SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Amendment
No. 3 to Form 10-KSB
(Mark
One)
xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended: January 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)
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Florida
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04-3721895
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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420
Lexington Avenue, Suite 1701, New York, New York 10170
(Address
of principal executive offices) (Zip Code)
(212)
297-0808
(Registrant's
telephone number)
Securities
registered pursuant to Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: None
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
Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
The
issuer's revenues for the year ended January 31, 2005 were $-0-.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on May 16, 2005, based on the closing bid
price
on such date, was $44,873,043.
As
of May 16, 2005 the issuer had a total of 18,949,300 shares of Common Stock
outstanding.
Transitional
Small Business Disclosure Format (Check one): oYes x
No
Explanatory
Note
This
Amendment No.3 to our Annual Report on Form 10-KSB includes restated audited
consolidated financial statements for the years ended January 31, 2005 and
2004,
and for the period from inception (August 4, 1999) to January 31, 2005, in
response to comments received by us from the Staff of the Securities and
Exchange Commission. We have determined that errors had occurred in these
prior financial periods for matters described in Item 6. Management's Discussion
and Analysis and Plan of Operation and in Note 2 to the Consolidated Financial
Statements. This Amendment speaks as of the original filing date of our Annual
Report on Form 10-KSB and has not been updated to reflect events occurring
subsequent to the original filing date.
XENOMICS,
INC.
AMENDMENT
NO. 3 TO FORM 10-KSB
INDEX
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PART
I
This
Amendment No.3 to Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. Such forward-looking statements are characterized
by
future or conditional verbs and include, but are not limited to, statements
regarding the results of product development efforts, clinical trials and the
scope and success of future operations. Such statements are only predictions
and
our actual results may differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include,
but
are not limited to, those discussed under "Risk Factors" and elsewhere in this
Amendment No.3 to Form 10-KSB for the year ended January 31, 2005, as filed
with
the Securities and Exchange Commission, including the uncertainties associated
with product development, the risk that products that appeared promising in
early clinical trials do not demonstrate efficacy in larger-scale clinical
studies, the risk that we will not obtain approval to market our products,
the
risks associated with dependence upon key personnel and the need for additional
financing. We do not assume any obligation to update forward-looking statements
as circumstances change.
We
are a development stage molecular diagnostic company that focuses on the
development of DNA-based tests using transrenal DNA or Tr-DNA. Tr-DNAs 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. Our patented technology uses safe and simple urine collection and
can
be applied to a broad range of testing including: prenatal genetic 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.
THE
TECHNOLOGY
Our
scientists were the first to report the discovery that a portion of cell-free
DNA found in the bloodstream can cross the kidney barrier and be detected in
the
urine. This is transrenal DNA or Tr-DNA. Urine analysis of Tr-DNA provides
a
simple, non-invasive method and a platform technology for a broad range of
diagnostic genetic tests. In comparison with conventional tests, this
methodology has significant advantages with respect to patient compliance,
ease
of testing, speed and cost. We own proprietary technology protected by broad
patents covering the fields of prenatal genetic diagnosis, cancer detection
and
transplantation. We expect pending patent applications to further extend
coverage to all diagnostic applications of Tr-DNA.
Our
Tr-DNA technology has been evaluated for applications in cancer in various
clinical studies and we have executed research contracts, subject to
Institutional Review Board, or IRB, approval, with North Shore - Long Island
Jewish (LIJ) Health System and Eastern Virginia Medical School to begin human
clinical studies for applications in prenatal genetic diagnosis. As a result,
our initial operations will focus on early product opportunities in prenatal
genetic diagnosis for disorders such as Down syndrome, Fragile X Syndrome,
Rh
incompatibility and gender determination. We plan to expand the prenatal testing
capabilities to include a comprehensive set of markers, and plan to develop
our
technology for diagnostic applications in cancer, infectious diseases and
transplantation.
We
plan to develop commercial diagnostic tests for which we will seek FDA approval.
Prior to FDA approval we expect these tests will be sold under the Analyte
Specific Reagent (ASR) rules for home-brew testing to laboratories licensed
under the Clinical Laboratory Improvement Act (CLIA) for performance of
high-complexity testing. FDA approval will allow us to sell to all hospital
and
independent testing laboratories. Of prime importance to our positioning in
the
market will be the need for adoption by key diagnostics laboratories and certain
diagnostic companies that will need access to our patents in order to enter
the
market for urine DNA testing.
THE
MARKET
We
believe that the market for Tr-DNA based diagnostic products is large and
growing. Based on various industry reports and the annual reports for several
large diagnostic companies, the market for DNA testing is over $2 billion in
the
United States alone. As this represents the initial stage of growth in the
use
of genetic testing it is anticipated that there will be significant market
expansion as new markers are discovered and validated for the diagnosis of
specific indications. The ease, non-invasive nature, and low cost of urine
analysis of nucleic acids suggest that our technology may ultimately become
the
method of choice for the majority of genetic tests.
PRENATAL
TESTING According to government statistics for 2004 there were 6.2 million
pregnancies in the United States alone. Those reports also show a current trend
in the United States that women are delaying having children until a later
age.
However, the risk of many genetic disorders increases with maternal age. An
example is Down syndrome where the risk is 1 in 1,400 for women 25 years of
age
and 1 in 380 for women 35 years of age. Today, the only prenatal test that
can
provide a definitive diagnosis of Down syndrome is amniocentesis. Because
amniocentesis has well known risks associated with the procedure, including
an
approximate 1% risk of spontaneous miscarriage, only about 10-15% of patients
who should have prenatal genetic tests according to physicians and genetic
counselors actually agree to undergo the amniocentesis procedure. The risk
of
spontaneous miscarriage limits the recommended use of amniocentesis to women
older than 35 years of age. Currently there are no tests available that provides
a definitive result for women who decline amniocentesis, or are younger than
35
years of age. Tests such as the "triple" screen or "quad" screen are available,
but these tests provide an assessment of risk, not a definitive result. In
addition, the best sensitivity reported in the scientific literature for these
is a 75% detection rate. If we succeed in developing a prenatal screening test
for Down syndrome with improved sensitivity compared to "triple" and "quad"
screen, we expect that patient compliance for recommended prenatal genetic
testing will increase significantly considering that donation of a urine
specimen is simple, risk-free to both the mother and the baby, and may be able
to be performed in the first trimester of pregnancy.
Initial
product focus in prenatal testing will be on diagnostic tests for Down syndrome,
Fragile X Syndrome, Rett syndrome, Rh incompatibility and gender determination.
The future pipeline in prenatal genetic testing may include tests for trisomy
18
and 13, Tay Sachs and Askenazi Jewish syndrome, Huntington's disease, sickle
cell anemia and other genetic disorders.
1
CANCER
TESTING It is anticipated 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 gastrointestinal
tumors, including colorectal cancer, liver cancer and pancreatic cancer. Our
technology was evaluated in a clinical study at Thomas Jefferson University
and
showed the ability to detect pre-cancerous colon polyps in patients undergoing
colonoscopy. About 160,000 new cases of colon cancer and 25,000 new cases of
pancreatic cancer occur in the United States each year. Routine testing is
recommended for the 60-70 million of people over 50 at risk for colorectal
polyps. Additional products in the oncology diagnostics pipeline are tests
for
the early detection of prostate cancer and other tumors as well as high-risk
pre-cancerous conditions.
Tr-DNA
products in the cancer diagnostic market can be expected to be highly
competitive based on cost, simplicity, and patient compliance. For example,
it
is likely that a urine test for patients at high-risk for pre-cancerous polyps
will have better acceptance than the more invasive colonoscopy. Additionally,
preliminary results with Tr-DNA associated with the Thomas Jefferson University
study suggest that Tr-DNA may have significantly greater sensitivity than many
existing tests such as Fecal Occult Blood Testing (FOBT).
TRANSPLANTATION
According to government statistics, there are approximately 50,000 organ
transplants performed in the U.S. annually. Post-transplant monitoring for
organ
rejection requires a highly invasive tissue biopsy. Approximately 10 biopsies
are taken over a period of one-year which results in approximately 500,000
tests/year market in the U.S. alone. Because organ rejection is marked by early
death of the cells, we believe that an early indication of rejection can be
identified by measuring a unique series of genetic markers characteristic of
the
organ donor that can be easily detected in random urine specimens from the
transplant recipient. Providing early evidence of tissue rejection is key to
administration and monitoring of immunosuppressive therapies. Opportunities
for
partnering with companies developing drugs for controlling tissue rejection,
companies developing cell transplantation, or companies developing novel
transplantation technologies illustrates the breadth of commercial potential
of
the Tr-DNA platform technology.
INFECTIOUS
DISEASES Agents such as viruses, bacteria and parasites that have precise
genetic signatures cause many infectious diseases. We recently reported clinical
data that demonstrated the ability to detect HIV-DNA in the urine of AIDS
patients and the DNA of common and multi-drug resistant strains of Mycobacterium
tuberculosis ("TB" and "MTB" respectively) in the urine of infected patients.
In
the case of the HIV virus, the sensitivity of the test under development allowed
90% detection of patients with residual disease; a stage at which the viral
load
of a patient is either barely detectable, or not detectable at all by
conventional methods. If developed, it can be expected that this test may
provide physicians with new information and assist in the treatment of AIDS.
According to the World Health Organization (WHO) the resurgence of tuberculosis
(TB), especially its multi-drug resistant strain (MTB), represents a critical
worldwide problem. The ability to simultaneously detect both TB and MTB from
a
simple urine sample suggests that tests based on Tr-DNA may be easier to collect
and perform in non-industrialized countries than with current culture-based
methods. An additional benefit of Tr-DNA testing is that urine does not contain
HIV and many other infectious agents, and thus is much less dangerous to
healthcare workers, whereas blood is highly infectious.
Tr-DNA
products in infectious disease can be expected to be highly competitive based
on
cost, simplicity and patient compliance, especially in non-industrialized
nations. The future pipeline for infectious disease products may include
extension of the technology to the detection of parasites, and/or applications
for combating bio-terrorism.
DRUG
DEVELOPMENT AND MONITORING OF THERAPEUTIC OUTCOMES The Tr-DNA technology has
significant potential as a means of monitoring clinical responses to new drugs
in development and evaluating patient-specific responses to already approved
therapies. Specific target applications include the monitoring of
transplantation patients on immunosuppressive drugs, detection of metastasis
following tumor surgery, monitoring of tumor progression during chemotherapy,
and the development of optimal hormonal and chemotherapeutic treatment
protocols.
One
of the largest costs associated with development of new drugs is the size of
the
human clinical trial required to identify the cohort of responders to the drug.
By measuring specific genetic markers it may be possible to pre-identify the
responding population. This would significantly reduce the cost to develop
a
drug. Alternately, in cancer treatment today, there is not a reliable way to
determine if a particular patient is responding to chemotherapy. Generally
patients are reexamined after a 60-day interval to determine if the tumor has
grown in size, reduced in size or remained the same. If the tumor has grown
in
size, or remained the same, the chemotherapy is adjusted. By measuring specific
genetic markers in the patient's urine pre and post chemotherapy, it may be
possible to determine whether a patient is responding to chemotherapy within
48
hours after administration instead of the current 60-day cycle. These
applications of Tr-DNA technology may permit therapeutic decisions on a
patient-specific basis. About 1.25 million new cancer cases are diagnosed
annually and there are several hundred companies developing chemotherapeutic
agents in the United States alone. This defines the size of the potential market
for applications of Tr-DNA technology in drug development and monitoring
therapeutic outcomes.
2
BUSINESS
STRATEGY
We
plan to use our Tr-DNA technology to develop FDA approved commercial diagnostic
products in each of our initial focus markets of prenatal genetic screening,
infectious disease and cancer monitoring, progression and re-growth. We expect
to sell our products to private independent medical laboratories, federal and
state medical laboratories and private and governmental hospitals. At the late
stages of development of each product while collecting clinical data for an
FDA
submission, we intend to market the products as ASR's to certain laboratories
approved under CLIA. There are approximately 3,000 CLIA licensed laboratories
in
the United States, but two laboratories, Quest Diagnostic and LabCorp represent
approximately 60% of the total market. CLIA laboratories may offer the tests
and
receive reimbursement under the "home brew" rules and we hope to establish
an
initial market presence and generate revenues prior to FDA approval.
If
we receive FDA approval for our products, we intend to market the tests to
medical testing laboratories. Approval by the FDA would enable us to file for
approval to market the tests in Europe. We have completed proof-of-principle
studies and developed the core capabilities for test development internally
and
manufacturing through contract suppliers. We intend to add dedicated product
development and regulatory personnel in order to speed up the development of
initial products and future diagnostic pipelines.
In
comparison with many other genetic tests, it is anticipated that the Tr-DNA
test
may significantly reduce costs as no surgical procedures (amniocentesis/tissue
biopsy) are involved and specimen preparation in the laboratory is simple and
can easily be automated. Currently, a large portion of the cost of performing
prenatal genetic testing is associated with the surgical procedure to collect
the sample from either amniotic fluid, chorionic villus sampling, or tissue
biopsy. For example, government statistics for Medicare and Medicaid
reimbursement show the typical cost for an amniocentesis is approximately
$1,200, but the laboratory charge for this procedure is around $400. Therefore,
major advantages of our Tr-DNA test, when commercially available, will be the
ease of sample collection and the corresponding reduced overall cost of each
test.
During
the last decade, medical laboratory operating margins have declined in the
face
of Medicare fee schedule reductions, managed care contracts, competitive bidding
and other cost containment measures. If our technology was commercially
available today, reimbursement would be available under the current procedural
terminology, or CPT, codes for molecular-based testing. We expect to initially
market our tests to medical laboratories at price points that we believe will
translate into substantially higher operating margins than has been traditional
in the laboratory industry; yet the overall cost to the healthcare system will
be reduced by elimination of the surgical component. We believe that will create
a strong incentive for laboratories to adopt our Tr-DNA test.
SPAXEN
JOINT VENTURE
In
March, 2004, we organized a joint venture with the Spallanzani National
Institute for Infectious Diseases (Instituto Nazionale per le Malattie
Infettive, "INMI") in Rome, Italy, in the form of a new R&D company called
SpaXen Italia, S.R.L ("SpaXen"). In laboratories provided to SpaXen within
INMI,
scientists work to apply the Tr-DNA technology to the development of new, truly
non-invasive test platforms for a broad variety of infectious diseases. Shares
of SpaXen are held 50% by INMI and 50% by us. SpaXen's deed of incorporation
(Costituzione Di Societa) dated March 11, 2004 provides, among other terms,
the
following:
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Corporate
capital: 200,000 Euros, of which INMI contributed 100,000 Euros
in cash
and we contributed intellectual property, as further described
below,
which was deemed to have a value of 100,000 Euros;
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Corporate
Term: Until December 31, 2009, unless extended or terminated prior
to that
date;
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Shareholder
Vote: All shareholder resolutions require a 2/3 super-majority except
for
certain resolutions regarding amendments to the deed of incorporation,
change of corporate purpose, and significant changes in shareholder
rights, among others, which require unanimous vote by the shareholders;
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Directors
and Officers: SpaXen will be managed by a sole managing director
or by a
board of directors; currently, SpaXen is being managed by a board
of
directors consisting of three directors, the chairman of which is
David L.
Tomei, who is also our chairman of the board; in addition, SpaXen
has
appointed a supervisory board (also referred to as "Board of Auditors"
in
SpaXen's deed of incorporation) consisting of three auditors and
two
deputies;
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Dissolution:
The shareholders of SpaXen may unanimously vote to dissolve SpaXen
prior
to the end of the Corporate Term.
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3
In
conjunction with the formation of SpaXen, we and INMI have entered into a
certain Shareholder Agreement, which provides, among other terms, the following
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As
its contribution to SpaXen, we agreed to assign to SpaXen all rights
and
patent applications to that portion of the Tr-DNA technology that
applies
Tr-DNA technology to the field of infectious diseases (the "Contributed
IP");
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All
profits of SpaXen will be reinvested into research and development
of
intellectual property applying Tr-DNA technology to pathologies caused
by
or associated with infectious agents (the "Newly Developed IP");
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INMI
will be the sole owner of all Newly Developed IP;
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SpaXen
will be the sole owner of all intellectual property derived from
SpaXen's
research that may be applied in fields other than pathologies caused
by or
associated with infectious agents (the "Derivative IP");
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We
will have royalty-free, perpetual, exclusive, worldwide commercialization
rights for Derivative IP;
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We
will have exclusive worldwide commercialization rights for Newly
Developed
IP in consideration for a license fee payment of not more than 10%
of net
proceeds of all products utilizing Newly Developed IP;
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The
initial term of commercialization rights for Newly Developed IP is
5 years
(commencing April 7, 2004), with the possibility of a 5 year extension;
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In
the event that a patent issues based on Newly Developed IP during
the term
of commercialization rights for Newly Developed IP, the commercialization
rights for Newly Developed IP will be extended for the duration of
such
patent; and
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Upon
dissolution of SpaXen, our commercialization rights for Newly Developed
IP
will terminate, the Contributed IP will revert back to us and all
capital
surplus will be paid to INMI;
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The
Shareholder Agreement stipulates SpaXen and we will enter into a Collaborative
Research and License Agreement, which will further define our respective
obligations and rights with respect to the above matters. We plan to begin
negotiations shortly.
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. There can be no assurance that the
Shareholder Agreement will continue and if the Shareholder Agreement is
terminated, we will have to find alternate sources for human clinical samples
and will have to hire and train adequate scientific personnel which will
significantly increase expenses. We may not be able to find alternate sources
for human clinical samples and may not be able to afford the personnel necessary
to continue development of infectious disease products
INTELLECTUAL
PROPERTY
We
consider the protection of our proprietary technologies and products to be
a
critical element in the success of our business. As of May 16, 2005, we had
3
issued U.S. patents expiring at varying dates, no issued foreign patents,and
a
number of pending patent applications filed in the U.S. and abroad. In addition
to pursuing patents and patent applications relating to our platform technology,
we have and may enter into other license arrangements to obtain rights to
third-party intellectual property where appropriate.
Wherever
possible we seek to protect our inventions through filing U.S. patents and
foreign counterpart applications in selected other countries. Because patent
applications in the U.S. are maintained in secrecy for at least eighteen months
after the applications are filed and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make the inventions covered by each of
our
issued or pending patent applications or that we were the first to file for
protection of inventions set forth in such patent applications. Our planned
or
potential products may be covered by third-party patents or other intellectual
property rights, in which case continued development and marketing of the
products would require a license. Required licenses may not be available to
us
on commercially acceptable terms, if at all. If we do not obtain these licenses,
we could encounter delays in product introductions while we attempt to design
around the patents, or could find that the development, manufacture or sale
of
products requiring these licenses is foreclosed.
We
may rely on trade secrets to protect our technology. Trade secrets are difficult
to protect. We seek to protect our proprietary technology and processes by
confidentiality agreements with our employees and certain consultants and
contractors. These agreements may be breached, we may not have adequate remedies
for any breach and our trade secrets may otherwise become known or be
independently discovered by competitors. To the extent that our employees or
our
consultants or contractors use intellectual property owned by others in their
work for us, disputes may also arise as to the rights in related or resulting
know-how and inventions.
4
MANUFACTURING
We
expect it will take 2 to 3 years for our first product to be commercialized.
During the second half of 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.
REIMBURSEMENT
Medicare
and other third-party payors will independently evaluate our technologies by,
among other things, reviewing the published literature with respect to the
results obtained from our clinical studies. Currently, CPT codes are available
which we believe will allow our technologies to be billed following completion
of a test prescribed (ordered) by a physician for a patient. We believe that
the
existence of current CPT codes with applicability to our screening test will
help facilitate Medicare's reimbursement process. During the development phase,
there can be no assurance that the rules connected with reimbursement will
remain constant. If the rules change significantly it may make our Tr-DNA test
non-reimbursable and would significantly reduce our ability to generate revenue.
GOVERNMENT
REGULATION
Regulation
by governmental authorities in the United States and other countries will be
a
significant factor in the production and marketing of any products that may
be
developed by us. The nature and the extent to which such regulation may apply
will vary depending on the nature of any such products. Virtually all of our
potential products will require regulatory approval by governmental agencies
prior to commercialization. It is our intention to submit and obtain FDA
approval for all of our diagnostic products.
Generally,
diagnostic products based upon our Tr-DNA technology, will require FDA approval
or clearance before they can be marketed for commercial distribution. Because
we
intend to apply for FDA approval for each of our developed products, at the
earliest stage of development we will have to adopt and adhere to design control
and documentation standards contained in the FDA Quality System Regulation.
This
will require significant training efforts and an increase in regulatory
personnel.
FDA
approval may be obtained through submission of a 510-K statement of equivalency,
or through a Pre-Market Approval (PMA) application. A 510-K submission requires
that we show equivalency of results in a clinical study with parallel comparison
against an existing and FDA-recognized reference method. We believe our initial
test for Down syndrome can receive approval under a 510-K process because
amniocentesis represents an adequate FDA-recognized reference test. However,
we
have not had any meetings with the FDA to verify this finding and there can
be
no assurance that we will succeed in obtaining FDA approval through the 510-K
application. If the FDA rejects our application for 510-K approval, we will
be
required to undertake a significantly longer and more extensive clinical study
to produce sufficient and compelling data for approval under a PMA application.
PMA applications evaluate the test on merits of the data alone. There can be
no
assurance that we will ever receive FDA approval for any of our diagnostic
products.
The
FDA also regulates the sale of certain reagents, including our potential
reagents, used by laboratories under the "home brew" rules to perform tests.
The
FDA refers to these reagents as Analyte Specific Reagents (ASR's). ASR's
generally do not require FDA pre-market approval or clearance if they are (i)
sold to clinical laboratories certified under the Clinical Laboratory
Improvement Act to perform high complexity testing and (ii) are labeled in
accordance with FDA requirements, including a statement that their analytical
and performance characteristics have not been established. The FDA also
regulates all promotional materials and specifically prohibits medical claims
and efficacy claims. However, prior to, or in lieu of FDA approval, we can
sell
our reagents to laboratories that meet the established criteria. Failure to
receive FDA approval would severely limit our customer base and significantly
impact the generation of revenues.
Even
if we receive FDA approval for our products, a number of other FDA requirements
apply to our manufacturing and distribution efforts. Medical device
manufacturers must be registered and their products listed with the FDA, and
certain adverse events, such as reagent failures, significant changes in quality
control and other events requiring correction and/or replacement/removal of
reagents must be documented and reported to the FDA. The FDA also regulates
the
product labeling, promotion, and in some cases, advertising, of medical devices.
As discussed above, we must comply with the FDA's Quality System Regulation
which establishes extensive requirements for design control, quality control,
validation and manufacturing. Thus, even with FDA approval, we must continue
to
spend time, money and effort to maintain compliance, and failure to comply
can
lead to enforcement action. The FDA periodically inspects facilities to
determine compliance with these and other requirements.
5
COMPETITION
The
medical diagnostic industry is characterized by rapidly evolving technology
and
intense competition. Our competitors include medical diagnostic companies,
most
of which have financial, technical and marketing resources significantly greater
than our resources. In addition, there are a significant number of biotechnology
companies working on evolving technologies that may supplant or make our
technology obsolete. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on
their
own or through joint venture. We are aware of certain development projects
for
products to prevent or treat certain diseases targeted by us. The existence
of
these potential products or other products or treatments of which we are not
aware, or products or treatments that may be developed in the future, may
adversely affect the marketability of products developed.
Currently,
the only definitive method for detecting prenatal Down syndrome is
amniocentesis. It is a highly invasive procedure that involves inserting a
long
needle into the amniotic sac and removing a portion of amniotic fluid.
Approximately 1% of the time, the procedure results in a spontaneous
miscarriage. For this reason, the procedure is only recommended for women older
than 35 years, where the risk of spontaneous miscarriage is similar to the
risk
of Down syndrome. Unfortunately, the largest number of Down syndrome births
occurs in the 17-35 year old group because this group represents the majority
of
the 6.2 million pregnancies.
Amniotic
fluid samples are sent to specialized "cytogenetic" laboratories where the
fetal
cells in the fluid are cultured for several days, then the chromatin material
is
harvested and the individual chromosomes are examined under a microscope. This
is a very slow, labor-intensive and highly skilled process, but it is considered
the standard of care and because it involves direct examination of the fetal
chromosomes is by definition 100% accurate. Government statistics indicate
that
approximately 200,000 amniocentesis are performed annually in the United States.
If our test is developed and found to be reliable, these cytogenetic
laboratories will be our direct competitors.
For
women who refuse amniocentesis, or are younger than 35 years, physicians opt
for
tests called the "Triple Screen", or "Quadruple Screen." These tests do not
provide a definitive diagnosis, only an estimate of the risk. The Triple and
Quadruple Screens measure three or four respectively, components of the mothers
blood and then apply a mathematical formula to calculate the risk. Virtually
all
laboratories perform the Triple and Quad screens. When the risk calculated
indicates that the patient may be carrying a Down affected fetus (generally
1:270), the patient is referred for amniocentesis to confirm the result.
However, the best sensitivity for the Triple and Quadruple Screen reported
in
the scientific literature is only 75% with a 5% false positive rate and they
can
only be performed in the second trimester (15-22 weeks) of pregnancy.
We
intend to initially market our test as a replacement for the Triple and Quad
screens. Unlike the Triple/Quad screen, we expect our test to provide a
definitive result. In addition, we expect our test will be a first trimester
test with results significantly earlier than the 15-22 weeks required for
triple/quad screen or amniocentesis. Because the amniocentesis test is regarded
as 100% accurate and is therefore the standard of care, we expect to initially
offer the Tr-DNA test as a pre-screen for amniocentesis replacing the
triple/quad screen. We expect that a negative result will be a reliable negative
and that a positive result will be confirmed by amniocentesis.
EMPLOYEES
As
of May 16, 2005 we had 9 full-time and 3 part-time employees. We believe our
employee relations are satisfactory.
AVAILABLE
INFORMATION
We
were incorporated in the State of Florida on April 26, 2002. On July 2, 2004,
we
acquired Xenomics, an unaffiliated California corporation by issuing 2,258,001
shares of our common stock to Xenomics' five shareholders in exchange for all
outstanding shares of Xenomics stock.
Our
principal executive office is located at 420 Lexington Avenue, Suite 1701,
New
York, New York 10170 and our telephone number is (212) 297-0808.
We
maintain a site on the World Wide Web at
www.xenomics.com; however, information found on our website is not incorporated
by reference into this report. We make available free of charge through our
website our Securities and Exchange Commission, or SEC, filings, including
our
annual report on Amendment No.2 to Form 10-KSB, quarterly reports on Form
10-QSB, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with,
or furnish it to, the SEC.
6
RISK
FACTORS
YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION
INCLUDED HEREIN AS WELL AS THE INFORMATION INCLUDED IN OTHER REPORTS AND FILINGS
MADE WITH THE SEC BEFORE INVESTING IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE HARMED. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE
DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS
RELATED TO OUR RESTATEMENTS
The
restatement of our consolidated financial statements could have a material
adverse impact on us, including the possibility of legal or administrative
proceedings.
We
determined that our consolidated financial statements for the year ended
January
31, 2005 as described in more detail in Management’s Discussion and Analysis of
Financial Condition and Plan of Operation and in Note 2 to our Consolidated
Financial Statements, should be restated. In the event litigation is pursued
or
other relief is sought by persons asserting claims for damages allegedly
resulting from or based on this restatement, or events related thereto, we
may
incur additional defense costs beyond our insurance coverage regardless of
their
outcome. Likewise, such events might cause a diversion of our management’s time
and attention. If we do not prevail in any such actions, we could be required
to
pay substantial damages or settlement costs.
We
have identified material weaknesses in our disclosure controls and procedures.
In addition, we may experience additional material weaknesses in the future.
Any
material weaknesses in our disclosure controls and procedures or our failure
to
remediate such material weaknesses could result in a material misstatement
in
our financial statements not being prevented or detected and could affect
investor confidence in the accuracy and completeness of our financial
statements, as well as our stock price.
We
have
identified material weaknesses in our disclosure controls and procedures
relating to recording of an incorrect charge for acquired in-process research
and development, improper recording of stock-based compensation expense and
insufficient communications and inadequate controls related to deferred stock
compensation. These material weaknesses and our remediation plans are described
further in “Management’s Discussion and Analysis of Financial Condition and Plan
of Operation” and in Item 8A Controls and Procedures. Material weaknesses in our
disclosure controls and procedures could result in material misstatements
in our
financial statements not being prevented or detected. We may experience
difficulties or delays in completing remediation or may not be able to
successfully remediate material weaknesses at all. Any material weakness
or
unsuccessful remediation could affect investor confidence in the accuracy
and
completeness of our financial statements, which in turn could harm our business
and have an adverse effect on our stock price and our ability to raise
additional funds.
RISKS
RELATED TO OUR BUSINESS
WE
ARE A DEVELOPMENT STAGE COMPANY AND MAY NEVER COMMERCIALIZE ANY OF OUR PRODUCTS
OR SERVICES OR EARN A PROFIT.
We
are a development stage company and have incurred losses since we were formed.
From our date of inception, August 4, 1999, through January 31, 2005, we have
accumulated a total deficit of $7,042,240. To date, we have experienced negative
cash flow from development of the Tr-DNA technology.
We currently have no products ready for commercialization, have not generated
any revenue from operations and expect to incur substantial net losses for
the
foreseeable future to further develop and commercialize the Tr-DNA technology.
We cannot predict the extent of these future net losses, or when we may
attain profitability, if at all. If we are unable to generate significant
revenue from the Tr-DNA technology or attain profitability, we will not be
able
to sustain operations.
WE
WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND
OUR FAILURE TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR
ELIMINATE OUR PRODUCT DEVELOPMENT PROGRAMS OR COLLABORATION EFFORTS.
To
date, our sources of cash have been primarily limited to the sale of our equity
securities. We currently have no credit facility or committed sources of
capital. If our capital resources are insufficient to meet future requirements,
we will have to raise additional funds to continue the development and
commercialization of our Tr-DNA technology.
We
cannot be certain that additional
funding will be available on acceptable terms, or at all. To the extent that
we
raise additional funds by issuing equity securities, our stockholders may
experience significant dilution. 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, restrict our
operations or obtain funds by entering into agreements on unattractive terms.
THE
COMMERCIAL SUCCESS OF OUR PRODUCT CANDIDATES WILL DEPEND UPON THE DEGREE OF
MARKET ACCEPTANCE OF THESE PRODUCTS AMONG PHYSICIANS, PATIENTS, HEALTH CARE
PAYORS AND THE MEDICAL COMMUNITY .
The
use of the Tr-DNA technology has never been commercialized for any indication.
Even if approved for sale by the appropriate regulatory authorities, physicians
may not order diagnostic tests based upon the Tr-DNA technology, in which event
we may be unable to generate significant revenue or become profitable.
Acceptance of the Tr-DNA technology will depend on a number of factors
including:
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acceptance
of products based upon the Tr-DNA technology by physicians and patients
as
safe and effective diagnostic products,
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adequate
reimbursement by third parties;
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cost
effectiveness;
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potential
advantages over alternative treatments; and
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relative
convenience and ease of administration.
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7
OUR FAILURE TO OBTAIN HUMAN URINE SAMPLES FROM
MEDICAL
INSTITUTIONS FOR OUR CLINICAL STUDIES WILL ADVERSELY IMPACT THE DEVELOPMENT
OF
OUR TR-DNA TECHNOLOGY.
We
have executed research contracts, subject to IRB approval, with North Shore
-
Long Island Jewish (LIJ) Health System in Lake Success, New York and Eastern
Virginia Medical School in Norfolk, Virginia in order to obtain human urine
samples from pregnant women for our clinical studies. There can be no assurance
we will receive IRB approval from these medical institutions. If we are not
able
to obtain IRB approval, we will not be able to perform the required clinical
studies to develop our Tr-DNA technology. Even if we obtain IRB approval,
we may
not be able to satisfy certain performance milestones required to continue
our
clinical studies. These performance milestones include:
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the
presence of sufficient Tr-DNA of fetal origin during first trimester
of
pregnancy to perform genetic testing;
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our
ability to reliably harvest Tr-DNA of fetal origin from random maternal
urine collection;
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developing
a method with sufficient sensitivity to provide a reliable "negative"
result; and
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developing
a method with an acceptable false positive rate.
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IF
OUR CLINICAL STUDIES DO NOT PROVE THE SUPERIORITY OF OUR TECHNOLOGIES, WE
MAY
NEVER SELL OUR PRODUCTS AND SERVICES.
The
results of our clinical studies may not show that tests using our Tr-DNA
technology are superior to existing testing methods. In that event, we will
have
to devote significant financial and other resources to further research and
development, and commercialization of tests using our technologies will be
delayed or may never occur. Our earlier clinical studies were small and included
samples from high-risk patients. The results from these earlier studies may
not
be representative of the results we obtain from any future studies, including
our next two clinical studies, which will include substantially more samples
and
a larger percentage of normal-risk patients.
OUR
INABILITY TO ESTABLISH STRONG BUSINESS RELATIONSHIPS WITH LEADING CLINICAL
REFERENCE LABORATORIES TO PERFORM TR-DNA TESTS USING OUR TECHNOLOGIES WILL
LIMIT
OUR REVENUE GROWTH.
A
key step in our strategy is to sell diagnostic products that use our proprietary
technologies to leading clinical reference laboratories that will perform Tr-DNA
tests. We currently have no business relationships with these laboratories
and
have limited experience in establishing these business relationships. If we
are
unable to establish these business relationships, we will have limited ability
to obtain revenues beyond revenue we can generate from our limited in-house
capacity to process tests.
OUR
FAILURE TO CONVINCE MEDICAL PRACTITIONERS TO ORDER TESTS USING OUR TECHNOLOGIES
WILL LIMIT OUR REVENUE AND PROFITABILITY.
If
we fail to convince medical practitioners to order tests using our technologies,
we will not be able to sell our products or license our technologies in
sufficient volume for us to become profitable. We will need to make leading
physicians aware of the benefits of tests using our technologies through
published papers, presentations at scientific conferences and favorable results
from our clinical studies. Our failure to be successful in these efforts would
make it difficult for us to convince medical practitioners to order Tr-DNA
tests
for their patients.
IF
WE LOSE KEY EMPLOYEES AND CONSULTANTS OR ARE UNABLE TO ATTRACT OR RETAIN
QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER
Our
success is highly dependent on our ability to attract and retain qualified
scientific and management personnel. We are highly dependent on our management
and scientific staff, including Dr. V. Randy White, Dr. Samuil Umansky and
Dr.
Hovsep Melkonyan. Dr. White has been critical to the development of our business
through his knowledge of the industry and his industry contacts. Drs. Umansky
and Melkonyan have been critical to the development of our Tr-DNA technology.
The loss of the services of any of Drs. White, Umansky and Melkonyan could
have
a material adverse effect on our operations. Although we have entered into
employment arrangements or agreements with each of Drs. White, Umansky and
Melkonyan, any of them may terminate his employment arrangement with us at
any
time on short notice. Accordingly, there can be no assurance that these
employees will remain associated with us. The efforts of these persons will
be
critical to us as we continue to develop our business and technology and as
we
attempt to transition from a development stage company to a company with
commercialized products and services. If we were to lose one or more of these
key employees, we may experience difficulties in competing effectively,
developing our technology and implementing our business strategies. Our planned
activities may require additional expertise in areas such as pre clinical
testing, clinical trial management, regulatory affairs, manufacturing and
marketing. Such activities may require the addition of new personnel and the
development of additional expertise by existing management personnel. We face
intense competition for such personnel from other companies, academic
institutions, government entities and other organizations, and there can be
no
assurance that we will be successful in hiring or retaining qualified personnel.
Our inability to develop additional expertise or to hire and retain such
qualified personnel could have a material adverse effect on our operations.
8
IF
WE ARE UNABLE TO MANAGE OUR ANTICIPATED GROWTH, WE MAY NOT BE ABLE TO DEVELOP
OUR BUSINESS.
Our
ability to develop our business requires an effective planning and management
process. We have 9 full-time and 3 part-time employees, as of May 16, 2005,
and
will need to hire additional employees in the near term. If we fail to identify,
attract, retain and motivate highly skilled personnel, we may be unable to
continue our development and commercialization activities.
We
expect that our anticipated future growth will place a significant strain on
our
management, systems and resources. To manage the anticipated growth of our
operations, we will need to increase management resources and implement new
financial and management controls, reporting systems and procedures. If we
are
unable to manage our growth, we maybe unable to execute our business strategy.
IF
WE DO NOT RECEIVE REGULATORY APPROVALS, WE WILL NOT BE ABLE TO DEVELOP AND
COMMERCIALIZE THE TR-DNA TECHNOLOGY.
We
need FDA approval to market products based on the Tr-DNA technology for
diagnostic uses in the United States and approvals from foreign regulatory
authorities to market products based on the Tr-DNA technology outside the United
States. If we fail to obtain regulatory approval for the marketing of products
based on the Tr-DNA technology, we will be unable to sell such products and
will
not be able to sustain operations.
The
regulatory review and approval process, which may include evaluation of
preclinical studies and clinical trials of products based on the Tr-DNA
technology, as well as the evaluation of manufacturing processes and contract
manufacturers' facilities, is lengthy, expensive and uncertain. Securing
regulatory approval for products based upon the Tr-DNA technology may require
the submission of extensive preclinical and clinical data and supporting
information to regulatory authorities to establish such products' safety and
effectiveness for each indication. We have limited experience in filing and
pursuing applications necessary to gain regulatory approvals.
Regulatory
authorities generally have substantial discretion in the approval process and
may either refuse to accept an application, or may decide after review of an
application that the data submitted is insufficient to allow approval of any
product based upon the Tr-DNA technology. If regulatory authorities do not
accept or approve our applications, they may require that we conduct additional
clinical, preclinical or manufacturing studies and submit that data before
regulatory authorities will reconsider such application. We may need to expend
substantial resources to conduct further studies to obtain data that regulatory
authorities believe is sufficient. Depending on the extent of these studies,
approval of applications may be delayed by several years, or may require us
to
expend more resources than we may have available. It is also possible that
additional studies may not suffice to make applications approvable. If any
of
these outcomes occur, we may be forced to abandon our applications for approval,
which might cause us to cease operations.
WE
MAY FACE SIGNIFICANT COMPETITION FROM LARGE BIOTECHNOLOGY, MEDICAL DIAGNOSTIC
AND OTHER COMPANIES WHICH COULD HARM OUR BUSINESS.
The
medical diagnostic industry is intensely competitive and characterized by rapid
technological progress. In each of our potential product areas, we face
significant competition from large biotechnology, medical diagnostic and other
companies. Most of these companies have substantially greater capital resources,
research and development staffs, facilities and experience at conducting
clinical trials and obtaining regulatory approvals. In addition, many of these
companies have greater experience and expertise in developing and
commercializing products.
Since
the Tr-DNA technology is under development, we cannot predict the relative
competitive position of any product based upon the Tr-DNA technology. However,
we expect that the following factors will determine our ability to compete
effectively: safety and efficacy; product price; turnaround time; ease of
administration; performance; reimbursement; and marketing and sales capability.
We
believe that many of our competitors spend significantly more on research and
development-related activities than we do. Our competitors may discover new
diagnostic tools or develop existing technologies to compete with the Tr-DNA
technology. Our commercial opportunities will be reduced or eliminated if these
competing products are more effective, are more convenient or are less expensive
than our products.
CHANGES
IN HEALTHCARE POLICY COULD SUBJECT US TO ADDITIONAL REGULATORY REQUIREMENTS
THAT
MAY DELAY THE COMMERCIALIZATION OF OUR TESTS AND INCREASE OUR COSTS.
Healthcare
policy has been a subject of discussion in the executive and legislative
branches of the federal and many state governments. We have developed a staged
commercialization strategy for our Tr-DNA tests based on existing healthcare
policies. Changes in healthcare policy, if implemented, could substantially
delay the use of our tests, increase costs, and divert management's attention.
We cannot predict what changes, if any, will be proposed or adopted or the
effect that such proposals or adoption may have on our business, financial
condition and results of operations.
REIMBURSEMENT
MAY NOT BE AVAILABLE FOR PRODUCTS BASED UPON THE TR-DNA TECHNOLOGY, WHICH COULD
IMPACT OUR ABILITY TO ACHIEVE PROFITABILITY.
Market
acceptance, sales of products based upon the Tr-DNA technology and our
profitability may depend on reimbursement policies and health care reform
measures.
9
The
levels at which government authorities and third-party payors, such as private
health insurers and health maintenance organizations, may reimburse the price
patients pay for such products could affect whether we are able to commercialize
our products. We cannot be sure that reimbursement in the U.S. or elsewhere
will
be available for any of our products in the future. If reimbursement is not
available or is limited, we may not be able to commercialize our products.
WE
WILL NEED TO DEVELOP STRATEGIC PARTNERSHIPS TO MARKET AND COMMERCIALIZE PRODUCTS
BASED UPON THE TR-DNA TECHNOLOGY
We
currently intend to develop strategic commercial partnerships to market any
future diagnostic products through third parties and will need to enter into
marketing arrangements with them. We may not be able to enter into marketing
arrangements with third parties on favorable terms, or at all. In the event
that
we are unable to enter into marketing arrangements for products based upon
the
Tr-DNA technology, we may not be able to develop an effective sales force to
successfully commercialize our products. If we fail to enter into marketing
arrangements for our future products and are unable to develop an effective
sales force, our revenues will be severely limited.
OTHER
COMPANIES MAY DEVELOP AND MARKET METHODS FOR PRE-NATAL TESTING, WHICH MAY MAKE
OUR TECHNOLOGIES LESS COMPETITIVE, OR EVEN OBSOLETE.
The
market for pre-natal testing is large and has attracted competitors, some of
which have significantly greater resources than we have. In the United States
alone, there are approximately 6.2 million pregnancies a year.
Currently,
we face competition from alternative procedure-based detection technologies
such
as triple-screen, quad-screen, ultrasound imaging, chorionic villus sampling
and
amniocentesis. We may be unable to compete effectively against these competitive
technologies either because the test is superior or because they are more
established, physicians have more experience with them or patients are better
educated about them.
IF
WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY EFFECTIVELY, WE MAY BE UNABLE
TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGIES, WHICH WOULD IMPAIR OUR
COMPETITIVE ADVANTAGE.
We
rely on patent protection as well as a combination of trademark, copyright
and
trade secret protection, and other contractual restrictions to protect our
proprietary technologies, all of which provide limited protection and may not
adequately protect our rights or permit us to gain or keep any competitive
advantage. If we fail to protect our intellectual property, we will be unable
to
prevent third parties from using our technologies and they will be able to
compete more effectively against us.
We
cannot assure you that any of our currently pending or future patent
applications will result in issued patents, or that any patents issued to us
will not be challenged, invalidated or held unenforceable. We cannot guarantee
you that we will be successful in defending challenges made in connection with
our patents and patent applications.
In
addition to our patents, we rely on contractual restrictions to protect our
proprietary technology. We require our employees and third parties to sign
confidentiality agreements and employees to also sign agreements assigning
to us
all intellectual property arising from their work for us. Nevertheless, we
cannot guarantee that these measures will be effective in protecting our
intellectual property rights.
WE
CANNOT GUARANTEE YOU THAT THE PATENTS ISSUED TO US WILL BE BROAD ENOUGH TO
PROVIDE ANY MEANINGFUL PROTECTION NOR CAN WE ASSURE YOU THAT ONE OF OUR
COMPETITORS MAY NOT DEVELOP MORE EFFECTIVE TECHNOLOGIES, DESIGNS OR METHODS
WITHOUT INFRINGING OUR INTELLECTUAL PROPERTY RIGHTS OR THAT ONE OF OUR
COMPETITORS MIGHT NOT DESIGN AROUND OUR PROPRIETARY TECHNOLOGIES.
If
we are not able to protect our proprietary technology, trade secrets and
know-how, our competitors may use our inventions to develop competing products.
We own certain patents relating to the Tr-DNA technology. However, these patents
may not protect us against our competitors, and patent litigation is very
expensive. We may not have sufficient cash available to pursue any patent
litigation to its conclusion because currently we do not generate revenues.
We
cannot rely solely on our current patents to be successful. The standards that
the U.S. Patent and Trademark Office and foreign patent offices use to grant
patents, and the standards that U.S. and foreign courts use to interpret
patents, are not the same and are not always applied predictably or uniformly
and can change, particularly as new technologies develop. As such, the degree
of
patent protection obtained in the U.S. may differ substantially from that
obtained in various foreign countries. In some instances, patents have issued
in
the U.S. while substantially less or no protection has been obtained in Europe
or other countries. We cannot be certain of the level of protection, if any,
that will be provided by our patents if we attempt to enforce them and they
are
challenged in court where our competitors may raise defenses such as invalidity,
unenforceability or possession of a valid license. In addition, the type and
extent of any patent claims that may be issued to us in the future are
uncertain. Any patents which are issued may not contain claims that will permit
us to stop competitors from using similar technology.
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WE
MAY INCUR SUBSTANTIAL COSTS TO PROTECT AND ENFORCE OUR PATENTS.
In
order to protect or enforce our patent rights, we may initiate actions against
third parties. Any actions regarding patents could be costly and time-consuming,
and divert our management and key personnel from our business. Additionally,
they could put our patents at risk of being invalidated or interpreted narrowly.
WE
MAY BE SUBJECT TO SUBSTANTIAL COSTS AND LIABILITY OR BE PREVENTED FROM SELLING
OUR DIAGNOSTIC TESTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS RELATING
TO
PATENT RIGHTS.
Third
parties may assert infringement or other intellectual property claims against
us. Because patent applications in the United States are maintained in secrecy
until a patent issues, others may have filed patent applications for technology
covered by our pending applications. There may be third-party patents, patent
applications and other intellectual property relevant to our potential products
that may block or compete with our products or processes. Even if third-party
claims are without merit, defending a lawsuit may result in substantial expense
to us and may divert the attention of management and key personnel. In addition,
we cannot assure you that we would prevail in any of these suits or that the
damages or other remedies if any, awarded against us would not be substantial.
Claims of intellectual property infringement may require us to enter into
royalty or license agreements with third parties that may not be available
on
acceptable terms, if at all. We may also become subject to injunctions against
the further development and use of our technology, which would have a material
adverse effect on our business, financial condition and results of operations.
Also, patents and applications owned by us may become the subject of
interference proceedings in the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to
us,
as well as a possible adverse decision as to the priority of invention of the
patent or patent application involved. An adverse decision in an interference
proceeding may result in the loss or rights under a patent or patent application
subject to such a proceeding.
THE
FOLLOWING RISKS RELATE PRINCIPALLY TO OUR COMMON STOCK AND ITS MARKET VALUE:
THERE
IS A LIMITED MARKET FOR OUR COMMON STOCK.
Our
common stock is quoted on the OTC Bulletin Board under the symbol "XNOM.OB."
There is a limited trading market for our common stock. Accordingly, there
can
be no assurance as to the liquidity of any markets that may develop for our
common stock, the ability of holders of our common stock to sell our common
stock, or the prices at which holders may be able to sell our common stock.
OUR
STOCK PRICE MAY BE VOLATILE.
The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
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technological
innovations or new products and services by us or our
competitors;
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clinical
trial results relating to our tests or those of our competitors;
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reimbursement
decisions by Medicare and other managed care organizations;
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FDA
regulation of our products and services;
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the
establishment of partnerships with clinical reference laboratories;
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health
care legislation;
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intellectual
property disputes;
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additions
or departures of key personnel;
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sales
of our common stock
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our
ability to integrate operations, technology, products and services;
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our
ability to execute our business plan;
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operating
results below expectations;
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loss
of any strategic relationship;
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industry
developments;
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economic
and other external factors; and
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period-to-period
fluctuations in our financial results.
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Because
we are a development stage company with no revenues to date, you may consider
any one of these factors to be material. Our stock price may fluctuate widely
as
a result of any of the above.
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also materially and
adversely affect the market price of the our common stock.
11
WE
HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.
We
have never paid cash dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
OUR
COMMON STOCK MAY BE DEEMED PENNY STOCK WITH A LIMITED TRADING MARKET.
Our
common stock is currently listed for trading on the OTC Bulletin Board which
is
generally considered to be a less efficient market than markets such as NASDAQ
or other national exchanges, and which may cause difficulty in conducting trades
and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than
$5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as
a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii)
to
obtain coverage for significant news events because major wire services, such
as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
We
entered into a lease for separate office space in New York, New York directly
from the unaffiliated landlord for September 2004 occupancy. The space is
approximately 2,000 square feet and the lease is 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.
We
are not a party to any pending legal proceedings.
There
were no matters submitted to a vote of security holders during the three months
ended January 31, 2005.
Our
common stock has been quoted on the OTC Bulletin Board under the symbol
"XNOM.OB" since July 27, 2004. Prior to such date, our common stock was quoted
on the OTC Bulletin Board under the symbol "UKAR.OB" but never traded. The
following table shows the reported high and low closing bid quotations per
share
for our common stock based on information provided by the OTC Bulletin Board.
Particularly since our common stock is traded infrequently, such
over-the-counter market quotations reflect inter-dealer prices, without markup,
markdown or commissions and may not necessarily represent actual transactions
or
a liquid trading market.
|
2004
|
HIGH
|
LOW
|
|||||
|
Fourth
Quarter
|
$
|
4.35
|
$
|
3.65
|
|||
|
Third
Quarter
|
3.80
|
2.75
|
|||||
12
NUMBER
OF STOCKHOLDERS
As
of May 16, 2005, there were 151 holders of record of our common stock.
DIVIDEND
POLICY
Historically,
we have not paid any dividends to the holders of our common stock and we do
not
expect to pay any such dividends in the foreseeable future as we expect to
retain our future earnings for use in the operation and expansion of our
business.
13
The
following discussion should be read in conjunction with our consolidated
financial statements and notes to those statements starting on page F-1 of
this
Annual Report on Form 10-KSB. In addition to historical information, the
following discussion and other parts of this annual 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 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
We
were incorporated in the State of Florida on April 26, 2002 as Used Kar Parts,
Inc. On July 2, 2004, we acquired Xenomics, an unaffiliated California
corporation (“Xenomics Sub”) by issuing 2,258,001 shares of our common stock to
Xenomics Subs’ five shareholders in exchange for all outstanding shares of
Xenomics Sub stock (the "Exchange"). Xenomics Sub was formed on August 4, 1999.
For accounting purposes, the acquisition has been treated as an acquisition
of
Used Kar Parts, Inc. by Xenomics Sub and as such a recapitalization of Xenomics
Sub. Accordingly, the historical financial statements from inception on August
4, 1999 to July 2, 2004 are those of Xenomics Sub
The
Exchange was made according to the terms of a Securities Exchange Agreement
dated May 18, 2004. As part of the Exchange, we:
|
|
•
|
amended
our articles of incorporation to change our corporate name to "Xenomics,
Inc." and to split our stock outstanding prior to the redemption
111 for 1
(effective July 26, 2004).
|
|
|
•
|
redeemed
1,971,734 pre-split shares (the equivalent of 218,862,474 post-split
shares) from Panetta Partners Ltd., a principal shareholder at the
time,
for $500,000 or $0.0023 per share.
|
|
|
•
|
entered
into employment agreements with two of the former Xenomics Sub
shareholders and a consulting agreement with one of the former Xenomics
Sub shareholders.
|
|
|
•
|
entered
into a Voting Agreement with certain investors, the former Xenomics
Sub
shareholders and certain principal shareholders.
|
|
|
•
|
entered
into a Technology Acquisition Agreement with the former Xenomics
Sub
shareholders under which we granted an option to the former Xenomics
Sub
holders to acquire Xenomics Sub technology if we fail to apply at
least
50% of the net proceeds of financing we raise to the development
of
Xenomics Sub technology during the period ending July 1, 2006 in
exchange
for all of our shares and share equivalents held by the former Xenomics
Sub holders at the time such option is exercised.
|
On
June 24, 2004, we entered into a voting agreement with L. David Tomei,
Co-Chairman, Samuil Umansky, President, Hovsep Melkonyan, Vice President,
Research, Anatoly Lichtenstein and Kathryn Wilke (collectively, the “Xenomics
Shareholders”), Panetta Partners Ltd., an affiliate of Gabriele M. Cerrone,
Etruscan Mobilia Investments, Ltd., Hawkeye Incubator Ltd. and Lazio Bioventure
Ltd. (collectively, the “Original Shareholders”) and Fimi, SPA, Blenton
Management, Roffredo Gaetani, Nicola Granato, R. Merrill Hunter, Mike Wilkins,
Christoph Bruening and Fossil Ventures LLC (collectively, the “Investors”)
pursuant to which so long as the Xenomics Shareholders own an aggregate 752,667
shares of common stock of our company, such Xenomics Shareholders shall have
the
right to (i) designate 1/3 of the members of the Board of Directors if the
number of directors on the Board is more than 7, (ii) designate 2 directors
if
the number of directors on the Board is between 5 and 7 or (iii) designate
1
director if the number of directors on the Board is less than 5. The voting
agreement will terminate upon the earlier of (a) the adjudication by a court
of
competent jurisdiction that our company is bankrupt or insolvent, (b) the filing
of a certificate of dissolution by us, (c) upon the written consent of us and
a
majority of the Xenomics Shareholders, (d) upon the listing of our shares of
common stock on NASDAQ or a national securities exchange, or (e) on June 15,
2007.
14
HISTORY (Continued)
We
are a party to a technology acquisition agreement dated June 24, 2004 with
L.
David Tomei, Chairman, Samuil Umansky, President, Hovsep Melkonyan, Vice
President, Research, Anatoly Lichtenstein and Kathryn Wilke (collectively,
the
“Shareholders”) and Xenomics Sub pursuant to which the Shareholders have the
option for a period of 90 days after the delivery of an accounting from us
(due
by August 1, 2006) to acquire the Tr-DNA technology from us in the event we
expended less than 50% of the aggregate net proceeds received by us from our
aggregate equity or debt financings during the two year period ending on July
2,
2006, on development of the Tr-DNA technology. Upon delivery of the exercise
notice by the Shareholders, we will have 90 days in which to remedy the
inadequacies in the exercise notice. In consideration for the acquisition of
the
Tr-DNA technology each Shareholder would transfer to us all of the shares of
our
common stock owned by such Shareholder as well as the market value of the shares
of common stock received in the Exchange but subsequently sold by such
Shareholder. In addition, all stock options and other rights to purchase common
stock owned by such Shareholder would be canceled. As of January 31 2005, we
have raised $4,379,352, net of finder’s fees and expenses, substantially all of
which is expected to be used on development of the Tr-DNA technology. As
additional capital is raised, we anticipate that substantially all of it will
be
used to develop the Tr-DNA technology.
Since
inception on August 4, 1999 through January 31, 2005, we have sustained
cumulative net losses of $7,042,240. Our losses have resulted primarily from
research and development expenses, patent costs and legal and accounting
expenses. From inception through January 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.
Restatement
of financial statements
The
consolidated financial statements contained within this report have been
restated to eliminate errors for the matters described below. For restatement
purposes in accordance with Generally Accepted Accounting Principles in the
United States, an error is defined as an oversight or misuse of facts that
existed at the time the financial statements were prepared.
The
following is a summary of those adjustments:
|
|
|
Year
Ended January 31, 2005 |
|
Year
Ended January
31, 2004
|
|||
|
Net
loss prior to adjustments
|
$
|
(3,336,018
|
)
|
$
|
(521
|
)
|
|
|
Reversal
of charge for acquired in-process research and
development
|
2,145,101
|
0
|
|||||
|
Deferred
founders' compensation contributed to capital
|
(74,404
|
)
|
(382,500
|
)
|
|||
|
Stock
based compensation:
|
|||||||
|
Adjustment
for Trilogy warrants
|
(2,630,440
|
)
|
0
|
||||
|
Adjustment
for use of quoted market price
|
(245,697
|
)
|
0
|
||||
|
Adjustment
for the application of EITF 96-18
|
(1,229,568
|
)
|
0
|
||||
|
(4,105,705
|
)
|
0
|
|||||
|
Total
adjustments:
|
(2,035,008 |
)
|
(382,500 |
)
|
|||
|
Net
loss as restated:
|
$
|
(5,371,026 |
)
|
$
|
(383,021 |
)
|
|
|
Weighted
average common shares
|
14,580,186
|
13,166,502
|
|||||
|
Loss
per share - Basic and diluted - Prior to adjustments
|
$
|
(0.23
|
)
|
$
|
(0.00
|
)
|
|
|
Loss
per share - Basic and diluted - Prior to adjustments
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
|
Reversal
Of Charge For Acquired In-Process Research And Development
- The
original accounting treatment for the acquisition of Xenomics Sub by Used
Kar
Parts, Inc. followed the legal form of the transaction and included a charge
to
expense for acquired in-process research and development. Upon subsequent
re-examination of the circumstances, it was determined that this transaction
should be accounted for as a reverse merger. Consequently, the charge to
expense
for acquired in-process research and development was reversed.
Deferred
Founders’ Compensation Contributed To Capital
-
Originally, there was no accounting recognition as management was not aware
of
the existence of deferred compensation agreements. When management became
aware
of such agreements and the founders did not seek to be paid these amounts,
the
amounts were accounted for as compensation contributed to capital.
Stock
Compensation - Adjustment For Trilogy Warrants
- The
original accounting treatment for warrants issued to Trilogy Capital Partners,
Inc. were viewed to be non-compensatory in nature. Upon subsequent
re-examination of the circumstances, they were determined to be compensatory
in
nature. Consequently, the fair value of such warrants were calculated and
recorded as expense.
Stock
Compensation - Adjustment Resulting From Use Of Quoted Market
Price
- The
original accounting treatment for stock based compensation was based upon
a
subjective determination of the most appropriate value of our common shares
to
be used in the Black-Scholes calculations. Specifically, we elected to use
$1.95
per share for such calculations, representing the sales price per
share from a recent financing transaction, rather than the quoted market
price
with a simple average of approximately $3.70 per share during the applicable
period. Upon subsequent re-examination of the circumstances, it was determined
that the use of the quoted market price was required by generally accepted
accounting principles. Consequently, the calculations were revised and
additional stock based compensation expense was recorded.
Stock
Compensation - Adjustment For The Application Of EITF 96-18
- The
original accounting treatment for options issued to Messrs. Cerrone and Tomei,
Co-Chairmen of the Board of Directors, assumed those individuals to be employees
and no expense was recorded. Upon subsequent re-examination of the
circumstances, it was determined that the options were deemed to relate to
consulting services beyond the normal scope of their roles as Directors and,
as
required by EITF 96-18, they were expensed and marked to market through January
31, 2005.
YEARS
ENDED JANUARY 31, 2005 AND 2004.
We
had no revenues during the years ended January 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 $5,377,036 during the year ended January 31, 2005 from
$397,047 for the same period in 2004. This increase reflects heightened business
activity since the recapitalization discussed elsewhere in this report. During
the year ended January 31, 2005 research and development expenses increased
to
$619,635 as compared to $383,564 during the year ended January 31, 2004,
reflecting higher salaries and wages, patent prosecution fees and legal
expenses, consultants and scientific advisors. General and administrative
expenses increased to $651,695 during the year ended January 31, 2005, as
compared to $13,483 during the year ended January 31, 2004, primarily reflecting
higher rent expenses for our newly opened New York office and laboratory space
in New Jersey, corporate legal and accounting, insurance and higher salaries
and
wages associated with hiring a CEO in September 2004. Included in operating
expenses during the year ended January 31, 2005 was non-cash stock-based
compensation expense of $$4,105,706 whereas there was no comparable expense
during the prior year. This expense consisted of $2,630,440 associated with
warrants issued to an investor relations consultant, whereas we had no such
expense during the year ended January 31, 2004. The balance consisted of options
issued to employees and other consultants for services rendered in a variety
of
capacities.
Net
loss for the year ended January 31, 2005 was $5,371,027 compared to a loss
of
$383,021 for the same period in 2004. The increase in the net loss in 2005
is
the result of higher operating expenses, as described above.
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. These research
contracts are subject to approval by the medical institutions respective IRB's
which oversee the conduct of all studies involving human subjects. There can
be
no assurance that our applications will be approved by the respective IRB's.
Because these studies are overseen by the respective IRB's, they can be
terminated for safety and efficacy issues. If we do not gain access to human
clinical samples, or do not complete the studies, this will prevent us from
developing FDA approved products and will severely limit our ability to generate
revenue through product sales.
15
We
intend to develop our infectious disease applications at SpaXen, our joint
venture with 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 the two focus areas
of prenatal genetic testing and infectious disease detection with a goal toward
eventually bringing FDA approved products to market. 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. 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 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.
LIQUIDITY
AND CAPITAL RESOURCES.
As
of January 31, 2005 we had $3,226,965 in cash and cash equivalents, compared
to
$339 as of January 31, 2004. This increase is the result of $4,379,352 cash
provided by the sale of common stock, net of related finders fees and expenses,
less $86,562 invested in new equipment for our New Jersey laboratory, and
$1,066,164 expended in operating activities.
On
July 2, 2004 we completed a private placement of 2,645,210 shares of our common
stock for aggregate proceeds of $2,512,950, or $0.95 per share. The sale was
made to 17 accredited investors directly by us without any general solicitation
or broker and thus no finder's fees were paid.
On
September 15, 2004 we entered into a seven year lease for our corporate
headquarters in New York City comprising 1,963 square feet with an approximate
fixed rent of $75,000 per year through 2011. On July 7, 2004, we entered into
a
two year lease for our laboratory in New Jersey comprising 3,698 square feet
with an approximate fixed rent of $7,400 per month through 2006.
On
January 28, 2005, we 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. We also
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.
16
On
February 5, 2005 we completed the first traunche of the private placement
described above selling an additional 102,564 shares of our common stock to
the
Investors at a price of $1.95 per share for aggregate proceeds of $200,000.
In
addition, we 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, subsequent to the balance sheet date, we closed the second and
final traunche of the private placement of 1,515,384 shares of common stock
and
378,846 warrants to certain additional Investors. The securities were sold
as a
unit (the "Units") at a price of $1.95 per Unit for aggregate proceeds of
$2,954,999. 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. We paid an aggregate $298,000 and issued an aggregate
121,231 warrants to purchase common stock to Axiom Capital Management who acted
as the selling agent. The warrants are immediately exercisable at $2.15 per
share, 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
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.
17
We
had no off-balance sheet arrangements as of January 31, 2005.
CONTRACTUAL
OBLIGATIONS AND COMMITTMENTS
The
following is a summary of our significant contractual cash obligations for
the
periods indicated that existed as of January 31, 2005, and is based on
information appearing in the Notes to Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-KSB:
|
Total
|
Less
than
1
Year
|
1-2
Years
|
3-5
Years
|
More
than
5
Years
|
||||||||||||
|
Operating
Leases
|
$
|
649,303
|
$
|
160,878
|
$
|
200,383
|
$
|
234,249
|
$
|
53,793
|
||||||
|
Employment
and Consulting Agreements
|
1,728,375
|
700,000
|
700,000
|
328,375
|
—
|
|||||||||||
|
|
||||||||||||||||
|
Total
obligations
|
$
|
2,377,678
|
$
|
860,878
|
$
|
900,383
|
$
|
562,624
|
$
|
53,793
|
||||||
CRITICAL
ACCOUNTING POLICIES
Financial
Reporting Release No. 60 requires all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our accounting policies are described in Note 3 of the notes to
our
consolidated financial statements included in this Annual Report on Form 10-KSB
for the fiscal year ended January 31, 2005. The financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America, which 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
reporting period. Actual results could differ from those estimates
Accounting
for Business Combinations - We have applied the Financial Accounting Standards
Board Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations" to the Exchange concluded on July 2, 2004. SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes
APB
Opinion No. 16, "Business Combinations" in its entirety. All business
combinations in the scope of this Statement are now to be accounted for using
only one method, the purchase method. The accompanying consolidated financial
statements of our company which include the results of Xenomics, Inc. a Florida
corporation and its wholly owned subsidiary Xenomics Sub have been prepared
in
accordance with SFAS No. 141 and we have determined that the acquiring entity
was Xenomics Sub. For accounting purposes, the acquisition has been treated
as
an acquisition of Xenomics Inc. (formerly Used Kar Parts, Inc.) by Xenomics
Sub
and as a recapitalization of Xenomics Sub. Accordingly, the historical financial
statements prior to July 2, 2004 are those of Xenomics Sub
Accounting
for stock based compensation: We have adopted Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As
provided for by SFAS 123, we have also elected to account for our stock-based
compensation programs according to the provisions of Accounting Principles
Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")."
Accordingly, compensation expense has been recognized based on the intrinsic
value of stock issued or options granted to employees and directors for services
rendered. Other stock based compensation associated with grants to
non-employees, as well as Directors who perform services outside of their Board
duties, is measured using the fair value method. We rely on incentive
compensation in the form of stock options to recruit, retain and motivate
directors, executive officers, employees and consultants. Incentive compensation
in the form of stock options is designed to provide long-term incentives,
develop and maintain an ownership stake and conserve cash during our development
stage. Since inception through January 31, 2005 stock based compensation expense
totaled $4,105,706 and our deferred unamortized stock-based compensation as
January 31, 2005 was $1,691,803.
A
total of 5,000,000 shares have been reserved for issuance under the Plan. As
of
January 31, 2005, options for 5,445,000 shares were outstanding under the Plan.
445,000 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 subject to stockholder approval a measurement
date has not occurred and no compensation expense has been recorded. When such
measurement date does occur, compensation expense will be recorded for any
excess of the fair market value on that date over the exercise price. Had the
445,000 options granted to employees and directors, subject to shareholder
approval, been approved on January 31, 2005 (the measurement date, on which
date
the market price of the Company’s stock was $4.20 per share) the Company would
have recognized approximately $200,000 of additional stock-based compensation
during the twelve months ended January 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 and accordingly we have made 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.
18
Accounting
for research and development: In accordance with SFAS No. 2, “Accounting for
Research and Development Costs” (“SFAS 2”) all research and development costs
are expensed as incurred. These include expenditures in connection with an
in-house research and development laboratory, salaries and staff costs,
application and filing for regulatory approval of our proposed products, patent
legal, filing and maintenance expenses, regulatory and scientific consulting
fees to outside suppliers.
The
full text of our audited consolidated financial statements for the fiscal years
ended January 31, 2005 and 2004 begins on page F-1 of this Annual Report on
Amendment No.2 to Form 10-KSB.
We
are
required to maintain disclosure controls and procedures that are designed
to
ensure that information required to be disclosed in our reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
In
connection with the preparation of Amendment No. 3 to Form 10-KSB for the
year
ended January 31, 2005, management, under the supervision of the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were not effective as of January 31, 2005 due to the errors outlined
below.
|
a)
|
Reversal
Of Charge For Acquired In-Process Research And
Development
-
The original accounting treatment for the acquisition of Xenomics
Sub by
Used Kar Parts, Inc. was erroneously accounted for as a conventional
acquisition rather than a reverse merger. This error resulted in
a charge
to expense for acquired in process research and development. The
cause of
this error was attributable to financial management’s lack of familiarity
with the accounting literature concerning when a business combination
should be accounted for as a reverse
merger.
|
|
b)
|
Deferred
Founders’ Compensation Contributed To Capital
-
Originally, there was no accounting recognition as financial management
was not aware of the existence of deferred compensation agreements.
This
resulted in an understatement of compensation expense. The cause
of this
error was attributable to inadequate communication within our
company.
|
|
c)
|
Stock
Compensation - Adjustment For Trilogy Warrants
-
The original accounting treatment for warrants issued to Trilogy
Capital
Partners, Inc. was erroneously viewed to be non-compensatory in
nature.
This error resulted in an understatement of compensation expense.
The
cause of this error was attributable to financial management’s lack of
familiarity with certain provisions of the accounting literature
concerning stock compensation
expense.
|
|
d)
|
Stock
Compensation - Adjustment Resulting From Use Of Quoted Market
Price
-
The original accounting treatment for stock based compensation
was based
upon a subjective determination of the most appropriate value of
our
common shares to be used in the valuation calculations. Specifically,
we
elected to use $1.95 per share for such calculations,
representing the sales price per share from a recent financing
transaction, rather than the quoted market price with a simple
average of
approximately $3.70 per share during the applicable period. This
error
resulted in an understatement of compensation expense. The cause
of this
error was attributable to financial management’s lack of familiarity with
certain provisions of the accounting literature concerning stock
compensation expense.
|
|
e)
|
Stock
Compensation - Adjustment For The Application Of EITF
96-18
-
The original accounting treatment for options issued to the Co-Chairmen
of
the Board of Directors erroneously assumed those individuals to
be
employees and no expense was recorded. This error resulted in an
understatement of compensation expense. The cause of this error
was
attributable to financial management’s lack of familiarity with certain
provisions of EITF 96-18 concerning stock compensation
expense.
|
We
have
implemented the
following measures to remediate the errors described above. We
are
committed to establishing the necessary environment to ensure the effectiveness
of these controls in the future and
quality
financial reporting. As described in detail in the following paragraphs,
we
appointed a new director as Chairman of the Audit Committee and designated
him
as the Audit Committee financial expert. Additionally we hired a Chief Financial
Officer. Communication has been improved through the inclusion of the Chief
Financial Officer in all meetings of the Board of Directors and the
establishment of a Disclosure Committee. Further, we have strengthened our
accounting staff through the hiring of additional personnel.
Personnel
Changes:
|
a)
|
On
December 1, 2005, the Board of Directors appointed
John Brancaccio as director and Chairman of the Audit Committee.
Mr.
Brancaccio is a retired Certified Public Accountant and has over
30 years
of financial management experience. He currently serves as the
Chief
Financial Officer of Accelerated Technologies, Inc., a medical
device
company, and on the boards of the following publicly-held companies:
Callisto Pharmaceuticals, Inc., Alfacell Corporation, and FermaVir
Pharmaceuticals, Inc. Mr. Brancaccio was formerly the acting Chief
Financial Officer and Treasurer of Memory Pharmaceuticals Corporation.
The
Board has designated Mr. Brancaccio as the audit
committee financial expert.
|
|
b)
|
On
January 16, 2006 we hired Frederick Larcombe as Chief Financial
Officer.
Mr. Larcombe is a Certified Public Accountant and has over twenty-five
years of financial management experience which includes serving
as Chief
Financial Officer and Vice President of Finance with MicroDose
Technologies, Inc., a privately held drug delivery company, and
ProTeam.com, Inc., a publicly held Internet-oriented retailer.
Prior to
that, he held financial positions with Cambrex Corporation, a
publicly-held life sciences company, and PriceWaterhouseCoopers.
|
Communication:
|
a)
|
Effective
January 2006, the Chief Financial Officer participates in all meetings
of
the Board of Directors;
|
|
b)
|
Effective
January 2006 discussions concerning all contracts, commitments,
and
general business activities include a member of the financial management
team;
|
|
c)
|
Effective
March 2006, a Disclosure Committee was established consisting of
the Chief
Executive Officer, Chief Financial Officer, and the Chairman of
the Audit
Committee which will meet periodically to ensure the identification
of key
business matters and ensure the adequacy of related disclosures;
and
|
|
d)
|
Effective
March 2006, resources supporting the accounting and reporting function
has
been strengthened with the addition of a more experienced individual.
Additionally, a search has been initiated for an individual to
fill the
role of accounting manager or
controller.
|
Except
for changes in connection with the remediation subsequent to January 31,
2005 of
the errors described above, there was no change in our internal control over
financial reporting that occurred subsequent to October 31, 2004 that has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
19
The
following table sets forth information regarding our executive officers and
directors as of May 16, 2005:
|
Name
|
Age
|
Positions
|
|
L.
David Tomei, Ph.D.
|
60
|
Chairman
of the Board, President , SpaXen Italia, srl
|
|
V.
Randy White, Ph.D.
|
58
|
Chief
Executive Officer and Director
|
|
Hovsep
Melkonyan, Ph.D.
|
53
|
Vice
President, Research
|
|
Bernard
Denoyer.
|
57
|
Vice
President - Controller
|
|
Samuil
Umansky, M.D., Ph.D.
|
63
|
President
and Chief Scientific Officer and Director
|
|
Christoph
Bruening.
|
37
|
Director
|
|
Thomas
Adams, Ph.D.
|
62
|
Director
|
|
Donald
H. Picker, Ph.D.
|
59
|
Director
|
L.
DAVID TOMEI, PH.D. Dr. Tomei, one of our founders, has served as Chairman of
the
Board of Directors since July 2, 2004. In 1998, Dr. Tomei co-founded Xenomics,
a
California corporation (previously known as Diagen, Inc.) and was its Chairman
until its acquisition by us on July 2, 2004. From August 1998 to January 1999,
Dr. Tomei lectured as a Visiting Professor at the University of Rome, Italy.
From September 1992 to July 1998, Dr. Tomei was a scientist with LXR
Biotechnology, Inc., a company of which he was one of the founders. Dr. Tomei
graduated from Canisius College (1968) and received his Master's of Science
(1971) in Biochemistry, and Doctorate in Molecular Pharmacology (1974) from
the
Roswell Park Cancer Institute Division of SUNY. From 1973 to 1975, he headed
the
FMD virus vaccine R&D laboratory at the Plum Island Animal Disease
Laboratory (USDA, ARS). Dr. Tomei was a scientist at Roswell Park and The Ohio
State University Cancer Center through 1992. Dr. Tomei has published over 140
scientific papers, two books (Cold Spring Harbor Laboratory Press), and holds
16
U.S. patents in the fields of biotechnology and optical design and engineering.
He organized the first International Conference on Apoptosis held at Cold Spring
Harbor, 1991, and, together with Luc Montagnier, organized the First
International Conference on Apoptosis and AIDS held in Paris, 1994. Dr. Tomei
devotes approximately 30 hours per week to his duties as President of SpaXen
Italia, Srl.
V.
RANDY WHITE, PH.D. Dr. White has served as our Chief Executive Officer since
September 3, 2004 and a director since October 2004. From January 2003 to
September 2004, Dr. White was Chief Operating Officer for Clinical Laboratory
Partners, Inc. From June 1, 2000 to December 31, 2002, Dr. White was the Chief
Executive Officer of Nanogen, Inc. From September 1997 to June 2000, Dr. White
was the Executive Vice President of Operations and Research and Development
for
American Medical Laboratories, Inc. From September 1975 to December 1992, Dr.
White served in various capacities including Senior Vice President of Operation
from 1985 to 1992 of National Health Laboratories Holdings Inc. Dr White earned
a Ph.D. degree in Analytical Chemistry from the University of Houston in 1972
and completed a post-doctoral training program in Clinical Chemistry at Damon
Medical Laboratories in Birmingham, Alabama in conjunction with the University
of Alabama at Birmingham in 1973.
HOVSEP
MELKONYAN, PH.D. Dr. Melkonyan has served as our Vice President, Research since
July 2004. Dr. Melkonyan graduated from Yerevan State University (Armenia)
in
1974 and received qualifications in two major subjects: physico-chemical
structure of DNA molecules and kinetics of enzymatic reactions. He completed
his
Ph.D. program in 1981 at the Institute of Biological Physics, USSR Academy
of
Science ("IBP"). Following graduate school, in 1982 Dr. Melkonyan joined The
Institute of Molecular Genetics of the Ministry of USSR Medical Industry. In
1993, Dr. Melkonyan moved to the U.S. and joined LXR Biotechnology, Inc. where
he remained until 1999. Dr. Melkonyan was a co-founder of Xenomics and was
a
director and Vice President of Xenomics from 1999 until its acquisition by
us on
July 2, 2004.
SAMUIL
R. UMANSKY, M.D., PH.D. Dr. Umansky, one of our founders, has served as our
President, Chief Scientific Officer and Director since July 2, 2004. Dr. Umansky
co-founded Xenomics with Dr. Tomei in 1998. From August 1997 to August 1999,
Dr.
Umansky was the Chief Scientific Officer of LXR Biotechnology, Inc. From January
1996 to 1997 he was LXR's Vice President of Molecular Pharmacology and prior
thereto, he was LXR's Director of Cell Biology. Dr. Umansky graduated from
Kiev
Medical School (USSR) in 1964. In 1968 he received a Ph.D. and in 1975 a Dr.Sci.
in radiobiology from IBP. From 1968 to 1993 Dr. Umansky was a professor at
IBP.
He was among the very first scientists to begin studies of apoptosis, or
programmed cell death. He performed pioneering studies on DNA degradation in
dying cells and proposed a hypothesis on the existence of a genetic cell death
program, its evolutionary origin and role in carcinogenesis, concepts that
more
recently have become widely accepted. In 1987, for achievements on the
investigation of radiation induced cell death, Dr. Umansky was awarded the
Soviet State Prize, the highest scientific honor awarded to a scientist in
the
Soviet Union. He is a co-founder of the USSR Radiobiological Society.
20
BERNARD
DENOYER, CPA. Mr. Denoyer has served as our Vice President and Controller since
February 2005. Since January 2004, Mr. Denoyer has also served as Vice
President, Finance for Callisto Pharmaceuticals, Inc., a public biotechnology
company. From July 2003 to December 2003, Mr. Denoyer served as an independent
consultant to Callisto providing interim CFO services. In addition, Mr. Denoyer
provided interim CFO and other services to emerging technology companies,
principally portfolio companies of Marsh & McLennan Capital, LLC, from
October 2000 to December 2003. From October 1994 until September 2000, Mr.
Denoyer served as Chief Financial Officer and Senior Vice President at META
Group, Inc., a public information technology research company and was
instrumental in their 1995 IPO. From 1990 to 1994 Mr. Denoyer served as Vice
President, Finance for Environetics, Inc. a biopharmaceutical water diagnostic
business acquired by IDEXX Laboratories in 1993. He earned his CPA with Ernst
& Young, has a B.A. in Economics from Fairfield University and an MBA in
Finance with honors from the Columbia Business School
CHRISTOPH
BRUENING Mr. Bruening has been a director of our company since February 2004
and
has served as our President, Secretary and Treasurer from February 2004 to
March
2005. Mr. Bruening has served as a Director of Callisto Pharmaceuticals, Inc.
since May 2003. Mr. Bruening organized Value Relations GmbH, a full service
investor relations firm operating in Frankfurt, Germany in 1999 and currently
serves as its Managing Partner. From 1998 to 1999, Mr. Bruening served as a
funds manager and Director of Asset Management for Value Management and Research
AG, a private investment fund and funds manager in Germany. From 1997 to 1998,
Mr. Bruening was a financial analyst and Head of Research for Value Research
GmbH. On February 26, 2004. In addition, Mr. Bruening is currently a member
of
the advisory board of Clarity AG.
THOMAS
ADAMS, PH.D. Dr. Adams has served as a director since October 2004. Dr. Adams
is
the founder and Chairman Emeritus of Genta, Inc., a publicly held biotechnology
company in the field of antisense technology, and, since September 1998, has
been chairman of the board of directors and Chief Executive Officer of Leucadia
Technologies, a privately held company in the field of medical devices. From
1989 to 1997, Dr. Adams served as Chief Executive Officer of Genta, Inc. In
1984, Dr. Adams founded Gen-Probe, Inc., a publicly held company that develops
and manufactures diagnostic products, and served as its Chief Executive Officer
and Chairman until its acquisition by Chugai Biopharmaceuticals, Inc. in 1989.
From 1980 to 1984, Dr. Adams was Senior Vice President of Research and
Development at Hybritech, which was later acquired by Eli Lilly and Company
in
1986. Dr. Adams has also held management positions at Technicon Instruments
and
the Hyland Division of Baxter Travenol, and served as a director of Biosite
Diagnostics, Inc., a publicly held medical research firm, from 1989 to 1998.
In
addition, Dr. Adams served as a director of XiFin, Inc., a privately held
application service provider focusing on the financial management needs of
laboratories, and Bio-Mems, a privately held company. Dr. Adams is a director
of
La Jolla Pharmaceutical Company. Dr. Adams holds a Ph.D. in Biochemistry from
the University of California at Riverside.
DONALD
H. PICKER, PH.D. Dr. Picker was appointed a director of the Company on July
2,
2004. He has served as Executive Vice President, R&D of Callisto
Pharmaceuticals, Inc. since April 2004. From May 2003 until April 2004, Dr.
Picker served as Senior Vice President, Drug Development of Callisto. Dr. Picker
was Chief Executive Officer and President of Synergy Pharmaceuticals Inc. and
a
member of its board of directors from 1998 to April 2003. From 1996 to 1998,
Dr.
Picker was President and Chief Operating Officer of LXR Biotechnology Inc.
From
1991 to 1996, he was Senior Vice President of Research and Development at Genta
Inc.
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
During
fiscal 2004, our common stock was not registered under Section 12 of the
Securities Exchange Act of 1934, as amended, and therefore our executive
officers, directors and ten percent or more beneficial holders of our common
stock were not subject to Section 16(a).
CODE
OF BUSINESS CONDUCT AND ETHICS
We
have adopted a formal Code of Business Conduct and Ethics applicable to all
Board members, executive officers and employees. A copy of this Code of Business
Conduct and Ethics is filed as an exhibit to this annual report.
AUDIT
COMMITTEE
The
audit committee's responsibilities include: (i) reviewing the independence,
qualifications, services, fees, and performance of the independent auditors,
(ii) appointing, replacing and discharging the independent auditors, (iii)
pre-approving the professional services provided by the independent auditors,
(iv) reviewing the scope of the annual audit and reports and recommendations
submitted by the independent auditors, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management
and
the independent auditors. The audit committee currently consists of Thomas
Adams
and Donald Picker. Our Board has determined that each of Mr. Adams and Mr.
Picker is "independent" as that term is defined under applicable SEC rules.
We
currently do not have an audit committee financial expert serving on our audit
committee. We expect to shortly appoint a director who qualifies as an "audit
committee financial expert" as defined in Item 401(e) of Regulation S-B
promulgated by the SEC.
21
COMPENSATION
COMMITTEE
We
have a compensation committee consisting of Thomas Adams and Donald Picker.
The
compensation committee reviews, and makes recommendations to the board of
directors regarding, the compensation and benefits of our chief executive
officer and other executive officers. The compensation committee also
administers the issuance of stock options and other awards under our stock
plan
and establishes and reviews policies relating to the compensation and benefits
of our employees.
The
following summary compensation table sets forth certain information concerning
compensation paid to our Chief Executive Officer and our four most highly paid
executive officers (the "Named Executive Officers") whose total annual salary
and bonus for services rendered in all capacities for the year ended January
31,
2005 was $100,000 or more on an annualized basis.
|
Annual
Compensation
|
||||||||||||||||
| Position |
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual
Compensation
($)
|
||||||||||||
|
L.
David Tomei, Ph.D. Chairman
|
2005
|
58,333
|
(1) |
|
—
|
—
|
||||||||||
|
V.
Randy White, Ph.D, Chief Executive Officer
|
2005
|
62,019
|
—
|
—
|
||||||||||||
|
Samuil
R.Umansky, M.D., Ph.D, President
|
2005
|
83,461
|
—
|
—
|
||||||||||||
|
Hovsep
Melkonyan, Ph.D, Vice President, Research
|
2005
|
69,153
|
—
|
—
|
||||||||||||
(1)
Dr. Tomei is being paid pursuant to a consulting agreement with us.
Prior
to the acquisition of Xenomics on July 2, 2004, Xenomics never paid compensation
to its executive officers.
Option
Grants in Fiscal Year 2005
The
following table sets forth certain information concerning grants of stock
options to the Named Executive Officers during the fiscal year ended January
31,
2005.
| Name |
Number
of Shares
Underlying
Options
Granted
|
Percent
of Total Options
Granted
to
Employees
in 2005
|
Exercise
Price
Per
Share
|
Expiration
Date
|
|||||||||
|
L.
David Tomei, Ph.D. Chairman
|
1,012,500
|
18.6%
|
|
$1.25
|
6/24/2014
|
||||||||
|
V.
Randy White, Ph.D, Chief Executive Officer
|
1,425,000
|
26.2%
|
|
$2.25
|
9/13/2014
|
||||||||
|
Samuil
R.Umansky, M.D., Ph.D, President
|
1,012,500
|
18.6%
|
|
$1.25
|
6/24/2014
|
||||||||
|
Hovsep
Melkonyan, Ph.D, Vice President, Research
|
675,000
|
12.4%
|
|
$1.25
|
6/24/2014
|
||||||||
22
The
following table provides certain information with respect to the Named Executive
Officers concerning the exercise of stock options during the fiscal year ended
January 31, 2005 and the value of unexercised stock options held as of such
date.
|
Number
of Shares Underlying Options at January 31, 2005
|
Value
of Unexercised In the Money Options at January 31, 2005
|
||||||||||||
| Name |
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
(1)
|
|||||||||
|
L.
David Tomei, Ph.D. Chairman
|
|
1,012,500
|
|
$
|
2,784,375
|
||||||||
|
V.
Randy White, Ph.D, Chief Executive Officer
|
|
1,425,000
|
|
$
|
2,493,750
|
||||||||
|
Samuil
R.Umansky, M.D., Ph.D, President
|
|
1,012,500
|
|
$
|
2,784,375
|
||||||||
|
Hovsep
Melkonyan, Ph.D, Vice President, Research
|
|
675,000
|
|
$
|
1,856,250
|
||||||||
During
the fiscal year ended January 31, 2005, no options were exercised.
(1)
Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying common stock using the closing price on the
OTC
Bulletin Board of $4.00 per share on January 31, 2005.
EMPLOYMENT
AGREEMENTS
On
February 14, 2005, we entered into an employment agreement with Bernard Denoyer,
pursuant to which Mr. Denoyer will serve as our Vice President-Controller for
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 our 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
September 3, 2004, Dr. White and the Company entered into a letter agreement.
Pursuant to the letter agreement, the Company will employ Dr. White as Chief
Executive Officer for a period of 3 years commencing September 13, 2004. Dr.
White will be paid an annual base salary of $215,000. We have agreed to rent
for
Dr. White's benefit a studio apartment in New York, New York.
Dr.
White was granted an aggregate 1,425,000 incentive stock options pursuant to
our
Plan with an exercise price of $2.25 per share. 300,000 of such options shall
vest on the first anniversary of the date of the Letter Agreement, 350,000
of
such options shall vest on the second anniversary of the date of the letter
agreement and 400,000 of such options shall vest on the third anniversary of
the
date of the letter agreement (the "Sale Options"). The remaining 375,000 options
shall vest in the event there is a sale of the Company for consideration equal
to $15.00 per share or more.
In
the event there is a sale of the Company for consideration exceeding $9.25
per
share, Dr. White shall be entitled to a cash bonus of $500,000 and all of his
unvested Sale Options shall immediately vest. In the event there is a sale
of
the Company for consideration equal to $15.00 per share or more, Dr. White
shall
be entitled to a cash bonus of $750,000. In addition, at any time during the
term of his employment, in the event the stock price of the common stock of
the
Company exceeds $9.25 per share for 60 consecutive trading days, all of Dr.
White's unvested Sale Options shall immediately vest.
On
July 2, 2004, we entered into an employment agreement with Samuil Umansky,
Ph.D., pursuant to which Dr. Umansky serves as our President and Chief
Scientific Officer. Dr. Umansky's employment agreement is for a term of 36
months beginning June 24, 2004 and is automatically renewable for successive
one
year periods at the end of the term. Dr. Umansky's salary is $175,000 per year
and he is eligible to receive a cash bonus of up to 50% of his salary per year.
In connection with the employment agreement, Dr. Umansky received a grant of
1,012,500 stock options which vest in annual installments of 253,125, 303,750
and 455,625 and are exercisable at $1.25 per share.
On
July 2, 2004, we entered into an employment agreement with Hovsep Melkonyan,
Ph.D., pursuant to which Dr. Melkonyan serves as Vice President, Research for
a
term of 36 months beginning June 24, 2004, which is automatically renewable
for
successive one year periods at the end of the term. Dr. Melkonyan's salary
is
$135,000 per year and he is eligible to receive a cash bonus of up to 50% of
his
salary per year. In connection with the employment agreement, Dr. Melkonyan
received a grant of 675,000 stock options which vest in annual installments
of
168,750, 202,500 and 303,750 and are exercisable at $1.25 per share.
On
July 2, 2004, we entered into a consulting agreement with L. David Tomei, Ph.D.,
pursuant to which Dr. Tomei agreed to serve as Co-Chairman of our Board. Dr.
Tomei's consulting agreement is for a term of 36 months beginning June 24,
2004
and is automatically renewable for successive one year periods at the end of
the
term. Dr. Tomei's annual consulting fee is $175,000 per year and he is eligible
to receive cash bonuses of up to 50% of his salary per year, or
$87,500, upon the achievement of certain milestones. Dr. Tomei received a
grant of 1,012,500 stock options which vest in annual installments of 253,125,
303,750 and 455,625 and are exercisable at $1.25 per share.
23
STOCK
OPTION PLAN
In
June 2004 we adopted the Xenomics Stock Option Plan, as amended (the "Plan").
We
rely on incentive compensation in the form of stock options to retain and
motivate directors, executive officers, employees and consultants. Incentive
compensation in the form of stock options is designed to provide long-term
incentives to directors, executive officers employees and consultants, to
encourage them to remain with us and to enable them to develop and maintain
an
ownership position in our common stock.
The
Plan authorizes the grant of stock options to directors, eligible employees,
including executive officers and consultants. The value realizable from
exercisable options is dependent upon the extent to which our performance is
reflected in the value of our common stock at any particular point in time.
Equity compensation in the form of stock options is designed to provide
long-term incentives to directors, executive officers and other employees.
We
approve the granting of options in order to motivate these employees to maximize
stockholder value. Generally, vesting for options granted under the Plan is
determined at the time of grant, and options expire after a 10-year period.
Options are granted at an excise price not less than the fair market value
at
the date of grant. As a result of this policy, directors, executives, employees
and consultants are rewarded economically only to the extent that the
stockholders also benefit through appreciation in the market. Options granted
to
employees are based on such factors as individual initiative, achievement and
performance. In administering grants to executives, we evaluate each executive's
total equity compensation package. We generally review the option holdings
of
each of the executive officers, including vesting and exercise price and the
then current value of such unvested options. We consider equity compensation
to
be an integral part of a competitive executive compensation package and an
important mechanism to align the interests of management with those of our
stockholders.
A
total of 5,000,000 shares have been reserved for issuance under the Plan. As
of
January 31, 2005, options for 5,445,000 shares were outstanding under our Stock
Option Plan. 445,000 of such options have been granted to subject to stockholder
approval of an increase in the number of shares that can be granted under the
plan. The options we grant under the Plan may be either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986,
as amended (the "Code"), or non-statutory stock options at the discretion of
the
Board of Directors and as reflected in the terms of the written option
agreement. The Plan is not a qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended (ERISA).
The
following table summarizes information about our equity compensation plans
as of
January 31, 2005.
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
Category
|
|
Number
of Shares of
Common
Stock to be
Issued
upon Exercise
of
Outstanding Options
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options
|
|
Number
of Options
Remaining
Available for
Future
Issuance Under
Equity
Compensation Plans
(excluding
securities reflected in column (a))
|
|||
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|||
|
|
|
|
|
|
|
|
|||
|
Equity
Compensation Plans Approved by Stockholders
|
|
5,000,000
|
|
$
1.50
|
|
0
|
|||
|
Equity
Compensation Plans Not Approved by Stockholders
|
|
1,956,341
|
|
$
2.71
|
|
n/a
|
|||
|
Total
|
|
6,956,341
|
|
$
1.84
|
|
0
|
|||
The
following table indicates beneficial ownership of our common stock as of May
16,
2005 by:
|
|
•
|
Each
person or entity known by us to beneficially own more than 5% of
the
outstanding shares of our common stock;
|
|
|
•
|
Each
of our executive officers and directors; and
|
|
|
•
|
All
of our executive officers and directors as a group.
|
Except
as otherwise indicated, the persons named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws, where applicable. Unless other indicated, the address
of each beneficial owner listed below is c/o Xenomics, Inc., 420 Lexington
Avenue, Suite 1701, New York, New York 10170.
|
Name
of Beneficial Owner
|
|
Number
of Shares
|
|
Percentage
of Shares Beneficially Owned (1)
|
|
|
|
|
|
|
|
Executive
officers and directors:
|
|
|
|
|
|
|
|
|
|
|
|
L.
David Tomei
|
|
1,191,485
(2)
|
|
6.2
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
|
|
|
V.
Randy White
|
|
0
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
|
|
Bernard
Denoyer
|
|
0
|
|
|
|
Vice
President, Controller
|
|
|
|
|
|
|
|
|
|
|
|
Samuil
Umansky
|
|
1,138,934
(3)
|
|
5.9
|
|
President,
Chief Scientific Officer
|
|
|
|
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
|
|
Hovsep
Melkonyan
|
|
517,553
(4)
|
|
2.7
|
|
Vice
President, Research
|
|
|
|
|
|
|
|
|
|
|
|
Christoph
Bruening
|
|
115,000
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
Donald
Picker
|
|
100,000
(5)
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Adams
|
|
0
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers
|
|
2,462,972
(6)
|
|
12.5
|
|
as
a group (8 persons)
|
|
|
|
|
|
|
|
|
|
|
|
Other
5% Stockholders:
|
|
|
|
|
|
Gabriele
M. Cerrone
|
|
1,181,358
(7)
|
|
6.1
|
*
less than 1%
(1)
Applicable percentage ownership as of May 16, 2005 is based upon 18,949,300
shares of common stock outstanding. Beneficial ownership is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended.
Under Rule 13d-3, shares issuable within 60 days upon exercise of outstanding
options, warrants, rights or conversion privileges ("Purchase Rights") are
deemed outstanding for the purpose of calculating the number and percentage
owned by the holder of such Purchase Rights, but not deemed outstanding for
the
purpose of calculating the percentage owned by any other person. "Beneficial
ownership" under Rule 13d-3 includes all shares over which a person has sole
or
shared dispositive or voting power whether or not such person has a pecuniary
interest in such shares for purposes of Section 16 of the Exchange Act.
25
(2)
Includes 253,125 shares issuable upon exercise of stock options.
(3)
Includes 253,125 shares issuable upon exercise of stock options.
(4)
Includes 168,750 shares issuable upon exercise of stock options.
(5)
Includes 75,000 shares issuable upon exercise of stock options.
(6)
Include 750,000 shares issuable upon exercise of stock options.
(7)
Consists of 262,500 shares issuable upon exercise of stock options owned by
Gabriele M. Cerrone and 918,858 shares of Common Stock owned by Panetta
Partners, Ltd.. Mr. Cerrone is the Managing Partner of Panetta Partners, Ltd.
and in such capacity exercises voting and dispositive control over
securities owned by Panetta. As such, Mr. Cerrone may be deemed, solely for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended,
to
"beneficially" own securities in which he has no pecuniary interest and he
therefore disclaims such beneficial interest for purposes of Section 16 of
the
Exchange Act.
As
part of our acquisition of Xenomics and the completion of the private placement,
we redeemed 1,971,734 pre-split shares (the equivalent of 218,862,474 post-split
shares) from Panetta Partners Ltd., our then single largest shareholder, for
$500,000. The principal purpose of the redemption was to lower the relative
percentage of shares owned by Panetta Partners compared to non-affiliates.
We
sold 100,000 of the 2,645,210 shares sold in the June 2004 private placement
to
Christoph Bruening, a director and officer.
26
|
Exhibit
|
Description
|
|
|
|
|
|
|
2.1
|
Capital
Stock Purchase Agreement between Panetta Partners, Ltd. And Jeannine
Karklins dated February 24, 2004 (1)
|
|
|
|
|
|
|
3.1
|
Articles
of Incorporation of the Company (2)
|
|
|
|
|
|
|
3.2
|
Articles
of Amendment to Articles of Incorporation of Used Kar Parts, Inc.
changing
its name to Xenomics, Inc., filed on July 14, 2004 with the Florida
Secretary of State (3)
|
|
|
|
|
|
|
3.2
|
Amended
and Restated By-Laws (4)
|
|
|
|
|
|
|
4.1
|
Form
of Stock Certificate, $.001 par value (5)
|
|
|
|
|
|
|
4.2
|
Form
of Warrant issued to Irv Weiman, Laura Dever and Len Toboroff (6)
|
|
|
|
|
|
|
4.3
|
Form
of Warrant issued to Trilogy Capital Partners, Inc. (7)
|
|
|
|
|
|
|
4.4
|
Form
of Warrant to purchase shares of Common Stock issued in connection
with
the sale of the Common Stock (8)
|
|
|
|
|
|
|
10.1
|
Xenomics,
Inc. 2004 Stock Option Plan (9)+
|
|
|
|
|
|
|
10.2
|
Securities
Exchange Agreement by and among Used Kar Parts, Inc., the Individuals
named on Schedule 1.1 thereto and Xenomics dated as of May 18, 2004.
(10)
|
|
|
|
|
|
|
10.3
|
Closing
Agreement entered into effective as of July 2, 2004 by and among
Used Kar
Parts, Inc., and Xenomics and L. David Tomei, Samuil Umansky, Hovsep
S.
Melkonyan, Kathryn P. Wilke and Anatoly V. Lichtenstein (11)
|
|
|
|
|
|
|
10.4
|
Technology
Acquisition Agreement dated effective as of June 24, 2004 by and
among
Used Kar Parts, Inc., and Xenomics and L. David Tomei, Samuil Umansky,
Hovsep S. Melkonyan, Kathryn P. Wilke and Anatoly V. Lichtenstein
(12)
|
|
|
|
|
|
|
10.5
|
Shareholder
Escrow Agreement effective as of the 24th day of June, 2004, by and
among
Used Kar Parts, Inc., Sommer & Schneider LLP, and the several former
shareholders of Xenomics. (13)
|
|
|
|
|
|
|
10.6
|
Purchaser
Escrow Agreement effective as of the 24th day of June, 2004, by and
among
Used Kar Parts, Inc., Sommer & Schneider LLP and the several former
shareholders of Xenomics (14)
|
|
|
|
|
|
|
10.7
|
Repurchase
Agreement dated as of June 24, 2004 by and between Used Kar Parts,
Inc.
and Panetta Partners Ltd. Xenomics, Inc. 2004 Stock Option Plan (15)
|
|
|
|
|
|
|
10.8
|
Executive
Employment Agreement dated effective as of June 24, 2004 by and among
Hovsep Melkonyan, Xenomics and Used Kar Parts, Inc. (16)+
|
|
|
|
|
|
|
10.9
|
Consulting
Agreement effective as of June 24, 2004 by and among L. David Tomei,
Xenomics and Used Kar Parts, Inc. (17)+
|
|
|
|
|
|
|
10.10
|
Voting
Agreement effective as of June 24, 2004 by and among L. David Tomei,
the
Xenomics Shareholders, the Original Shareholders and the Investors
(18)
|
27
|
10.11
|
Letter
Agreement dated September 3, 2004 between Xenomics, Inc. and Dr.
Randy
White (19)+
|
|
|
10.12
|
Letter
of Engagement between Trilogy Capital Partners, Inc. and Xenomics,
Inc.
dated January 10, 2005 (20)
|
|
|
10.13
|
Form
of Registration Rights Agreement, dated as of January 28, 2005 by
and
among the Registrant and the purchasers set forth on the signature
page
thereto (21)
|
|
|
10.14
|
Employment
Agreement dated February 14, 2005 between the Company and Bernard
Denoyer
(22)+
|
|
|
10.15
|
Shareholders
Agreement between the Company and the National Institute of Infectious
Diseases "Lazzaro Spallanzani" dated April 7, 2004 (23)
|
|
|
10.16
|
Executive
Employment Agreement dated effective as of June 24, 2004 by and among
Samuil Umansky, Xenomics and Used Kar Parts, Inc. (24)+
|
|
| 14 | Code of Business Conduct and Ethics (25) | |
| 16 |
Letter
from Baum & Company, PA Re: Change in Certifying Accountant (26)
|
|
| 31.1 |
Certification
of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a)
under
the Exchange Act
|
|
| 31.2 |
Certification
of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a)
under the Exchange Act
|
|
| 32.1 |
Certification
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 |
Certification
of Principal Financial Officer pursuant to 18 U.S.C Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
(1)
|
Incorporated
by reference to exhibit 10.1 to the Company's Current Report on Form
8-K
filed on March 11, 2004.
|
|
(2)
|
Incorporated
by reference to exhibit 3.1 to the Company's Form SB-2 Registration
Statement, as amended, filed June 25, 2003.
|
|
(3)
|
Incorporated
by reference to exhibit 3(i).1 to the Company's Current Report on
Form 8-K
filed on July 19, 2004.
|
|
(4)
|
Incorporated
by reference to exhibit 3(ii).1 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
|
|
(5)
|
Incorporated
by reference to exhibit 4 to the Company's Form SB-2 Registration
Statement, as amended, filed June 25, 2003.
|
|
(6)
|
Incorporated
by reference to exhibit 4.2 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(7)
|
Incorporated
by reference to exhibit 4.1 to the Company's Current Report on Form
8-K
filed on January 13, 2005.
|
|
(8)
|
Incorporated
by reference to exhibit 4.1 to the Company's Current Report on Form
8-K
filed on February 3, 2005.
|
|
(9)
|
Incorporated
by reference to exhibit 4.3 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(10)
|
Incorporated
by reference to exhibit 2.1 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
28
|
(11)
|
Incorporated
by reference to exhibit 2.2 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(12)
|
Incorporated
by reference to exhibit 2.3 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(13)
|
Incorporated
by reference to exhibit 2.4 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(14)
|
Incorporated
by reference to exhibit 99.2 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(15)
|
Incorporated
by reference to exhibit 2.6 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(16)
|
Incorporated
by reference to exhibit 99.3 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(17)
|
Incorporated
by reference to exhibit 99.4 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(18)
|
Incorporated
by reference to exhibit 99.5 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
(19)
|
Incorporated
by reference to exhibit 99.1 to the Company's Current Report on Form
8-K
filed on September 9, 2004.
|
|
(20)
|
Incorporated
by reference to exhibit 10.1 to the Company's Current Report on Form
8-K
filed on January 13, 2005.
|
|
(21)
|
Incorporated
by reference to exhibit 10.1 to the Company's Current Report on Form
8-K
filed on February 3, 2005.
|
|
(22)
|
Incorporated
by reference to exhibit 4.1 to the Company's Current Report on Form
8-K
filed on February 17, 2005.
|
|
(23)
|
Incorporated
by reference to exhibit 10.15 to the Company's Annual Report on Form
10-KSB filed on May 17, 2005.
|
|
|
|
|
(24)
|
Incorporated
by reference to exhibit 99.3 to the Company's Current Report on Form
8-K
filed on July 19, 2004.
|
|
|
|
|
(25)
|
Incorporated
by reference to exhibit 10.15 to the Company's Annual Report on Form
10-KSB filed on May 17, 2005.
|
|
(26)
|
Incorporated
by reference to exhibit 16.1 to the Company's Current Report on Form
8-K
filed on February 3, 2005.
|
|
+
Denotes a management contract or compensatory plan or arrangement
|
|
29
AUDIT
FEES.
The
aggregate fees billed and unbilled for the fiscal years ended January 31, 2005
and 2004 for professional services rendered by our principal accountants for
the
audits of our annual financial statements on Amendment No.2 to Form 10-KSB
and
the review of our financial statements included in our quarterly reports on
Form
10-QSB were approximately $28,271 and $8,000 respectively.
AUDIT-RELATED
FEES.
There
were no aggregate fees billed for the fiscal years ended January 31, 2005 and
2004 for assurance and related services rendered by our principal accountants
related to the performance of the audit or review of our financial statements.
TAX
AND OTHER FEES.
There
were no aggregate fees billed for the fiscal years ended January 31, 2005 and
2004 as there were no tax related or other services rendered by our principal
accountants in connection with the preparation of our federal and state tax
returns.
Consistent
with SEC policies and guidelines regarding audit independence, the Audit
Committee is responsible for the pre-approval of all audit and permissible
non-audit services provided by our principal accountants on a case-by-case
basis. Our Audit Committee has established a policy regarding approval of all
audit and permissible non-audit services provided by our principal accountants.
Our Audit Committee pre-approves these services by category and service. Our
Audit Committee has pre-approved all of the services provided by our principal
accountants.
30
Pursuant
to the requirements of Section 13 or 15D 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.
|
||
| |
|
|
| Date: March 15, 2006 | By: | /s/ L. David Tomei |
|
|
||
|
L.
David Tomei
Chief
Executive Officer and President
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
L. David Tomei
|
|
Co-Chairman
of the Board, Chief Executive Officer, President and President, SpaXen
Italia, srl
|
|
March
15, 2006
|
|
L.
David Tomei, Ph.D
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Gabriele M. Cerrone
|
|
Co-Chairman
of the Board
|
|
March
15, 2006
|
|
Gabriele
M. Cerrone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March —
, 2006
|
|
V.
Randy White, Ph.D
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Frederick Larcombe
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
March
15, 2006
|
|
Frederick
Larcombe
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Samuil Umansky
|
|
Chief
Scientific Officer and Director
|
|
March
15, 2006
|
|
Samuil
Umansky, M.D., Ph.D
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Christoph Bruening
|
|
Director
|
|
March
15, 2006
|
|
Christoph
Bruening
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John Brancaccio
|
|
Director
|
|
March
15, 2006
|
|
John
Brancaccio
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Donald H. Picker
|
|
Director
|
|
March
15, 2006
|
|
Donald
H. Picker, Ph.D
|
|
|
|
|
31
XENOMICS,
INC.
(A
Development Stage Company)
Index
to Restated Consolidated Financial Statements
|
|
|
PAGE
|
|
|
F-2
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
F-8
|
F-1
Board
of Directors and Stockholders
Xenomics,
Inc.
New
York, New York
We
have audited the accompanying consolidated balance sheet of Xenomics, Inc.
and
Subsidiary (a development stage company) (the "Company") as of January 31,
2005,
the related consolidated statements of operations, stockholders' equity and
cash
flows for the period from inception (August 4, 1999) to January 31, 2005 and
the
years ended January 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Xenomics, Inc.
and
Subsidiary as of January 31, 2005, and the results of their operations and
their
cash flows for the period from inception (August 4, 1999) to January 31, 2005
and the years ended January 31, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States.
As
discussed in Note 2 to the consolidated financial statements the accompanying
financial statements for the 2005 and 2004 years , and for the period from
inception (August 4, 1999) to January 31, 2005, have been restated.
|
|
|
|
|
|
/s/ Lazar
Levine & Felix LLP
|
|
|
|
||
|
|
Lazar
Levine & Felix LLP
|
|
New
York, New York
December
15, 2005
F-2
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEET - RESTATED
AS
OF JANUARY 31, 2005
ASSETS
|
Current
Assets:
|
|
|||
|
|
|
|||
|
Cash
and cash equivalents
|
$
|
3,226,965
|
||
|
Prepaid
expenses
|
35,360
|
|||
|
Total
Current Assets
|
3,262,325
|
|||
|
|
||||
|
Property
and equipment, net
|
77,495
|
|||
|
Security
deposits
|
58,173
|
|||
|
TOTAL
ASSETS
|
$
|
3,397,993
|
||
|
|
||||
|
|
||||
|
Current
Liabilities:
|
||||
|
Accounts
payable
|
$
|
95,063
|
||
|
Accrued
expenses
|
111,995
|
|||
|
Total
Current Liabilities
|
207,058
|
|||
|
|
||||
|
Stockholders'
equity:
|
||||
|
Preferred
stock, $.001 par value, 20,000,000 shares
|
||||
|
authorized,
none outstanding
|
—
|
|||
|
Common
stock, $.0001 par value, authorized 100,000,000
|
||||
|
shares,
17,306,891 issued at January 31, 2005
|
1,731
|
|||
|
Treasury
stock 350,000 common shares, at par
|
(35
|
)
|
||
|
Additional
paid-in-capital
|
11,923,282
|
|||
|
Deferred
unamortized stock-based compensation
|
(1,691,803
|
)
|
||
|
Deficit
accumulated during the development stage
|
(7,042,240
|
)
|
||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
3,190,935
|
|||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
3,397,993
|
||
See
accompanying notes
F-3
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS - RESTATED
|
For
the years ended January
31,
|
For
the
Period
from
August
4, 1999
(inception)
to
January
31,
|
|||||||||
|
2005
|
2004
|
2005
|
||||||||
|
Revenues
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
|
||||||||||
|
Costs
and Expenses:
|
||||||||||
|
Research
and development
|
619,635
|
383,564
|
2,290,327
|
|||||||
|
General
and administrative
|
651,695
|
13,483
|
666,242
|
|||||||
|
Stock-based
compensation - general and administrative
|
4,105,706
|
—
|
4,105,706
|
|||||||
|
|
5,377,036
|
397,047
|
7,062,275
|
|||||||
|
|
||||||||||
|
Loss
from operations
|
(5,377,036
|
)
|
(397,047
|
)
|
(7,062,275
|
)
|
||||
|
|
||||||||||
|
Interest
and other income
|
6,009
|
14,026
|
20,035
|
|||||||
|
|
||||||||||
|
Net
loss
|
$
|
(5,371,027
|
)
|
$
|
(383,021
|
)
|
$
|
(7,042,240
|
)
|
|
|
|
||||||||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
and diluted
|
14,580,186
|
13,166,502
|
11,988,509
|
|||||||
|
|
||||||||||
|
Net
loss per common share:
|
||||||||||
|
Basic
and diluted
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
$
|
(0.59
|
)
|
|
See
accompanying notes
F-4
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - RESTATED
|
|
|
Deficit
|
||||||||||||||||||||
|
Deferred
|
Accumulated
|
|||||||||||||||||||||
|
Additional
|
Unamortized
|
During
|
Total
|
|||||||||||||||||||
|
Common
Stock
|
Treasury
|
Additional
Paid
in
|
Stock-based
|
Development
|
Stockholder’s
|
|||||||||||||||||
|
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
|
)
|
|||||||
See
accompanying notes
F-5
XENOMICS,
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - RESTATED (Continued)
|
Deficit
|
||||||||||||||||||||||
|
Deferred
|
Accumulated
|
|||||||||||||||||||||
|
Additional
|
Unamortized
|
During
|
Total
|
|||||||||||||||||||
|
Common
Stock
|
Treasury
|
Paid
in
|
Stock-based
|
Development
|
Stockholders'
|
|||||||||||||||||
|
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
|
||||||||
See
accompanying notes
F-6
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS (RESTATED)
|
For
The Years ended January 31,
|
|
For
the Period from August 4, 1999
(inception) to January 31,
|
||||||||
|
2005
|
2004
|
2005
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(5,371,027
|
)
|
$
|
(383,021
|
)
|
$
|
(7,042,240
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
||||||||||
|
Depreciation
|
9,067
|
—
|
9,067
|
|||||||
|
Founders’
deferred compensation contributed
|
||||||||||
|
to
stockholder’s equity
|
74,404
|
382,500
|
1,655,029
|
|||||||
|
Stock-based
compensation expense
|
4,105,706
|
—
|
4,105,706
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Prepaid
expenses
|
(35,360
|
)
|
—
|
(35,360
|
)
|
|||||
|
Security
deposit
|
(58,173
|
)
|
—
|
(58,173
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
207,058
|
—
|
207,058
|
|||||||
|
Patent
Costs
|
2,162
|
365
|
—
|
|||||||
|
Total
Adjustments
|
4,304,863
|
382,865
|
5,883,327
|
|||||||
|
|
||||||||||
|
Net
cash used in operating activities
|
(1,066,164
|
)
|
(156
|
)
|
(1,158,913
|
)
|
||||
|
|
||||||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Acquisition
of equipment
|
(86,562
|
)
|
—
|
(86,562
|
)
|
|||||
|
Net
cash used in investing activities
|
(86,562
|
)
|
—
|
(86,562
|
)
|
|||||
|
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of common stock - net
|
5,180,850
|
—
|
5,273,938
|
|||||||
|
Redeemed
shares from Panetta Partners, Ltd.
|
(500,000
|
)
|
—
|
(500,000
|
)
|
|||||
|
Costs
associated with recapitalization
|
(301,498
|
)
|
—
|
(301,498
|
)
|
|||||
|
Net
cash provided by financing activities
|
4,379,352
|
—
|
4,472,440
|
|||||||
|
Net
increase(decrease) in cash and cash equivalents
|
3,226,626
|
(156
|
)
|
3,226,965
|
||||||
|
|
||||||||||
|
Cash
and cash equivalents at beginning of period
|
339
|
495
|
—
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
3,226,965
|
$
|
339
|
$
|
3,226,965
|
||||
|
|
||||||||||
|
Supplemental
disclosure of cashflow information:
|
||||||||||
|
|
||||||||||
|
Cash
paid for taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
See
accompanying notes
F-7
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
1.
BUSINESS OVERVIEW:
On
July 2, 2004, Xenomics, Inc., formerly Used Kar Parts, Inc. acquired all of
the
outstanding common stock of Xenomics Sub, a then un-affiliated California
corporation, by issuing 2,258,001 shares of Used Kar Parts, Inc. common stock
to
Xenomics Sub's five shareholders (the "Exchange"). The Exchange was made
according to the terms of a Securities Exchange Agreement dated May 18, 2004.
For accounting purposes, the acquisition has been treated as an acquisition
of
Used Kar Parts, Inc. by Xenomics Sub and as a recapitalization of Xenomics
Sub.
Accordingly, the historical financial statements prior to July 2, 2004 are
those
of Xenomics Sub. In connection with the Exchange, Used Kar Parts, Inc.:
|
|
•
|
Redeemed
1,971,734 shares (218,862,474 shares post-split shares) from Panetta
Partners Ltd., a principal shareholder, for $500,000 or $0.0023 per
share.
|
|
|
•
|
Amended
its articles of incorporation to change its corporate name to "Xenomics,
Inc." and to split its stock outstanding 111 for 1 (effective July
26,
2004), immediately following the redemption.
|
|
|
•
|
Entered
into employment agreements with two of the former Xenomics Sub
shareholders and a consulting agreement with one of the former Xenomics
Sub shareholders.
|
|
|
•
|
Entered
into a Voting Agreement with certain investors, the former Xenomics
Sub
shareholders and certain principal shareholders.
|
|
|
•
|
Entered
into a Technology Acquisition Agreement with the former Xenomics
Sub
shareholders under which Xenomics granted an option to the former
Xenomics
Sub holders to re-purchase Xenomics Sub technology if Xenomics fails
to
apply at least 50% of the net proceeds of financing it raises to
the
development of Xenomics Sub technology during the period ending July
1,
2006 in exchange for all Xenomics shares and share equivalents held
by the
former Xenomics Sub holders at the time such option is exercised.
|
|
|
•
|
Issued
and transferred 350,000 shares of common stock to be held in escrow,
in
the name of the Company, to cover any undisclosed liabilities of
Xenomics
Sub. Such shares as being treated as treasury shares. The escrow
period is
for one year to July 2, 2005 at which time a determination of liability
will be made.
|
The
combined entities (Xenomics, Inc. and Xenomics Sub, referred to as "Xenomics"
or
"the Company"), are considered to be in the development stage. Since inception
August 4, 1999 the Company's efforts have been principally devoted to research
and development, securing and protecting our patents and raising capital. From
inception through January 31, 2005, Xenomics has sustained cumulative net losses
of $7,042,240. Xenomics's losses have resulted primarily from expenditures
incurred in connection with research and development activities, application
and
filing for regulatory approval of our 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. From inception through January 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, the nature and
timing of costs and competing technologies being developed by organizations
with
significantly greater resources.
F-8
2.
BASIS OF PRESENTATION :
The
accompanying 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 accounting principles generally accepted in the United States
of
America ("GAAP"). All significant intercompany balances and transactions have
been eliminated in consolidation.
RESTATEMENT:
On
September 2, 2005 and November 28, 2005 the Company received comment letters
from the Securities and Exchange Commission (the“SEC”) concerning its Form SB-2
which was filed with the SEC by the Company on August 1, 2005 and amended on
October 28, 2005. The Company’s consolidated financial statements for the year
ended January 31, 2005 which were incorporated into Form SB-2, have been
restated in response to certain of the SEC comments.
The
following is a summary of the impact of these adjustments on net loss for the
years ended January 31, 2005 and 2004 and for the period from August 4, 1999
(Inception) through January 31, 2005:
|
2005
|
2004
|
From
Inception
|
||||||||
|
Net
loss -- as reported
|
$
|
(3,336,018
|
)
|
$
|
(521
|
)
|
$
|
(3,426,606
|
)
|
|
|
Deferred
founders compensation
|
||||||||||
|
contributed
to equity (see footnote 9)
|
(74,404
|
)
|
(382,500
|
)
|
(1,655,029
|
)
|
||||
|
To
reverse purchased in process research
|
||||||||||
|
and
development expense
|
2,145,101
|
—
|
2,145,101
|
|||||||
|
Additional
stock-based compensation
|
||||||||||
|
(see
footnotes 3,6 and 9 below)
|
(4,105,706
|
)
|
—
|
(4,105,706
|
)
|
|||||
|
Net
loss - restated
|
$
|
(5,371,027
|
)
|
$
|
(383,021
|
)
|
$
|
(7,042,240
|
)
|
|
|
Loss
per share
|
||||||||||
|
Basic
and diluted -- as reported
|
$
|
(0.23
|
)
|
$
|
(0.00
|
)
|
$
|
(0.29
|
)
|
|
|
Loss
per share
|
||||||||||
|
Basic
and diluted -- restated
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
$
|
(0.59
|
)
|
None
of the above adjustments had any impact on Cash or Stockholders Equity.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
COMBINATIONS - Xenomics has applied Financial Accounting Standards Board
Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations" to the Exchange concluded on July 2, 2004. SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes
APB
Opinion No. 16, "Business Combinations" in its entirety. All business
combinations in the scope of this Statement are now to be accounted for using
only one method, the purchase method. The accompanying consolidated financial
statements have been prepared in accordance with SFAS No. 141 and the Company
has determined that the acquiring entity, for accounting purposes, was Xenomics
Sub.
Thus,
while Xenomics, Inc. is the parent and registrant, the results of operations
of
Xenomics, Inc., the legal acquirer, are included in the consolidated statement
of operations only since July 2, 2004 and the date of "inception" for accounting
and reporting purposes is August 4, 1999, the date of incorporation of Xenomics
Sub.
USE
OF ESTIMATES - The preparation of financial statements in conformity with GAAP
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 reporting period. Actual results could differ
from those estimates.
CASH
EQUIVALENTS - Cash and cash equivalents consist of short term, highly liquid
investments, with original maturities of less than three months when purchased
and are stated at cost.
F-9
FAIR
VALUE OF FINANCIAL INSTRUMENTS - Xenomics's financial instruments consist of
cash and accounts payable. These financial instruments are stated at their
respective carrying values which are equivalent to fair value due to their
short
term nature.
BUSINESS
CONCENTRATIONS AND CREDIT RISKS - All of Xenomics's cash and cash equivalents
as
of January 31, 2005 are on deposit with a major money center financial
institution. Deposits at any point in time may exceed federally insured limits.
PROPERTY
AND EQUIPMENT - Fixed assets are recorded at cost. Depreciation and amortization
are provided on a straight-line basis over the estimated useful lives of the
assets as follows: furniture and fixtures - 3 years, lab equipment - 5 years.
IMPAIRMENT
OF LONG LIVED ASSETS - In accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, Xenomics evaluates long-lived
assets, such as property and equipment and intangible assets subject to
amortization for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset to estimated undiscounted future cash flows expected to be generated
by
the asset. If the carrying amount of an asset exceeds its estimated undiscounted
future cash flows, an impairment charge would be recognized as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the consolidated
balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the consolidated
balance sheet.
RESEARCH
AND DEVELOPMENT - Xenomics does not currently have any commercial molecular
diagnostic products, and does not expect to have such for several years, if
at
all. In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard (“SFAS”) No. 2, “Accounting for Research and
Development Costs” all research and development costs are expensed as incurred.
These include expenditures in connection with an in-house research and
development laboratory, salaries and staff costs, application and filing for
regulatory approval of our proposed products, patent legal, filing and
maintenance expenses and regulatory and scientific consulting fees to outside
suppliers.
INCOME
TAXES - Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates expected
to be in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided if it is more likely than not that some or
the
entire deferred tax asset will not be realized.
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 exercise of stock options and
warrants, would have been antidilutive. As of January 31, 2005 Xenomics had
5,445,000 stock options outstanding, whereas none were outstanding as of January
31, 2004. In addition Xenomics had 1,511,342 common stock warrants outstanding
which were 100% vested as of January 31, 2005 and none outstanding as of January
31, 2004. All share and per share amounts have been restated to reflect the
111
for 1 stock split which was effective July 26, 2004 as discussed in Note 1.
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 also 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")." Accordingly, compensation expense has been recognized
based on the intrinsic value of stock issued or options granted to employees
and
directors for services rendered. Other stock based compensation associated
with
grants to non-employees, as well as Directors who perform services outside
of
their Board duties, is measured using the fair value method. We rely on
incentive compensation in the form of stock options to recruit, retain and
motivate directors, executive officers, employees and consultants. Incentive
compensation in the form of stock options is designed to provide long-term
incentives, develop and maintain an ownership stake and conserve cash during
our
development stage. Since inception through January 31, 2005 stock based
compensation expense totaled $4,105,706 and our deferred unamortized stock-based
compensation as January 31, 2005 was $1,691,803
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 annual
(see below) and interim financial statements about the method of accounting
for
stock-based employee compensation and the effect of the method used on reported
results.
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:
F-10
|
Years
Ended January
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
loss, as reported
|
$
|
(5,371,027
|
)
|
$
|
(383,021
|
)
|
|
|
|
|||||||
|
Add:
Stock-based employee compensation expense
|
|||||||
|
recorded
under APB No. 25 intrinsic value method
|
245,697
|
—
|
|||||
|
|
|||||||
|
Deduct:
Stock-based employee compensation
|
|||||||
|
expense
determined under fair value based method
|
|||||||
|
for
all employee awards
|
(499,130
|
)
|
—
|
||||
|
Pro
forma net loss
|
$
|
(5,624,458
|
)
|
$
|
(383,021
|
)
|
|
|
|
|||||||
|
Net
loss per share:
|
|||||||
|
Basic
and diluted -as reported
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
|
|
Basic
and diluted -pro forma
|
$
|
(0.39
|
)
|
$
|
(0.03
|
)
|
|
|
Range
of fair value per share for
|
|||||||
|
options
granted to employees
|
|
$0.02
to $0.59
|
N/A
|
||||
|
|
|||||||
|
Black-Scholes
Methodology Assumptions:
|
|||||||
|
|
|||||||
|
Dividend
yield
|
0%
|
|
0%
|
|
|||
|
Risk
free interest rate
|
4.25%
|
|
N/A
|
||||
|
Expected
lives of options
|
7
years
|
N/A
|
|||||
Volatility
of 0% was used until Xenomics's common stock began to trade publicly on July
2,
2004. Since July 5, 2004 through January 31, 2005 Xenomics has used 80%
volatility to determine fair value of options granted to employees.
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 annual
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
above in this footnote.
4.
PROPERTY AND EQUIPMENT:
Fixed
assets consist of laboratory, testing and computer equipment and fixtures stated
at cost. Depreciation expense for the years ended January 31, 2005 and for
the
period August 4, 1999 (inception) to January 31, 2005 was $9,067 and $0,
respectively. As of January 31, 2005, property and equipment consisted of the
following:
|
Furniture
and fixtures
|
$
|
6,158
|
||
|
Laboratory
equipment
|
80,404
|
|||
|
|
86,562
|
|||
|
Less
- accumulated depreciation
|
(9,067
|
)
|
||
|
Property
and equipment, net
|
$
|
77,495
|
5.
STOCKHOLDERS' EQUITY:
All
share and per share amounts have been restated to reflect the 111 for 1 stock
split which was effected July 26, 2004 as discussed in Note 1.
On
July 2, 2004 we completed a private placement of 2,645,210 shares of our common
stock for aggregate proceeds of $2,512,950, or $0.95 per share. The sale was
made to 17 accredited investors directly by us without any general solicitation
or broker and thus no finder's fees were paid. We filed a Form D with the
Securities and Exchange Commission ("SEC") and the offering is claimed to be
exempt from registration pursuant to Rule 506 of Regulation D under the
Securities Act of 1933, as amended.
F-11
Pursuant
to the Agreement with Trilogy (see note 9) 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 immediately expensed. The
following assumptions were used to determine fair value: (i) stock price $4.20
per share (ii) no dividend (iii) risk free interest rate 4.5% (iv) volatility
of
80%.
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 fair value of these Investor warrants using a market price of
$4.20 per share on the date of issuance date was $1,198,373. The Company also
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. The selling agent warrants had a fair value of
$403,038 on the date of issuance and this amount was recorded as a cost of
raising capital.
On
February 5, 2005 the Company completed the first traunche of the private
placement described above selling an additional 102,564 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, which
had a fair value of $47,699 capitalized at $1.95 per share.
F-12
In
connection with the offer and sale of securities to the Investors 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. In the event a registration statement covering such
shares of Common Stock is not filed with the SEC by the 120th day after the
final closing of the Offering, the Company shall pay to the investors, at the
Company's option in cash or common stock, an amount equal to 0.1125% of the
gross proceeds raised in the Offering for each 30 day period that the
registration statement is not filed with the SEC. Pursuant to this January
28,
2005 Registration Rights Agreement there are no additional liquidated damages
for failure to have the registration statement declared effective by a specified
date, nor for failure to maintain its effectiveness for any specified period
of
time.
On
April 7, 2005, subsequent to the balance sheet date, the Company closed the
second and final traunche of the private placement of 1,515,384 shares of common
stock and 378,846 warrants to certain additional Investors. The securities
were
sold as a unit (the "Units") at a price of $1.95 per Unit for aggregate proceeds
of $2,954,999. 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 fair value of these Investor warrants using
a
market price of $2.61 per share on the date of issuance date was $694,335.
The
Company paid an aggregate $298,000 and issued an aggregate 121,231 warrants
to
purchase common stock to Axiom Capital Management who acted as the selling
agent. The warrants are immediately exercisable at $2.15 per share, will expire
five years after issuance. The warrants had a fair value of $222,188 on the
date
of issuance and this amount was recorded as a cost of raising capital. These
April 7, 2005 Investors became parties to the same Registration Rights Agreement
as the January 28, 2005 Investors
6.
STOCK OPTION PLAN:
In
June 2004 we adopted the Xenomics Stock Option Plan, as amended (the "Plan").
The Plan authorizes the grant of stock options to directors, eligible employees,
including executive officers and consultants. Generally, vesting for options
granted under the Plan is determined at the time of grant, and options expire
after a 10-year period. Options are granted at an exercise price not less than
the fair market value at the date of grant.
A
total of 5,000,000 shares have been reserved for issuance under the Plan. As
of
January 31, 2005, options for 5,445,000 shares were outstanding under the Plan.
445,000 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 subject to stockholder approval a measurement
date has not occurred and no compensation expense has been recorded. When such
measurement date does occur, compensation expense will be recorded for any
excess of the fair market value on that date over the exercise price. Had the
445,000 options granted to employees and directors, subject to shareholder
approval, been approved on January 31, 2005 (the measurement date, on which
date
the market price of the Company’s stock was $4.20 per share) the Company would
have recognized approximately $200,000 of additional stock-based compensation
during the twelve months ended January 31, 2005.
The
options granted under the Plan may be either "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
or
non-qualified stock options at the discretion of the Board of Directors.
The
following represent options outstanding for the years since August 4, 1999
(inception) through January 31, 2005:
|
Number
of
Shares
|
Exercise
Price
Per
Share
|
Weighted
Average
Exercise
Price
|
||||||||
|
Balance,
August 4, 1999 (inception)
|
||||||||||
|
To
January 31, 2004
|
0
|
$0.00
|
||||||||
|
|
||||||||||
|
Activity
for the year ended January 31, 2005:
|
||||||||||
|
|
||||||||||
|
Add:
new grants
|
5,445,000
|
$1.25
- $2.50
|
$1.56
|
|||||||
|
Less:
cancellations and forfeitures
|
0
|
|||||||||
|
Less:
exercises
|
0
|
|||||||||
|
Balance,
January 31, 2005
|
5,445,000
|
$1.25
- $2.50
|
$1.56
|
|||||||
F-13
Options
are exercisable as follows at January 31, 2005:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||
|
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted
Average
Remaining
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|||
|
$1.25
|
|
3,825,000
|
|
9.5
years
|
|
$
1.25
|
|
75,000
|
|
$
1.25
|
|
|||
|
$2.25
- $2.50
|
|
1,620,000
|
|
9.5
years
|
|
$
2.28
|
|
0
|
|
—
|
|
|||
|
All
Options
|
|
5,445,000
|
|
9.5
years
|
|
$
1.56
|
|
75,000
|
|
$
1.25
|
|
|||
7.
INCOME TAXES :
At
January 31, 2005, Xenomics had available Federal net operating tax loss carry
forwards of approximately $1,000,000 expiring through 2024 to offset future
taxable income. The net deferred tax asset has been fully offset by a valuation
allowance due to uncertainties regarding realization of benefits from these
future tax deductions. As a result of the change in control provisions of
Internal Revenue Code Section 382, a significant portion of these net operating
loss carry forwards may be subject to limitation on future utilization.
8.
SPAXEN JOINT VENTURE
In
March, 2004, Xenomics organized a joint venture with the Spallanzani National
Institute for Infectious Diseases (Instituto Nazionale per le Malattie
Infettive, "INMI") in Rome, Italy, in the form of a new R&D company called
SpaXen Italia, S.R.L ("SpaXen"). In laboratories provided to SpaXen within
INMI,
SpaXen scientists work to apply the Tr-DNA technology to a broad variety of
infectious diseases. Shares of SpaXen are held 50% by INMI and 50% by Xenomics.
SpaXen's deed of incorporation (Costituzione Di Societa) dated March 11, 2004
provides, among other terms, the following:
|
|
•
|
Corporate
capital: 200,000 Euros, of which INMI contributed 100,000 Euros in
cash
and Xenomics contributed 100,000 Euros in the form of intellectual
property, as further described below;
|
|
|
•
|
Corporate
Term: Until December 31, 2009, unless extended or terminated prior
to that
date;
|
|
|
•
|
Shareholder
Vote: All shareholder resolutions require a 2/3 super-majority except
for
certain resolutions regarding amendments to the deed of incorporation,
change of corporate purpose, and significant changes in shareholder
rights, among others, which require unanimous vote by the shareholders;
|
|
|
•
|
Directors
and Officers: SpaXen will be managed by a sole managing director
or by a
board of directors; currently, SpaXen is being managed by a board
of
directors consisting of three directors, the chairman of which is
David L.
Tomei, who is also Xenomics’ chairman of the board; in addition, SpaXen
has appointed a supervisory board (also referred to as "Board of
Auditors"
in SpaXen's deed of incorporation) consisting of three auditors and
two
deputies;
|
|
|
•
|
Dissolution:
The shareholders of SpaXen may unanimously vote to dissolve SpaXen
prior
to the end of the Corporate Term.
|
|
|
•
|
In
conjunction with the formation of SpaXen, Xenomics and INMI have
entered
into a certain Shareholder Agreement, which provides, among other
terms,
the following
|
|
|
•
|
As
its contribution to SpaXen, Xenomics agreed to assign to SpaXen all
rights
and patent applications to that portion of the Tr-DNA technology
that
applies Tr-DNA technology to the field of infectious diseases (the
"Contributed IP");
|
|
|
•
|
All
profits of SpaXen will be reinvested into research and development
of
intellectual property applying Tr-DNA technology to pathologies caused
by
or associated with infectious agents (the "Newly Developed IP");
|
|
|
•
|
INMI
will be the sole owner of all Newly Developed IP;
|
|
|
•
|
SpaXen
will be the sole owner of all intellectual property derived from
SpaXen's
research that may be applied in fields other than pathologies caused
by or
associated with infectious agents (the "Derivative IP");
|
F-14
|
|
•
|
Xenomics
will have royalty-free, perpetual, exclusive, worldwide commercialization
rights for Derivative IP;
|
|
|
•
|
Xenomics
will have exclusive worldwide commercialization rights for Newly
Developed
IP in consideration for a license fee payment of not more than 10%
of net
proceeds of all products utilizing Newly Developed IP;
|
|
|
•
|
The
initial term of commercialization rights for Newly Developed IP is
5 years
(commencing April 7, 2004), with the possibility of a 5 year extension;
|
|
|
•
|
In
the event that a patent issues based on Newly Developed IP during
the term
of commercialization rights for Newly Developed IP, the commercialization
rights for Newly Developed IP will be extended for the duration of
such
patent; and
|
|
|
•
|
Upon
dissolution of SpaXen, Xenomics’ commercialization rights for Newly
Developed IP will terminate, the Newly Developed IP becomes the property
of INMI, the Contributed IP will revert back to Xenomics and all
capital
surplus will be paid to INMI;
|
F-15
The
Shareholder Agreement stipulates SpaXen and we will enter into a Collaborative
Research and License Agreement, which will further define our respective
obligations and rights with respect to the above matters. We plan to begin
negotiations shortly.
The
Company accounted for its interest in SpaXen in accordance with Financial
Accounting Standards Board Interpretation No. 46 (revised December 2003)
“Consolidation of Variable Interest Entities—an interpretation of ARB No. 51”
(“FIN 46R”). Accordingly, the Company’s interest in SpaXen was not consolidated
because (i) INMI, not the Company, is the primary beneficiary and any surplus,
Newly Developed IP and patents thereon, upon liquidation, are the exclusive
property of INMI; (ii) SpaXen is managed by a 3 person Board of Directors to
which the Company can only appoint one representative, Dr. L. David Tomei,
which
gives the Company a certain measure of oversight but not effective control.
SpaXen
also met several exceptions to the scope of FIN46R. First ,
SpaXen
is a not-for-profit entity specifically chartered
to
only do research and development. Xenomics has exclusive commercialization
rights should a viable product be developed which is not assured.
Second,
INMI, the Company’s 50% partner, is an Italian governmental health
organization.
9.
COMMITMENTS AND CONTINGENCIES:
LICENSE
AGREEMENTS:
On
May 18, 2004, Xenomics entered into a Technology Acquisition Agreement with
the
former Xenomics Sub shareholders under which Xenomics granted an option to
the
former Xenomics Sub holders to re-purchase Xenomics Sub technology if Xenomics
fails to apply at least 50% of the net proceeds of financing it raises to the
development of Xenomics Sub technology during the period ending July 1, 2006.
The repurchase would constitute an exchange for all Xenomics shares and share
equivalents held by the former Xenomics Sub holders at the time such option
is
exercised
EMPLOYMENT
AND CONSULTING AGREEMENTS:
On
February 14, 2005, subsequent to the balance sheet date, we 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 $60,000 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.
On
September 3, 2004, Dr. Randy White and Xenomics entered into a letter agreement.
Pursuant to the letter agreement, Xenomics will employ Dr. White as Chief
Executive Officer for a period of 3 years commencing September 13, 2004. Dr.
White will be paid an annual base salary of $215,000. We have agreed to rent
for
Dr. White's benefit a studio apartment in New York, New York. Dr. White was
granted an aggregate 1,425,000 incentive stock options pursuant to Xenomics's
Plan with an exercise price of $2.25 per share. 300,000 of such options shall
vest on the first anniversary of the date of the Letter Agreement, 350,000
of
such options shall vest on the second anniversary of the date of the letter
agreement and 400,000 of such options shall vest on the third anniversary of
the
date of the letter agreement (the "Sale Options"). The remaining 375,000 options
shall vest in the event there is a sale of Xenomics for consideration equal
to
$15.00 per share or more. In the event there is a sale of Xenomics for
consideration exceeding $9.25 per share, Dr. White shall be entitled to a cash
bonus of $500,000 and all of his unvested Sale Options shall immediately vest.
In the event there is a sale of Xenomics for consideration equal to $15.00
per
share or more, Dr. White shall be entitled to a cash bonus of $750,000. In
addition, at any time during the term of his employment, in the event the stock
price of the common stock of Xenomics exceeds $9.25 per share for 60 consecutive
trading days, all of Dr. White's unvested Sale Options shall immediately vest.
F-16
On
July 2, 2004, we entered into an employment agreement with Samuil Umansky,
Ph.D., pursuant to which Dr. Umansky serves as Xenomics's President and Chief
Scientific Officer. Dr. Umansky's employment agreement is for a term of 36
months beginning June 24, 2004 and is automatically renewable for successive
one
year periods at the end of the term. Dr. Umansky's salary is $175,000 per year
and he is eligible to receive a cash bonus of up to 50% of his salary per year
upon the achievement of certain milestones. In connection with the employment
agreement, Dr. Umansky received a grant of 1,012,500 stock options which vest
in
annual installments of 253,125, 303,750 and 455,625 and are exercisable at
$1.25
per share.
On
July 2, 2004, we entered into an employment agreement with Hovsep Melkonyan,
Ph.D., pursuant to which Dr. Melkonyan serves as Vice President, Research for
a
term of 36 months beginning June 24, 2004, which is automatically renewable
for
successive one year periods at the end of the term. Dr. Melkonyan's salary
is
$135,000 per year and he is eligible to receive a cash bonus of up to 50% of
his
salary per year upon the achievement of certain milestones. In connection with
the employment agreement, Dr. Melkonyan received a grant of 675,000 stock
options which vest in annual installments of 168,750, 202,500 and 303,750 and
are exercisable at $1.25 per share.
On
July 2, 2004, we entered into a consulting agreement with L. David Tomei, Ph.D.,
pursuant to which Dr. Tomei agreed to serve as Co-Chairman of Xenomics's Board.
Dr. Tomei's consulting agreement is for a term of 36 months beginning June
24,
2004 and is automatically renewable for successive one year periods at the
end
of the term. Dr. Tomei's annual consulting fee is $175,000 per year and he
is
eligible to receive cash bonuses of up to 50% of his salary per year, or
$87,500, upon the achievement of certain milestones. Dr. Tomei received a grant
of 1,012,500 stock options which vest in annual installments of 253,125; 303,750
and 455,625 and is exercisable at $1.25 per share.
DEFERRED
FOUNDERS COMPENSATION
On
August 15, 2000 Dr. Tomei, Mr. Umansky and Mr. Melkonyan (collectively the
“Founders”) entered into employment agreements with the Company pursuant to
which each Founder contributed 100% of their time to the Company with payment
of
their compensation deferred until the Company was sufficiently funded, sold
or
merged with another company. In accordance with SAB 107, Topic 5, section T,
the
value of services performed by the Founders and principal shareholders was
recorded as a liability and compensation expense. On April 12, 2004, in
contemplation of entering into the Securities Exchange Agreement with Used
Kar
Parts, Inc. the Founders terminated their agreements, waiving any claims to
be
paid deferred compensation. On April 12, 2004, $1,655,029 of deferred Founders’
compensation liability, which had accumulated since August 15, 2000, was deemed
an equity contribution and converted to additional paid in capital. Deferred
founders compensation expense totaled $74,404 and $382,500 for the years ended
January 31, 2005 and 2004, respectively.
LEASE
AGREEMENTS:
On
September 15, 2004, Xenomics entered into a seven year lease for its corporate
headquarters in New York City with an approximate rent of $75,000 annually
through September 30, 2011. On September 1, 2004, Xenomics entered a two year
lease for laboratory space in New Jersey, with an approximate rent of $90,000
annually through August 31, 2006. During the years ended January 31, 2005 and
for the period from August 4, 1999 (inception) to January 31, 2005, total rent
expense was $74,637. No rent expense was incurred prior to September 1, 2004.
Total annual commitments under these leases for each of the twelve months ended
January 31, are as follows:
|
$
|
160,867
|
||
|
2007
|
125,342
|
||
|
2008
|
75,041
|
||
|
2009
|
76,542
|
||
|
2010
|
78,073
|
||
|
2011
|
79,634
|
||
|
2012
|
53,793
|
||
|
Total
|
$
|
649,303
|
F-17
Index
to Exhibits
|
Exhibit
|
Description
|
|
|
|
|
|
|
2.1
|
Capital
Stock Purchase Agreement between Panetta Partners, Ltd. And Jeannine
Karklins dated February 24, 2004 (1)
|
|
|
|
|
|
|
3.3
|
Articles
of Incorporation of the Company (2)
|
|
|
|
|
|
|
3.4
|
Articles
of Amendment to Articles of Incorporation of Used Kar Parts, Inc.
changing
its name to Xenomics, Inc., filed on July 14, 2004 with the Florida
Secretary of State (3)
|
|
|
|
|
|
|
3.2
|
Amended
and Restated By-Laws (4)
|
|
|
|
|
|
|
4.1
|
Form
of Stock Certificate, $.001 par value (5)
|
|
|
|
|
|
|
4.2
|
Form
of Warrant issued to Irv Weiman, Laura Dever and Len Toboroff (6)
|
|
|
|
|
|
|
4.3
|
Form
of Warrant issued to Trilogy Capital Partners, Inc. (7)
|
|
|
|
|
|
|
4.4
|
Form
of Warrant to purchase shares of Common Stock issued in connection
with
the sale of the Common Stock (8)
|
|
|
|
|
|
|
10.1
|
Xenomics,
Inc. 2004 Stock Option Plan (9)+
|
|
|
|
|
|
|
10.2
|
Securities
Exchange Agreement by and among Used Kar Parts, Inc., the individuals
named on Schedule 1.1 thereto and Xenomics dated as of May 18, 2004.
(10)
|
|
|
|
|
|
|
10.3
|
Closing
Agreement entered into effective as of July 2, 2004 by and among
Used Kar
Parts, Inc., and Xenomics and L. David Tomei, Samuil Umansky, Hovsep
S.
Melkonyan, Kathryn P. Wilke and Anatoly V. Lichtenstein (11)
|
|
|
|
|
|
|
10.4
|
Technology
Acquisition Agreement dated effective as of June 24, 2004 by and
among
Used Kar Parts, Inc., and Xenomics and L. David Tomei, Samuil Umansky,
Hovsep S. Melkonyan, Kathryn P. Wilke and Anatoly V. Lichtenstein
(12)
|
|
|
|
|
|
|
10.5
|
Shareholder
Escrow Agreement effective as of the 24th day of June, 2004, by and
among
Used Kar Parts, Inc., Sommer & Schneider LLP, and the several former
shareholders of Xenomics. (13)
|
|
|
|
|
|
|
10.6
|
Purchaser
Escrow Agreement effective as of the 24th day of June, 2004, by and
among
Used Kar Parts, Inc., Sommer & Schneider LLP and the several former
shareholders of Xenomics (14)
|
|
|
|
|
|
|
10.7
|
Repurchase
Agreement dated as of June 24, 2004 by and between Used Kar Parts,
Inc.
and Panetta Partners Ltd. Xenomics, Inc. 2004 Stock Option Plan (15)
|
|
|
|
|
|
|
10.8
|
Executive
Employment Agreement dated effective as of June 24, 2004 by and among
Hovsep Melkonyan, Xenomics and Used Kar Parts, Inc. (16)+
|
|
|
|
|
|
|
10.9
|
Consulting
Agreement effective as of June 24, 2004 by and among L. David Tomei,
Xenomics and Used Kar Parts, Inc. (17)+
|
|
|
|
|
|
|
10.10
|
Voting
Agreement effective as of June 24, 2004 by and among L. David Tomei,
the
Xenomics Shareholders, the Original Shareholders and the Investors
(18)
|
i
|
10.11
|
Letter
Agreement dated September 3, 2004 between Xenomics, Inc. and Dr.
Randy
White (19)+
|
|
|
|
|
|
|
10.12
|
Letter
of Engagement between Trilogy Capital Partners, Inc. and Xenomics,
Inc.
dated January 10, 2005 (20)
|
|
|
|
|
|
|
10.13
|
Form
of Registration Rights Agreement, dated as of January 28, 2005 by
and
among the Registrant and the purchasers set forth on the signature
page
thereto (21)
|
|
|
|
|
|
|
10.14
|
Employment
Agreement dated February 14, 2005 between the Company and Bernard
Denoyer
(22)+
|
|
|
|
|
|
|
10.15
|
Shareholders’
Agreement between the Company and the National Institute of Infectious
Diseases "Lazzaro Spallanzani" dated April 7, 2004 (23)
|
|
|
|
|
|
|
10.16
|
Executive
Employment Agreement dated effective as of June 24, 2004 by and among
Samuil Umansky, Xenomics and Used Kar Parts, Inc. (24)+
|
|
|
|
|
|
|
14
|
Code
of Business Conduct and Ethics (25)
|
|
|
|
|
|
|
16
|
Letter
from Baum & Company,PA Re: Change in Certifying Accountant (26)
|
|
31.1
|
||
|
|
|
|
|
31.2
|
||
|
|
|
|
|
32.1
|
||
|
|
|
|
|
32.2
|
(1)
Incorporated by reference to exhibit 10.1 to the Company's Current Report on
Form 8-K filed on March 11, 2004.
(2)
Incorporated by reference to exhibit 3.1 to the Company's Form SB-2 Registration
Statement, as amended, filed June 25, 2003.
(3)
Incorporated by reference to exhibit 3(i).1 to the Company's Current Report
on
Form 8-K filed on July 19, 2004.
(4)
Incorporated by reference to exhibit 3(ii).1 to the Company's Current Report
on
Form 8-K filed on July 19, 2004.
(5)
Incorporated by reference to exhibit 4 to the Company's Form SB-2 Registration
Statement, as amended, filed June 25, 2003.
(6)
Incorporated by reference to exhibit 4.2 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(7)
Incorporated by reference to exhibit 4.1 to the Company's Current Report on
Form
8-K filed on January 13, 2005.
(8)
Incorporated by reference to exhibit 4.1 to the Company's Current Report on
Form
8-K filed on February 3, 2005.
(9)
Incorporated by reference to exhibit 4.3 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(10)
Incorporated by reference to exhibit 2.1 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(11)
Incorporated by reference to exhibit 2.2 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(12)
Incorporated by reference to exhibit 2.3 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(13)
Incorporated by reference to exhibit 2.4 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(14)
Incorporated by reference to exhibit 99.2 to the Company's Current Report on
Form 8-K filed on July 19, 2004.
(15)
Incorporated by reference to exhibit 2.6 to the Company's Current Report on
Form
8-K filed on July 19, 2004.
(16)
Incorporated by reference to exhibit 99.3 to the Company's Current Report on
Form 8-K filed on July 19, 2004.
(17)
Incorporated by reference to exhibit 99.4 to the Company's Current Report on
Form 8-K filed on July 19, 2004.
(18)
Incorporated by reference to exhibit 99.5 to the Company's Current Report on
Form 8-K filed on July 19, 2004.
(19)
Incorporated by reference to exhibit 99.1 to the Company's Current Report on
Form 8-K filed on September 9, 2004.
(20)
Incorporated by reference to exhibit 10.1 to the Company's Current Report on
Form 8-K filed on January 13, 2005.
(21)
Incorporated by reference to exhibit 10.1 to the Company's Current Report on
Form 8-K filed on February 3, 2005.
(22)
Incorporated by reference to exhibit 4.1 to the Company's Current Report on
Form
8-K filed on February 17, 2005.
(23)
Incorporated by reference to exhibit 10.15 to the Company's Annual Report on
Form 10-KSB filed on May 17, 2005.
(24)
Incorporated by reference to exhibit 99.3 to the Company's Current Report on
Form 8-K filed on July 19, 2004.
(25)
Incorporated by reference to exhibit 10.15 to the Company's Annual Report on
Form 10-KSB filed on May 17, 2005.
(26)
Incorporated by reference to exhibit 16.1 to the Company's Current Report on
Form 8-K filed on February 3, 2005.
+
Denotes a management contract or compensatory plan or arrangement
ii
CERTIFICATION
I,
L. David Tomei, certify that:
1.
I have reviewed this annual report on Amendment No.3 to Form 10-KSB 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)
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
c)
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
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 in the design or operation of internal controls
which could adversely affect the small business issuer's ability to record,
process, summarize and report financial data and have identified for the small
business issuer's auditors any material weaknesses in internal controls; 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.
|
March
15, 2006
|
|
| /s/ L. David Tomei | |
|
|
|
|
Name:
L. David Tomei
Title:
Chief Executive Officer and President
(Principal Executive
Officer)
|
EXHIBIT
31.2
CERTIFICATION
I,
Frederick Larcombe, certify that:
1.
I have reviewed this annual report on Amendment No.3 to Form 10-KSB 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)
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
c)
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
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 in the design or operation of internal controls
which could adversely affect the small business issuer's ability to record,
process, summarize and report financial data and have identified for the small
business issuer's auditors any material weaknesses in internal controls; 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.
|
March
15, 2006
|
|
| /s/ Frederick Larcombe | |
|
|
|
|
Name:
Frederick Larcombe
Title:
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
XENOMICS,
INC.
AMENDMENT
NO. 3 TO FORM 10-KSB FOR THE YEAR ENDED JANUARY 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-KSB of the Company for the year ended January 31, 2005 and
filed with the Securities and Exchange Commission ("Amendment No. 3 to Form
10-KSB").
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-KSB 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-KSB fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
|
Date: March
15, 2006
|
|
| /s/ L. David Tomei | |
|
|
|
|
Name: L.
David Tomei
Title:
Chief Executive Officer and
President
|
XENOMICS,
INC.
AMENDMENT
NO. 3 TO FORM 10-KSB FOR THE YEAR ENDED JANUARY 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-KSB of the Company for the year ended January 31, 2005 and
filed with the Securities and Exchange Commission ("Amendment No.3 to Form
10-KSB").
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-KSB 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-KSB fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
|
Date: March
15, 2006
|
|
| /s/ Frederick Larcombe | |
|
|
|
|
Name:
Frederick Larcombe
Title:
Chief Financial Officer
|