall be convertible into that
number of shares of common stock determined by dividing the Stated Value,
currently $10 per share, by the conversion price, currently $2.15 per share.
The
conversion price is subject to adjustment for dilutive issuances.
Beginning
July 13, 2006, if the price of the common stock equals
$4.30 per share for 20 consecutive trading days, and an average of 50,000
shares
of common stock per day shall have been traded during the 20 trading days,
the
Company shall have the right to deliver a notice to the holders of the
Series A Convertible Preferred Stock, to convert any portion of the shares
of
Series A Convertible Preferred Stock into shares of Common Stock at the
conversion price.
In
connection with the offer and sale of the Series A Preferred Stock securities
the Company also entered into a Registration Rights Agreement pursuant
to which
the Company has agreed to have a registration statement covering the resale
of
the common stock attributable to conversion of Series A Preferred Stock
and the
shares of common stock issuable upon exercise of the preferred warrants,
declared effective by October 25, 2005. In the event a registration statement
covering such shares of common stock is not declared effective by October
25,
2005 Company shall pay to the investors, at the Company’s option in cash or
common stock, an amount equal to 1% of the gross proceeds raised in the
Offering
for each 30 day period that the registration statement is not declared
effective
by the SEC.
The
Company’s
Articles of Incorporation have been amended to provide for the issuance of
277,100 shares of Series A Preferred Stock pursuant to the Articles of Amendment
to the Articles of Incorporation filed with the State of Florida on July
13,
2005.
5.
COMMITMENTS AND CONTINGENCIES:
LICENSE
AGREEMENTS:
On
June
28, 2005, Xenomics, The Spallanzani National Institute for Infectious Diseases
(“INMI”) and SpaXen Italia, S.R.L., a joint venture between Xenomics and INMI
(“SpaXen”), entered into a license agreement in which INMI granted to SpaXen an
exclusive license to manufacture, have manufactured, use, import, offer to
sell
and/or sell products covered by certain existing and newly developed
intellectual property assigned to INMI, pertaining to the application of
Tr- DNA
technology to the field of infectious diseases. In addition, SpaXen
granted Xenomics an exclusive sublicense to manufacture, use, import and/or
sell
any products covered by the same INMI intellectual property licensed by SpaXen
from INMI. Pursuant to the license agreement Xenomics agreed to pay to
SpaXen a running royalty of 2% of the Company’s net sales of any product
resulting from the licensed INMI intellectual property. SpaXen has agreed
to pay
INMI a running royalty of 50% of the royalty fees paid by Xenomics. SpaXen's
primary research and development targets will be tests for diagnosis of AIDS,
hepatitis B, tuberculosis, malaria, and leishmaniasis diseases with the highest
levels of morbidity and mortality.
EMPLOYMENT
AND CONSULTING AGREEMENTS:
On
June
27, 2005 Xenomics entered into an agreement with Gabriele M. Cerrone, the
Company’s Co-Chairman, to serve as a consultant for a term of three years with
automatic renewal for successive one year periods unless either party gives
notice to the other not to renew the agreement. The duties of Mr. Cerrone
pursuant to the agreement consist of business development, strategic planning,
capital markets and corporate financing consulting advice. Mr. Cerrone’s
compensation under the agreement is $16,500 per month. In the event the
agreement is terminated without cause or for good reason, Mr. Cerrone will
receive a cash payment equal to the aggregate amount of the compensation
payments for the then remaining term of the agreement. In addition, in such
event, all unvested stock options owned by Mr. Cerrone will immediately
vest and the exercise period of such options will be extended to the later
of
the longest period permitted by the Company’s stock option plans or ten years
following termination. In the event a change of control of the Company occurs,
Mr. Cerrone shall be entitled to such compensation upon the subsequent
termination of the agreement within two years of the change in control unless
such termination is the result of Mr. Cerrone's death, disability or retirement
or Mr. Cerrone’s termination for cause.
On
May 24,
2005, the Company’s Compensation Committee in recognition of the substantial
time and effort to the Company’s affairs during the past year by each of
Gabriele M. Cerrone, Co-Chairman, L. David Tomei, Co-Chairman and President
of
SpaXen Italia, S.R.L., the Company’s joint venture with the Spallanzani National
Institute for Infectious Diseases in Rome, Italy, Samuil Umansky, President
and
Hovsep Melkonyan, Vice President, Research, accelerated the vesting of
outstanding stock options dated June 24, 2004 previously granted to each
such
officer in the amounts of 1,050,000, 1,012,500, 1,012,500 and 675,000,
respectively, so that such options vest as of May 24, 2005. No other terms
of
the original option agreements were changed (e.g. number of shares, exercise
price, or life of the option) therefore, in accordance with
FASB
Interpretation No. 44 Accounting for Certain Transactions Involving Stock
Compensation (paragraph 31), no modification of the original stock based
compensation was required.
The
acceleration did not result in the two affected employees (Mr. Umansky
and Mr.
Melkonyan) being able to exercise options that would have otherwise expired
unexercised therefore no change to our original accounting treatment
is required
under FIN 44. However if any of the employees terminate their employment
prior
to the date they would have otherwise fully vested in the award we will
be
required to record compensation expense based on the intrinsic value
on the date
of modification. Because there were a relatively small number of affected
employees, we have no basis for recording an estimate of future terminations
and
accordingly no compensation expense can be recorded until the date of
any future
terminations prior to the original vesting date. The compensation expense
associated with the options granted to the two affected non-employee
Directors
(Mr. Cerrone and Mr. Tomei), who perform consulting services outside
of their
Board duties, was measured using the fair value method in accordance
with EITF
96-18. Because these grants were awarded in conjunction with consulting
agreements the fair value was remeasured (“market to market”) each quarter
during the original vesting (service) period. The acceleration of these
options
fixed the measurement date prior to the original vesting therefore we
expensed
the remaining balance of deferred stock based compensation totaling $3,197,694
during the quarter ended July 31, 2005.
13
On
February 14, 2005, Xenomics entered into an employment agreement with Bernard
Denoyer, pursuant to which Mr. Denoyer will serve as Vice President-Controller
for a period of 1 year commencing February 14, 2005. The agreement is
automatically renewed for successive 1 year periods until written notice not
to
renew is delivered by either us or Mr. Denoyer. Mr. Denoyer's salary is $75,000
per year. In connection with the employment agreement, Mr. Denoyer received
a
grant of 75,000 incentive stock options pursuant to Xenomics's stock option
plan
with an exercise price of $2.50 per share. Such options will vest at the rate
of
25,000 per year for a period of three years beginning on January 14, 2006.
On
December 13, 2004 Xenomics entered into a letter of engagement (the “Agreement”)
with Trilogy Capital Partners, Inc. (“Trilogy”). The term of the Agreement is
for twelve months and terminable thereafter by either party upon 30 days’ prior
written notice. Pursuant to the Agreement, Trilogy will provide marketing,
financial public relations services and assume the responsibilities of an
investor relations officer. Xenomics will pay Trilogy $10,000 per month under
the Agreement.
Pursuant
to the Agreement, Xenomics issued warrants to Trilogy to purchase 1,000,000
shares of Common Stock of Xenomics at an exercise price of $2.95 per share
(the
“Warrants”). The exercise price was determined to be consistent with the price
of the warrants being offered to purchasers as part of an investment unit in
the
then operative private placement memorandum. The Warrants issued to Trilogy
are
exercisable upon issuance and expire on December 13, 2007. Xenomics has agreed
to file a registration statement with the Securities and Exchange Commission
registering for resale the shares of Common Stock underlying the Warrants.
The
Fair Value of the Warrants using the Black-Scholes methodology is $2,630,440
which was recorded as stock-based compensation expense in the quarter ended
January 31, 2005.
6.
Restatement
On
September 2, 2005 the Company received a comment letter from the Securities
and
Exchange Commission (the “SEC”) concerning its Form SB-2 which was filed with
the SEC by the Company on August 2, 2005. The Company’s consolidated financial
statements for the year ended January 31, 2005 and the three and six months
ended April 30 and July 31, 2005 included in Amendment No. 1 to Form SB-2
filed
on October 28, 2005 were restated in response to certain SEC
comments.
On
November 28, 2005 the Company received a comment letter from the SEC concerning
Amendment No. 1 to Form SB-2. The Company’s consolidated financial statements
for the year ended January 31, 2005 included in Amendment No. 2 to Form
SB-2
filed on January 11, 2006 were restated in response to certain SEC
comments.
On
February 2, 2006 the Company received a comment letter from the SEC concerning
Amendment No. 2 to Form SB-2. The Company’s consolidated financial statements
for the year ended January 31, 2005 and the nine months ended October 31,
2005
included in Amendment No. 3 to Form SB-2 filed on February 14, 2006 were
restated in response to certain SEC comments.
The
following is a summary of the impact of those adjustments:
|
Year
Ended
January
31, 2005
|
|
Six
Months
Ended
July
31, 2005
|
|||||
|
Net
loss prior to adjustments
|
$
|
(3,336,018
|
)
|
$
|
(2,072,783
|
)
|
|
|
Reversal
of charge for acquired in-process research and
development
|
2,145,101
|
0
|
|||||
|
Stock
based compensation - Trilogy Capital Partners, Inc.
|
(123,063
|
)
|
(453,294
|
)
|
|||
|
Deferred
founders' compensation contributed to capital
|
(74,404
|
)
|
0
|
||||
|
Net
loss as reported in Amendment #1
|
(1,388,384
|
)
|
(2,526,077
|
)
|
|||
|
Stock
based compensation:
|
|||||||
|
Trilogy
Capital Partners, Inc.
|
(2,507,377
|
)
|
453,294
|
||||
|
Consultants
other than Trilogy
|
(1,229,568
|
)
|
(2,928,298
|
)
|
|||
|
Employees
|
(245,697
|
)
|
(322,916
|
)
|
|||
|
Other
|
0
|
(35,199
|
)
|
||||
|
Net
loss as reported in Amendment #2
|
(5,371,026
|
)
|
(5,359,196
|
)
|
|||
|
Derivative
financinal instrument
|
0
|
(598,137
|
)
|
||||
|
Net
loss as reported in Amendment #3
|
$
|
(5,371,026
|
)
|
$
|
(5,957,333
|
)
|
|
|
Weighted
average common shares
|
14,580,186
|
18,335,109
|
|||||
|
Loss
per share - Basic and diluted - Prior to adjustments
|
$
|
(0.23
|
)
|
$
|
(0.11
|
)
|
|
|
Loss
per share - Basic and diluted - Prior to adjustments
|
$
|
(0.37
|
)
|
$
|
(0.32
|
)
|
|
14
The
following discussion should be read in conjunction with our consolidated
financial statements and notes to those statements included in this Quarterly
Report on Amendment No.2 to Form 10-QSB. In addition to historical information,
the following discussion and other parts of this Quarterly Report contain
forward-looking information that involves risks and uncertainties.
OVERVIEW
We
are a
development stage molecular diagnostic company that focuses on the development
of DNA-based tests using Trans-renal DNA (“Tr-DNA”). Tr-DNA's are fragments of
DNA derived from dying cells inside the body compartment. The intact DNA
is
fragmented in these dying cells, appears in the blood stream and these fragments
have been shown to cross the kidney barrier and can be detected in urine.
Because Tr-DNA originates inside the body, using a safe and simple urine
collection, we believe our patented technology can be applied to a broad
range
of testing including: prenatal testing, tumor detection and monitoring, tissue
transplantation, infectious disease, forensic identification, drug development
and bio-terrorism. In March 2004, we organized a joint venture with the
Spallanzani National Institute for Infectious Diseases (Instituto Nazionale
per
le Malattie Infettive) in Rome, Italy, in the form of a new R&D company
called SpaXen Italia, S.R.L, or SpaXen, which will conduct research and
development on non-invasive diagnostic tests for infectious disease using
Tr-DNA
methodology.
HISTORY
Since
inception on August 4, 1999 through July 31, 2005, we have sustained cumulative
net losses of $13,321,782. Our losses have resulted from research and
development expenses, patent costs and legal, accounting, and administrative
expenses aggregating $5,948,362 and non-cash stock-based compensation expense
of
$7,373,420. From inception through July 31, 2005, we have not generated any
revenue from operations. We expect to incur additional losses to perform
further
research and development activities. We do not currently have any commercial
products and we do not expect to have any for the foreseeable future. Our
product development efforts are in their early stages and we cannot make
estimates of the costs or the time it will take to complete. The risk of
completion of any program is high because of the long duration of clinical
testing, regulatory approval and review cycles and uncertainty of the costs.
Net
cash inflows from any products developed may take several years to achieve.
RESULTS
OF OPERATIONS
We
had no
revenues during the quarters ended July 31, 2005 and 2004 because we do not
have
any commercial products and we do not expect to have any for the foreseeable
future.
Operating
expenses increased to $4,624,711 during the quarter ended July 31, 2005 from
$254,283 for the same period in 2004. This increase occurred as a result
of
increased business activities which began subsequent to July 2, 2004, the
date
our business combination and first private placement was completed.
Research
and development expenses increased to $266,161 during the quarter ended July
31,
2005, from $90,949 during the quarter ended July 31, 2004. These expenditures
include our in-house research and development laboratory in New Jersey, salaries
and staff costs, patent legal, filing and maintenance expenses, regulatory
and
scientific consulting fees and laboratory supplies. Our research and development
expenses increased because we were operating for the full three months in
the
quarter ended July 31, 2005 whereas we only had limited operations during
the
quarter ended July 31, 2004.
General
and administrative expenses increased to $982,897 during the quarter ended
July
31, 2005 as compared to $2,004 during the quarter ended July 31, 2004. This
increase was principally due to increased investor relation expenditures
of
approximately $246,000; higher compensation cost associated with the hiring
of
our Chief Executive Officer, Controller and other office staff of approximately
$160,000; consulting fees associated with retaining the services of our
Co-Chairmen, Messrs. Cerrone and Tomei totaling approximately $140,000; plus
legal and public accounting fees of approximately $138,000; and facilities
expense totaling approximately $114,000.
15
Stock-based
compensation expense for the quarters ended July 31, 2005 and 2004 was
$3,375,652 and $161,330 respectively. During the quarter ended July 31, 2005
approximately $3,198,000 of such expense is attributable to options and warrants
granted to certain independent consultants for services rendered and was
measured using the fair value (Black-Scholes) methodology. Had we used the
fair
value method for employee and director options (instead of intrinsic value)
our
stock based compensation expense would have been approximately $163,000 higher
in the quarter ended July 31, 2005, whereas this alternative methodology would
have had minimal impact in the quarter ended July 31, 2004.
Interest
and investment income for the quarter ended July 31, 2005 was $33,686, whereas
no interest income was earned in the quarter ended July 31, 2004. Interest
and
investment income increased as a result of our higher cash and marketable
investment balances reflecting our recent private placements discussed in
the
“Liquidity and Capital Resources” section below.
Derivative
financial instrument charge to expense for the quarters ended July 31, 2005
and
2004 was $598,137 and zero, respectively. This charge is attributable to
the
expense associated with warrants issued in connection with the financing
transaction on July 13, 2005.
This
interest and investment income was partially offset by $16,304 in liquidated
damages paid, to certain investors under the Registration Rights Agreement
dated
January 28, 2005, for failure to file a registration statement with the SEC
by
May 25, 2005.
Net
loss
for the quarter ended July 31, 2005 was $5,205,466 as compared to a loss
of
$254,283 for the same period in 2004. The increase in the net loss in 2005
is
the result of higher operating expenses, slightly offset by higher interest
and
investment income as described above.
SIX
MONTHS ENDED JULY 31, 2005 AND 2004.
We
had no
revenues during the six months ended July 31, 2005 and 2004 because we do
not
have any commercial products and we do not expect to have any for the
foreseeable future.
Operating
expenses increased to $5,388,707 during the six months ended July 31, 2005
from
$331,507 for the same period in 2004. This increase occurred as a result
of
increased business activities which began subsequent to July 2, 2004, the
date
our business combination and first private placement was completed.
Research
and development expenses increased to $562,807 during the six months ended
July
31, 2005, up from $165,353 during the six months ended July 31, 2004. These
expenditures include salaries and staff costs for our in-house research and
development laboratory in New Jersey, patent legal, filing and maintenance
expenses, regulatory and scientific consulting fees and laboratory supplies.
Our
research and development expenses increased because we were operating for
the
full six months in the six months ended July 31, 2005 whereas we only had
limited operations during the six months ended July 31, 2004.
General
and administrative expenses increased to $1,558,181 during the six months
ended
July 31, 2005 as compared to $4,824 during the six months ended July 31,
2004.
This increase was principally due to increased investor relation expenditures
of
approximately $370,000; higher compensation cost associated with the hiring
of
our Chief Executive Officer, Controller and other office staff of approximately
$292,000; consulting fees associated with retaining the services of our
Co-Chairmen, Messrs. Cerrone and Tomei totaling approximately $205,000; plus
legal and public accounting fees in connection with our fund raising activities
of approximately $166,000; and facilities expense totaling approximately
$203,000.
Stock-based
compensation expense for the six months ended July 31, 2005 and 2004 was
$3,267,714 and $161, 330 respectively. During the six months ended July 31,
2005
approximately $3,198,000 of such expense is attributable to options and warrants
granted to certain independent consultants for services rendered and was
measured using the fair value (Black-Scholes) methodology. Had we used the
fair
value method for employee and director options (instead of intrinsic value)
our
stock based compensation expense would have been approximately $327,000 higher
in the six months ended July 31, 2005, whereas this alternative methodology
would have had minimal impact in the six months ended July 31, 2004.
Interest
and investment income for the six months ended July 31, 2005 was $45,810,
whereas no interest income was earned in the six months ended July 31, 2004.
Interest and investment income increased as a result of our higher cash and
marketable investment balances reflecting our recent private placements
discussed in the “Liquidity and Capital Resources” section below.
Derivative
financial instrument charge to expense for the six months ended July 31,
2005
and 2004 was $598,137 and zero, respectively. This charge is attributable
to expense associated with warrants issued in connection with the financing
transaction on July 13, 2005.
Net
loss
for the six months ended July 31, 2005 was $5,957,333 as compared to a loss
of
$331,507 for the same period in 2004. The increase in the net loss in 2005
is
the result of higher operating expenses, slightly offset by higher interest
and
investment income as described above.
16
PLAN
OF OPERATIONS
We
plan to
devote significant financial and other resources to further research and
development, and commercialize tests using our Tr-DNA technology. Our initial
focus is on two key applications: prenatal genetic testing and infectious
disease detection. If developed, we intend to sell these products to independent
clinical laboratories and hospital laboratories approved for performance of
high-complexity tests. We have completed our proof of principle studies in
these
two key areas and must now validate these findings in human clinical samples.
It
is expected that the next phase of product development will last throughout
the
2006 fiscal year. The next phase requires that we gain access to clinical
samples pertinent to each product focus. We have executed research contracts
with North Shore - Long Island Jewish (LIJ) Health System in Lake Success,
New
York and Eastern Virginia Medical School in Norfolk, Virginia. The research
contract with Long Island Jewish (LIJ) Health System is subject to approval
by
its Institutional Review Board (“IRB”). There can be no assurance that our
contract with North Shore Long Island Jewish (LIJ) Health System will be
approved by its IRB.
We
intend
to develop our infectious disease applications at SpaXen, S.R.L. our joint
venture with The Spallanzani National Institute for Infectious Diseases (“INMI”)
located in Rome Italy. Under the terms of our agreement with INMI, INMI provides
laboratory space to SpaXen and financial support in the form of chemicals and
scientific personnel to work on applications of the Tr-DNA technology for a
broad variety of infectious diseases. The Spallanzani Institute is a large
AIDS
treatment center and provides patient care to 4,000 infected patients. The
SpaXen joint venture provides access to needed human clinical samples for
development of our HIV and TB products. If our agreement with INMI is
terminated, we may not be able to gain access to needed human clinical samples
which will prevent us from developing FDA approved products and will severely
limit our ability to generate revenue through product sales.
Our
plan
of operation is to continue our product development in our two focus areas
of
prenatal genetic testing and infectious disease detection with a goal toward
eventually bringing FDA approved products to market. We anticipate that Tr-DNA
analysis will become a platform technology for development of tests for the
monitoring of tumor and pre-cancerous progression and post-treatment screening
for tumor re-growth conditions. The initial opportunities for diagnostic test
development are gastro-intestinal tumors, including colorectal cancer, liver
cancer and pancreatic cancer. Because cancer detection and monitoring studies
are long and expensive, we are actively seeking academic-based researchers
who
are funded to perform evaluations of new cutting-edge technologies. In this
way
we expect to progress our understanding of cancer detection and monitoring
with
little or no cost to us. We believe that our Tr-DNA technology can also be
used
to monitor organ transplant patients. Because organ rejection is marked by
early
death of cells, we believe that an early indication of rejection can be
identified by measuring a unique series of genetic markers of the organ donor
that can be detected in random urine samples of the organ recipient. Because
organ transplant monitoring is not truly "diagnostic," in the next fiscal year
we will begin to explore licensing arrangements with drug companies who
manufacture the immune-suppression drugs used to prevent organ rejection. If
we
can conclude a license agreement, this may provide an early source of revenue
for us. However, there can be no assurance that appropriate strategic
partnership or licensing arrangements will be completed in either of these
areas.
We
expect
it will take 2 to 3 years for our first product to be commercialized. During
the
second half of calendar 2006, with the addition of appropriate regulatory
personnel, we intend to create a good manufacturing practice, or GMP, compliant
manufacturing facility. At the same time, we must adopt the FDA Quality System
Regulations (QSR) system of documentation. In most cases, we expect to purchase
bulk quantities of specified raw materials and reagents from qualified vendors.
In some cases, we may synthesize certain materials and reagents. We expect
our
manufacturing facility to use bulk materials to assemble reagent sets, perform
quality control testing and package the reagent sets for shipping and
distribution. Because we do not have manufacturing experience, we may not be
able to establish a GMP compliant facility or develop reproducible and effective
manufacturing processes at a reasonable cost. In such event, we will have to
rely on third party manufacturers whose availability and cost is presently
unclear.
We
entered
into a lease for corporate office space in New York City comprising
approximately 2,000 square feet, for seven years ending September 30, 2011.
In
addition, we have leased a laboratory facility of approximately 3,700 sq. ft.
in
Monmouth Junction, New Jersey. We believe that these facilities, together with
laboratory facilities provided to SpaXen by INMI, will be adequate for our
anticipated level of activity during fiscal year 2006.
17
LIQUIDITY
AND CAPITAL RESOURCES.
As
of July
31, 2005 we had $6,261,544 in cash, cash equivalents and marketable investments,
compared to $3,226,965 as of January 31, 2005. This increase of approximately
$3,000,000 is the result of a net fund raising of approximately $5,100,000
less
$2,100,000 used for operating activities during the six months ended July
31,
2005.
On
January
28, 2005, the Company closed the first traunche of a private placement selling
1,368,154 shares of common stock and 367,681 warrants to certain investors
(the
"Investors"). The securities were sold as a unit (the "Units") at a price
of
$1.95 per Unit for aggregate proceeds of $2,667,900. Each Unit consisted
of one
share of common stock and a warrant to purchase one quarter share of common
stock. The warrants are immediately exercisable at $2.95 per share and are
exercisable at any time within five years from the date of issuance. The
Company
issued an aggregate 123,659 warrants to purchase common stock to various
selling
agents, which are immediately exercisable at $2.15 per share and will expire
five years after issuance.
On
February 5, 2005 the Company completed the first traunche of the private
placement described above selling an additional 104,564 shares of its common
stock to the Investors at a price of $1.95 per share for aggregate proceeds
of
$200,000. In addition, the Company paid an aggregate $179,600 in cash and
issued
24,461 shares of common stock to certain selling agents, in lieu of cash.
On
April
7, 2005, the Company closed the second and final traunche of the private
placement selling 1,515,384 shares of common stock and 378,846 warrants to
certain additional Investors for aggregate proceeds of $2,954,999. The Company
paid an aggregate $298,000 in fees and issued an aggregate 121,231 warrants
to
purchase common stock to selling agents. The warrants are immediately
exercisable at $2.15 per share and will expire five years after issuance.
These
April 7, 2005 Investors became parties to the same Registration Rights Agreement
as the January 28, 2005 Investors.
On
July
13, 2005, the Company closed a private placement of 277,100 shares of Series
A
Convertible Preferred Stock (the “Series A Preferred Stock”) and 386,651
warrants to certain investors for aggregate gross proceeds of $2,771,000
pursuant to a Securities Purchase Agreement dated as of July 13, 2005. The
warrants are immediately exercisable at $3.25 per share and are exercisable
at
any time within five years from the date of issuance. The Company paid an
aggregate $277,101 and issued an aggregate 105,432 warrants to purchase common
stock to certain selling agents. The warrants issued to selling agents are
immediately exercisable at $2.50 per share and will expire five years after
issuance.
Our
working capital requirements will depend upon numerous factors including
but not
limited to the nature, cost and timing of: product development; pre-clinical
and
clinical testing; obtaining regulatory approvals; technological advances
and our
ability to establish collaborative arrangements with research organizations
and
individuals needed to commercialize our products. Our capital resources will
be
focused primarily on the clinical development and regulatory approval of
our
Tr-DNA technology. We expect that our existing capital resources will be
sufficient to fund our operations for at least the next 12 months. We will
be
required to raise additional capital to complete the development and
commercialization of our current product candidates.
To
date,
our sources of cash have been primarily limited to the sale of our equity
securities. We cannot be certain that additional funding will be available
on
acceptable terms, or at all. Any debt financing, if available, may involve
restrictive covenants that impact our ability to conduct our business. If
we are
unable to raise additional capital when required or on acceptable terms,
we may
have to significantly delay, scale back or discontinue the development and/or
commercialization of one or more of our product candidates.
Our
Chief Executive Officer and Principal Financial Officer, based on evaluation
of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) required
by
paragraph (b) of Rule 13a-15 or Rule 15d-15, as of July 31, 2005 have concluded
that our disclosure controls and procedures were effective in ensuring
that
information required to be disclosed by us in the reports that we file
or submit
under the Exchange Act is recorded, processed, summarized and reported
within
the time periods specified in the Commission’s rules and forms. Our Chief
Executive Officer and Principal Financial Officer also concluded that,
as of
July 31, 2005 our disclosure controls and procedures are effective in ensuring
that information required to be disclosed by us in the reports that we
file or
submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Principal Financial Officer,
to allow
timely decisions regarding required disclosure.
18
There
were
no significant changes in our internal controls over financial reporting that
could significantly affect internal controls during the three months ended
July
31, 2005.
(a)
Exhibits
|
|
31.1
|
|
|
|
|
|
|
|
31.2
|
|
|
|
|
|
|
|
32.1
|
|
|
|
|
|
|
|
32.2
|
19
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.
Xenomics,
Inc .
(Registrant)
|
Date:
February 13, 2006
|
By:
|
/s/
V. Randy White
|
|
|
|
|||
| V. Randy White | |||
|
Chief
Executive Officer
|
|
Date:
February 13, 2006
|
By:
|
/s/
Frederick Larcombe
|
|
|
|
|||
| Frederick Larcombe | |||
|
Chief
Financial Officer
|
20
Index
to
Exhibits
|
Exhibit
|
Description
|
|
|
|
|
|
|
31.1
|
||
|
|
|
|
|
31.2
|
||
|
|
|
|
|
32.1
|
||
|
|
|
|
|
32.2
|
21
EXHIBIT
31.1
CERTIFICATION
I,
V.
Randy White, certify that:
1.
I have
reviewed this quarterly report on Amendment No.3 to Form 10-QSB of Xenomics,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and
have:
a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b)
[paragraph omitted in accordance with SEC transition instruction contained
in
SEC Release 34-47986]
c)
evaluated the effectiveness of the small business issuer's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5.
The
small business issuer's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the small business issuer's
board of directors (or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and
b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuers internal control over
financial reporting.
February
13, 2006
|
|
|
|
|
|
|
|
/s/
V. Randy White, Ph.D.
|
|
|
|
|
||
|
|
Name:
V. Randy White, Ph.D.
Title:
Chief Executive Officer
(Principal
Executive Officer)
|
||
EXHIBIT
31.2
CERTIFICATION
I,
Frederick Larcombe, certify that:
1.
I have
reviewed this Quarterly Report on Amendment No.3 to Form 10-QSB of Xenomics,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer's other certifying officer(s) and I are responsible
for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer
and
have:
a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b)
[paragraph omitted in accordance with SEC transition instruction contained
in
SEC Release 34-47986]
c)
evaluated the effectiveness of the small business issuer's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5.
The
small business issuer's other certifying officer(s) and I have disclosed,
based
on our most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the small business issuer's
board of directors (or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and;
b)
any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuers internal control over
financial reporting.
February
13, 2006
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/s/
Frederick Larcombe
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Name:
Frederick Larcombe
Title:
Chief Financial Officer
(Principal
Financial Officer)
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EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
XENOMICS,
INC.
AMENDMENT
NO.3 TO FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 2005
PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I
am the
Chief Executive Officer of Xenomics, Inc., a Florida corporation (the
"Company"). I am delivering this certificate in connection with the Amendment
No.3 to Form 10-QSB of the Company for the quarter ended July 31, 2005 and
filed
with the Securities and Exchange Commission ("Amendment No.2 to Form 10-QSB").
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge,
the Amendment No.3 to Form 10-QSB fully complies with the requirements of
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and
that
the information contained in the Amendment No.3 to Form 10-QSB fairly presents,
in all material respects, the financial condition and results of operations
of
the Company.
Date:
February 13, 2006
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/s/
V. Randy White
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Name:
V. Randy White, Ph.D.
Title:
Chief Executive Officer
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EXHIBIT
32.2
XENOMICS,
INC.
AMENDMENT
NO.3 TO FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 2005
PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I
am the
Chief Financial Officer of Xenomics, Inc., a Florida corporation (the
"Company"). I am delivering this certificate in connection with the Amendment
No.3 to Form 10-QSB of the Company for the quarter ended July 31, 2005 and
filed
with the Securities and Exchange Commission ("Amendment No.2 to Form 10-QSB").
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge,
the Amendment No.3 to Form 10-QSB fully complies with the requirements of
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and
that
the information contained in the Amendment No.3 to Form 10-QSB fairly presents,
in all material respects, the financial condition and results of operations
of
the Company.
Date:
February 13, 2006
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/s/
Frederick Larcombe
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Name:
Frederick Larcombe
Title:
Chief Financial Officer
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