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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____
Commission file number 333-34765
IXION BIOTECHNOLOGY, INC.
(Exact Name of Small Business Issuer in Its Charter)
DELAWARE 59-3174033
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12085 RESEARCH DRIVE
ALACHUA, FL 32615
(Address of Principal Executive Offices) (Zip Code)
904-418-1428
(Issuer's Telephone Number, Including Area Code)
Securities registered under 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 past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
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 revenue for the most recent fiscal year, ending December 31,
1997, was $221,452.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of March
27, 1998, was approximately $8,400,000 based on the most recent sales of
newly-issued common equity. There is no public market for the issuer's common
stock.
The number of shares of the Company's common stock, par value $.01 per
share, outstanding as of March 27, 1998, was 2,471,744..
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT PART INTO WHICH INCORPORATED
-------- ----------------------------
The Proxy Statement to be used in connection Part III
with the annual meeting of stockholders to be
held June 12, 1998 (the "Proxy Statement"), to
be filed with the Commission prior to April 30,
1998, pursuant to Rule 14a-101, Schedule 14A
of the Exchange Act.
<PAGE>
PART I
Item 1. Description of Business.
Business
The Company
Ixion Biotechnology, Inc. ("Ixion" or the "Company"), was organized as
a Delaware corporation in 1993. It is a development stage, discovery research
biotechnology company, with several product candidates in development. The
Company is the holder of world-wide exclusive licenses to patents and pending
patents in two key areas: diabetes and oxalate-related disorders. Ixion has
executive offices and development laboratories at the Biotechnology Development
Institute, a small business incubator operated by the Biotechnology Program at
the University of Florida.
Ixion is developing diabetes products based on its Islet
Progenitor/Stem Cell ("IPSC") technology, including a proprietary line of in
vitro (in test tube) islet stem cells for use in islet transplantation therapy.
This development program is aimed at optimizing the growth of functioning islets
or islet progenitors in vitro from IPSCs which Ixion has established in cell
cultures. The transplantation of islets is the only known potential cure for
Type I diabetes. The Company believes that successful islet transplantation
therapy will provide better management of diabetes than conventional treatment
with insulin and other metabolic regulators. Conventional treatment can result
in hyper- and hypo-glycemic episodes which are a major cause of diabetic
complications. Ixion's technology is intended to ameliorate this condition by
implanting functional islets into the body in order to materially improve
control of blood glucose levels.
In addition to developing its cell transplantation therapy, Ixion has
an ongoing discovery program to identify and characterize IPSCs as well as novel
growth factors associated with them. The goal of this program is to discover
factors important in islet cell differentiation and to identify stem cell
markers to which the Company hopes to produce antibodies useful in stem cell
isolation. All of the Company's potential diabetes products are in the discovery
research stage.
Diabetes is a chronic, complex metabolic disease. Type I (often
referred to as Insulin Dependent Diabetes or IDD) is characterized by an
inability to produce insulin due to the destruction of the insulin-producing
cells of the pancreatic islets of Langerhans. Type I diabetes also leads to many
serious conditions ranging from death from diabetic coma or insulin shock, to
end stage renal disease, blindness, amputations, nerve damage, and
cardiovascular and periodontal disease. Over 16 million people in the United
States have diabetes, of whom five to ten percent (or about 800,000 patients)
have Type I, the most severe form of the disease, and must take insulin. An
additional one and one-half million Type II patients also take insulin. Annual
expenditures on all forms of diabetes are over $100 billion.
The Company is also developing products based on its oxalate technology
for the diagnosis and treatment of oxalate-related diseases. The Company's
oxalate technology is based on genes from the non-pathogenic anaerobic
intestinal bacteria, Oxalobacter formigenes, which produce enzymes responsible
for oxalate degradation in healthy people. Inadequate colonies of O. formigenes
result in reduced ability to degrade oxalate. Excess oxalate from dietary and
metabolic sources plays a role in a variety of disorders including kidney
stones, hyperoxaluria, cardiomyopathy, cardiac conductance disorders, cystic
fibrosis, Crohn's disease, renal failure and toxic death, and, possibly,
vulvodynia
There are approximately one million kidney stone incidents annually in
the United States. Annual expenditures on kidney stones exceed $1.8 billion.
There are approximately 25,000 cystic fibrosis patients in the United States;
these patients are at materially increased risk of kidney stones as a result of
excess oxalate. There are from 5,000 to 16,000 new cases of Inflammatory Bowel
Disease annually, resulting in 100,000 hospitalizations, 60% from Crohn's
Disease which is associated with enteric hyperoxaluria. Vulvodynia, a chronic
multifactorial disorder, believed to be in some degree oxalate-related, results
in painful and debilitating symptoms affecting the tissue surrounding the vagina
and urethra. There are no population studies of the incidence or prevalence of
vulvodynia, but estimates range as high as 150,000 to 200,000 U.S. women with
this condition. Very few effective treatments, if any, exist for these
disorders.
The most developed products in Ixion's development pipeline area
diagnostic and a therapy for the management of oxalate-related disorders.
The diagnostic component of the Company's oxalate-related disease
management product is a DNA-based molecular diagnostic test for the rapid and
sensitive detection of human O. formigenes (the "Ixion Oxalobacter formigenes
Monitor"). The current tests for O. formigenes are laborious, time consuming,
and unreliable, and are limited by (1) the difficulties of anaerobic culture
methods, (2) the inability to standardize and accurately quantitate the presence
of the bacteria, and (3) the fact that the tests cannot be automated. In
addition, the current tests are not sensitive and are poorly suited to a
clinical setting. The Ixion Oxalobacter formigenes Monitor, on the other hand,
can accurately and reliably detect very small numbers of O. formigenes, is
quantitative, and is capable of automation.
The therapeutic component of the Company's oxalate-related disease
management product is an orally administered pill consisting of a recombinant
form of two enzymes normally found in O. formigenes and responsible for oxalate
degradation ("IxC1-62/47"). The Company believes that the administration of
IxC1-62/47 will greatly diminish the recurrence of calcium oxalate kidney stones
and will have positive therapeutic effects on other oxalate-related disorders.
The Company intends to file an Investigational New Drug application for
its IxC1-62/47 enzyme therapy for oxalate-related diseases and a 510(k)
submission for premarket clearance for the Ixion Oxalobacter formigenes Monitor,
with the Food and Drug Administration, during 1998. See -"Government
Regulation."
Ixion is in the development stage, has earned only limited revenues,
the majority of which have been research and development payments, and has
incurred accumulated deficits of $1,979,359 from its inception through December
31, 1997. During the last two fiscal years, the Company has spent $946,761 on
research and development.
Industry Description and Outlook
In 1997, the U.S. biotechnology industry was composed of approximately
1,300 companies, public and private. The public market for biotechnology
financing was restrained during 1997 with the industry raising about $2.5
billion compared to $4.9 billion in 1996. Total financings (excluding milestone
payments and equity purchases by corporate partners) amounted to $5.8 billion.
The biotechnology industry is part of the broader health care industry in the
United States, which accounts for approximately 14% of the country's gross
domestic product, or approximately $1 trillion.
Diabetes. Diabetes is the world's most common metabolic disease. In
1995, there were over 16 million diabetics in the United States. There are 21
million diabetics in Europe and as many as 100 million worldwide. Type I
patients compose from 5% to 10% of the total number of diabetics in the U.S., or
approximately 800,000 patients. An additional 1.5 million Type II diabetics also
take insulin. There are approximately 500,000 to 600,000 new patients annually
in the U.S., of which 35,000 to 50,000 are Type I diabetics. Approximately 25
percent of the new Type II patients (or approximately 110,000) will also take
insulin.
In 1995, diabetes accounted for over 10% of total U.S. health care
expenditures, or approximately $100 billion. In 1992, the American Diabetes
Association estimated that another $47 billion was spent in indirect costs, such
as lost wages. Other sources have estimated that indirect costs may actually
exceed the direct costs. Complications of the disease include amputations of
toes and feet, blindness, ulcers, nerve damage and cardiovascular, periodontal,
and kidney disease. Approximately 30% to 40% of people with Type I diabetes will
develop diabetic nephropathy leading to kidney dialysis and renal transplants.
Overall, diabetes is the fourth leading cause of death in the U.S.
Current therapies, including insulin shots, amylin therapy, or oral
hypoglycemic medication modulate blood glucose, but cannot consistently maintain
the diabetic's blood glucose at normal levels. The Diabetes Control and
Complications trial, a nine-year NIH study, demonstrated that maintaining blood
glucose at normal levels reduces by approximately 60% the risk of development
and progression of diabetes complications. However, there is no therapy that
supplies insulin in response to changes in blood glucose with the speed and
precision of functioning islets. The Company believes that approximately 500,000
insulin dependent diabetics are candidates for islet transplantation and that
successful transplantation of islets capable of providing constant glucose
control will ameliorate the complications of the disease. While islet
transplantation is the only known potential cure for Type I diabetes, transplant
therapy is an early stage procedure and results, as is common for early stage
procedures, for the adult islet transplants performed to date have been
disappointing. Although there can be no assurance, the Company believes that the
success rate of transplant therapy will improve over time.
Oxalate-related Diseases. Excess oxalate appears to be a factor in
diseases like calcium-oxalate kidney stones, primary hyperoxaluria, and possibly
vulvodynia. It is also a complication in a variety of other conditions,
including various lipid malabsorption disorders (including Inflammatory Bowel
Disease, Crohn's disease, cycstic fibrosis, and jujuno-ileal bypasses) and
cardiomyopathy, cardiac conductance disorders, and renal failure and toxic
death.
Kidney stones. Kidney stones are a major health care problem in the
United States, and a worse one in other parts of the world. Nearly one in every
1000 residents in the United States has been hospitalized for stones, and
autopsies have revealed that one in every 100 persons have observable stone
formation in their kidneys. Between seven and ten of every 1000 hospital
admissions in the United States are for kidney stones; this is approximately
248,000 hospital admissions annually. There are approximately one million kidney
stone incidents annually, the seventh leading cause of physician visits.
Nationwide, approximately 12% of the U.S. population will develop stones in
their lifetimes, but stones are particularly common in the region from Virginia
to New Mexico, commonly referred to as the "stone belt." In other parts of the
world, particularly the Middle-East, Asia, and India, kidney stones are an even
worse problem since hot climates seem to favor stone formation.
If a stone cannot be passed, it is surgically removed or shattered by
extracorporeal shock-wave lithotripsy. Both treatments are expensive, with the
average lithotripsy costing $4,617 and surgery costing $8,308 (including the
hospital stay). Approximately 30% of patients with kidney stones are
hospitalized, the remainder pass the stone at home, which, while not
particularly expensive, is exceedingly painful. Based on 1993 data, the total
annual cost of kidney stones in the United States was conservatively estimated
at $1.83 billion annually.
Unfortunately, kidney stones usually recur; although for most patients,
the time between episodes can be years. The majority of kidney stones are made
of oxalate, which is an end product of metabolism in the body, and an important
component of a typical diet. The intestinal oxalate degrading bacteria,
Oxalobacter formigenes, plays an important role in oxalate control, both by
regulating intestinal absorption of dietary oxalate and also its secretion into
intestinal lumen from the blood by maintaining a transepithelial gradient.
Indeed, recent research indicates an increased risk of kidney stones,
particularly recurrent kidney stones, in patient populations with significantly
decreased intestinal colonization by O. formigenes. Thus the Company believes it
is clinically important to screen and treat patients with calcium-oxalate kidney
stones for the absence of the bacterium.
Inflammatory Bowel Disease, Crohn's Disease, and Cystic Fibrosis.
Inflammatory Bowel Disease ("IBD") is a general term which covers two primary
chronic disorders that cause inflammation or ulceration in the small and large
intestine: Crohn's disease and ulcerative colitis. The cause of IBD is unknown,
with many theories, none proven. Many persons with IBD and Crohn's disease are
also hyperoxaluric, suggesting that excess oxalate may be a complicating factor,
or may lead to increased risk of kidney stones. In 1987, the latest data
available, the number of new cases of IBD in the United States annually ranged
from two to six per 100,000 of population. There are about 100,000 IBD
hospitalizations annually, approximately 64% for Crohn's disease. Patients with
cystic fibrosis, appear to be at materially increased risk of kidney stones as a
result of excess oxalate. There are about 25,000 cystic fibrosis patients in the
United States.
Vulvodynia. Vulvar vestibulitis syndrome ("vulvodynia") is a complex,
multifactorial disorder with painful and debilitating symptoms affecting the
tissue surrounding the vagina and urethra, including intense burning, itching,
and inflammation. In chronic cases it is very disruptive of a person's life.
Recognition of this condition as a significant, physiological syndrome appeared
in medical journals only a decade ago. There are no population studies of the
incidence or prevalence of vulvodynia although the condition may affect from
150,000 to 200,000 American women. Because the cause is often unknown,
treatments have been aimed at symptoms and include xylocaine, acupuncture,
hypnotherapy, interferon injections, and, as a last resort in chronic cases,
surgery. Recent research suggests that vulvodynia is associated with oxalate,
with some investigators reporting significant improvement following control of
dietary oxalate.
Other Oxalate-Related Markets. Two additional products which could make
use of Ixion's oxalate technology include improved kidney dialysis devices and
an improved urological catheter. As of 1996, there were approximately 287,000
U.S. hemodialysis patients and approximately 300,000 more in Europe and Japan.
The use of the Ixion oxalate technology could significantly reduce the time that
patients spend in dialysis by increasing the efficiency of oxalate removal
during the process.
The world market for urological drains (catheters) was $675 million in
1995. Catheters often foster infection and account for the leading side effect
of an invasive hospital procedure. One major cause of catheter infection is the
build-up of oxalate crystals on the catheter. The Ixion oxalate technology would
allow an improved catheter which would inhibit or dissolve encrusted oxalate
crystals, thus reducing the potential for infection.
Business Strategy
The Company intends to market its initial diagnostic products, while
working with strategic partners to take its planned therapeutic products through
clinical trials into the market.
Basic Research. Ixion has used and intends to continue to use
cooperative research and development agreements with the University of Florida
for basic discovery research. The University of Florida is the tenth largest
university in the nation and is the largest research institution in the
Southeast. In 1995, it ranked ninth in the United States in gross royalties
received from patent licenses, and sixteenth in the United States in the number
of U.S. patents obtained.
Technology Evaluation and Development. The Company plans to use its
affiliation with the University of Florida Biotechnology Program to seek out,
evaluate, license, and develop cutting-edge university based biotechnology. The
Company's scientific and business team will review early stage academic
inventions, identify discoveries which are scientifically innovative and
commercially promising, obtain licenses from the University, and develop the
discoveries to add value by confirming the initial observations. Discoveries
that support the Company's core technologies will be retained for further
development; the remainder will be licensed-out to generate immediate royalty
revenue.
The Company's relationship with the scientists at the University of
Florida is based upon personal relationships between Ixion's management and
University of Florida members of the Company's Scientific Advisory Board, on the
one hand, and other members of the University of Florida faculty on the other.
These relationships are facilitated by the Company's location at the University
of Florida's research park and by the business consulting provided by Ixion
management to University faculty at no cost, by arrangement with the
Biotechnology Program. The Company has no formal agreement providing general
access to rights to University research, nor to advance notice of disclosures by
University researchers.
The University's faculty has only recently begun to engage in
commercial collaborations in significant numbers, thus many promising commercial
discoveries have not been exploited, for example, the Company recently licensed
an anti-microbial patent from two members of the University of Florida faculty.
See "Business-Licensed Technology." In addition, academic intellectual property
is often embryonic and, therefore, too risky, expensive, and time consuming for
large pharmaceutical and biotechnology companies to acquire and develop. Ixion,
on the other hand, is in a position to perform "applied basic" research
inexpensively, either in its labs or through cooperative research agreements, in
order to add value to the technology such that it is of greater interest to
commercial licensees. By increasing the maturity stage of the technology, Ixion
hopes to capture an enhanced return upon licensing-out for royalty and milestone
payments. See Figure 1, below.
Discovery supports core technology.
/ Ixion develops product.
/
/
/
University-Discovered Ixion / Substantial commercial potential,
Very Early Stage --------Evaluation----- but not within core focus.
Technology \ Ixion develops technology,
\ then licenses out.
\
\
\
Discovery lacks commercial
promise or no Ixion
capability for further
development.
Ixion declines license.
Figure 1 - Ixion Technology Opportunity Strategy
Ixion intends to continue to develop collaborative arrangements with
leading researchers at the University of Florida and at other research
institutions in its core oxalate and diabetes areas to diversify and strengthen
its intellectual property estate and to establish its reputation and credibility
in the scientific and medical communities.
Collaborative Product Development and Marketing with Established
Companies. Ixion plans to develop products in collaboration with other
companies. Collaborative agreements may call for Ixion's collaborative partners
to provide research funds as well as clinical and other support during product
development, although Ixion may develop and test ideas independently before
entering into a collaborative agreement. The Company contemplates that its
partners will provide an established and trained marketing and sales force, as
well as GMP manufacturing experience, clinical trial expertise, support for
patent prosecution, and other capabilities.
Independent Product Development. The quality of Ixion's scientific team
also permits independent product development. Independently developed products
will provide the Company with the flexibility either to market the product
directly or enter into agreements with pharmaceutical partners on terms more
favorable to the Company. While independent product development is riskier than
collaborative development, the Company may be able to retain a higher proportion
of any eventual product revenue stream. The Ixion Oxalobacter formigenes Monitor
is an example of independent product development.
Contract Clinical Trial and Manufacturing Services. Initially, the
Company has elected to retain contract vendors to support clinical studies and
product development. Moreover, it will not initially construct its own good
manufacturing practices ("GMP") manufacturing facilities. By contracting with a
qualified manufacturing company, Ixion will be able to obtain immediate access
to the necessary GMP and regulatory skill base at low entry costs. The Company
thus expects to minimize the time to market, maintain control over development
candidates, and reduce its financial risk when product risk is the greatest.
Product Development
The Company's first target products for diabetes will be a population
of cultured islet or pancreatic cells for use in diabetes treatment, and its
first target products for oxalate-related diseases will be the Ixion Oxalobacter
formigenes Monitor and the IxC1-62/47 enzymatic treatment for oxalate-related
conditions. The Company also plans other products that will detect and measure
the presence of oxalate in urine or blood. Certain of these products may be
suitable for use in research applications and, subject to certain limitations,
would not require FDA approval prior to use in that context. (See
"Business-Government Regulation," below.)
Genetics Institute Sponsored Research Agreement. In connection with its
potential diabetes products, in June 1996, the Company entered into a sponsored
research agreement with Genetics Institute, Inc. ("GI"), a leading
biopharmaceutical firm. The sponsored research agreement related to the
Company's IPSC technology and granted GI an option to a right of first
negotiation for an exclusive world-wide license to the Company's IPSC technology
and any improvements or developments relating to IPSC technology which arise
during the term of the agreement. This agreement expired in 1997, and GI did not
exercise its option.
Descriptions of Planned Diabetes Products. Ixion intends to develop
products to enhance research into the disease of diabetes, as well as
therapeutic approaches where Ixion's proprietary technology offers unique
solutions.
Islet transplantation to reverse diabetes or reduce insulin dependency
has been limited by, among other things, immunological attack resulting in rapid
rejection of transplanted tissue. In addition to the immunologic difficulties,
there are significant shortages of human islets suitable for transplant or
research, with only 4,000 or fewer pancreases available for transplant annually.
Xenotransplants using porcine islets face additional difficulties, such as the
possibility of cross-species viruses. To date, efforts to propagate commercial
quantities of human islets in vitro (in the test tube) from either fetal or
adult tissue have had minimal success. The Company believes that a source of
reproducible islet cells would significantly improve the speed and results of
research into transplanted islets.
Ixion's IPSC technology permits the successful growth of in vitro
pancreatic-derived, pluripotent (e.g., able to differentiate) islet-producing
cells from mice. When mouse cells were implanted into clinically prediabetic
mice, the implanted mice were successfully weaned from insulin until they were
sacrificed for histological studies. The Company has also been successful in
propagating human islet cells from children and adult donors, but has not
transplanted such islets at the date of this report.
The following table summarizes the current status of the Company's IPSC
research and development program for diabetes products.
<PAGE>
Product Development-Diabetes IPSC Technology
Product Planned Research Products Status (1)
Indications
Cultured IPSCs Implantation in vivo of encapsulated Research
or Islets cells for study of protected
implantations to reverse diabetes
Genetically Implantation in vivo without Research
Engineered IPSCs encapsulation for study of
unprotected implantations
to reverse diabetes
Islet Growth Promotion of cell growth Research
Factors and differentiation of
pancreatic explants
Nucleic Acid Genetic and phenotype analysis Concept
Probes
Surface Analysis of health or disease Concept
Antibodies of biopsy specimens
Identification of cells
Enrichment of specific cell types
Isolation and identification of
cells by stage of differentiation
Production of knock-out lines of
pancreatic cells
Planned Clinical Products
Cultured IPSCs Encapsulated implantation in vivo Concept
or Islets to reverse diabetes
Genetically Transplantation without Concept
Engineered encapsulation (or other
IPSCs means of immunologic protection) in
vivo to reverse diabetes
Islet Growth Correct disease deficiencies Concept
Factors
Promote greater efficiency
in culturing cells for transplantation
Elucidation of diabetes disease process
Monitor disease stages
(1) "Concept" includes feasibility, theoretical market, and product design
studies based on laboratory or other data. "Research" includes discovery
research, development of the product's physical form and specifications, and its
initial production. "Preclinical" denotes efficacy, pharmacology, safety, or
toxicology studies in animal models.
Descriptions of Planned Oxalate Products. At the present time, there is
no commercial method of rapidly and easily detecting the presence or absence of
O. formigenes in the body or of measuring oxalate levels in a patient's blood.
The current tests for O. formigenes are laborious, time consuming, and
unreliable, and are limited by (1) the difficulties of anaerobic culture
methods, (2) the inability to standardize and accurately quantitate the presence
of the bacteria, and (3) the fact that the tests cannot be automated. In
addition, the current tests are not sensitive and are poorly suited to a
clinical setting.
The only commercially available tests for levels of oxalate in the
human body are currently performed in clinical labs by measuring oxalate
concentrations in urine. Available assays for measuring oxalate levels in urine
also have major drawbacks: the samples require careful processing to remove
inhibitory substances, the tests are complex and cumbersome, and they often fail
to provide consistent results. Accordingly, such tests cannot be performed in
many hospital labs or in a doctor's office. Ixion's planned oxalate products are
designed to address these drawbacks.
The Ixion Oxalobacter formigenes Monitor. Ixion's oxalate technology
consists of cloned, sequenced, and expressed genes encoding the oxalate
degrading enzyme and formate degrading enzyme from the intestine dwelling
bacteria, Oxalobacter formigenes. Ixion's Dr. Sidhu, in collaboration with Dr.
Milton Allison, a member of Ixion's Scientific Advisory Board and the discoverer
of O. formigenes, has used these genes to construct a DNA-based molecular
diagnostic test (the "Ixion Oxalobacter formigenes Monitor") to detect the
presence of O. formigenes in easily-collectable stool samples. O. formigenes is
a gram negative anaerobe present in humans and other animals. The role of this
species in intestinal management of oxalate is supported by findings showing
significantly decreased intestinal colonization in patient populations at
increased risk of kidney stones, especially patients with recurrent kidney
stones. Research in this area has been inhibited by the difficulty of culturing
and detecting the anaerobe.
The Ixion Oxalobacter formigenes Monitor developed by Ixion is a
significant improvement over current tests for O. formigenes and is an important
potential addition to routine diagnostic testing for several reasons.
Ixion's Oxalobacter formigenes Monitor is much easier to perform and
provides accurate results in a fraction of the time required to culture
and test for O. formigenes using existing methods.
Ixion's DNA method relies upon standard DNA techniques and does not
require anaerobic cultures of the organisms since it provides direct
detection of DNA extracted from fecal samples and amplified using
polymerase-based amplification ("PCR").
Because it is based upon PCR and subsequent hybridization to
species-specific sequences, the Ixion Oxalobacter formigenes Monitor
provides the required level of sensitivity, accuracy, selectivity, and
throughput necessary for a commercial diagnostic test.
The test has a high degree of specificity and will not cross react
with common anaerobic or enteric bacteria,
including Bacteroides ovatus, Clostridium perfringens, Clostridium
sordellii, Veilonella parvula, Enterobacter aerogenes, Enterobacter
cloacae, Escherichia coli, Proteus vulgaris, and normal colonic flora.
The Ixion Oxalobacter formigenes Monitor is sensitive to the level of
1,000 to 10,000 colony forming units/gram of fecal material. This is
approximately 100-fold lower than the number of colony forming units to
be expected in normal, healthy adults.
Ongoing development of the Ixion Oxalobacter formigenes Monitor is focused
on the following areas: Extended evaluation and enhancement of performance
specificity with respect to other intestinal organisms to assure the absence of
cross reactivity and misdiagnosis. Organisms currently being evaluated include
the following: Alcaligenes spp, morella thermoactica, Yersinia spp., Shigella
spp., Salmonella spp., Vibrio colera, Helicobacter pylori, Klebsiella, Giardia
lamblia, and Campylobacter spp.
Development of analytically sensitivity and reproducibility standards to
support the 510(k) submission. .
Development of a quantitative capability for the Ixion Oxalobacter
formigenes Monitor.
The Company expects to file a 510(k) submission for clearance to market
the Ixion Oxalobacter formigenes Monitor during 1998. There is no assurance that
the Ixion Oxalobacter formigenes Monitor will qualify for 510(k) procedure, in
which case the Company will have to file an application for premarket approval
("PMA") with the FDA. If the Company must follow the PMA approval route, the
approval process may be lengthy.
The Company intends to develop its DNA probe technology into similar
molecular diagnostic assays against clinically important intestinal organisms
such as those listed above. These, coupled with the Ixion Oxalobacter formigenes
Monitor, will provide for a panel of clinically important diagnostic tests
IxC1-62/47 Enzyme Therapy for Oxalate-Related Disease. Ixion is
developing IxC1-62/47, an orally administered therapeutic product consisting of
the recombinant form of two enzymes normally found in O. formigenes: oxalyl-CoA
decarboxylase ("oxc") and formyl-CoA transferase ("frc"). The enzymatic therapy
is based upon the re-establishment or enhancement of oxalate degrading
mechanisms in the body. IxC1-62/47 will be targeted initially at disease states
that are directly related to malfunctions in handling dietary oxalate, but
indications will be broadened ultimately to cover all disorders where excess
oxalate is a factor, including diseases or complications in which the absence of
O. formigenes is not the cause of the patient's hyperoxaluria Very few
satisfactory treatments currently exist for these disorders.
Both the oxc and frc genes have been successfully cloned into E. coli
and expressed in active form as verified using activity assays developed by
Ixion's scientists. Physicochemical analyses such as SDS-PAGE, IEF, and
N-terminal sequence analysis have been completed. Ixion has grown the
recombinant E. coli to 80 liter scale and has purified the oxc and frc enzymes
for use in a variety of preclinical studies including (1) additional
physicochemical characterization, (2) formulation and drug delivery, and (3)
animal studies. The Company is also purifying the native form of the oxc and frc
enzymes from O. formigenes, to provide comparative data to the recombinant
versions. The Company has not determined whether the recombinant or native
enzymes will be used therapeutically. The current intention is to file an IND
for the IxC1-62/47 enzymatic therapy for oxalate-related disorders in 1998.
In initial animal studies, IxC1-62/47 successfully lowered urinary
oxalate levels in rats. In those studies, oral doses of the enzymes from O.
formigenes resulted in marked differences in urinary oxalate levels of animals
that received the enzymes versus those that did not. The animal studies also
established that IxC1-62/47 could replace the enzymes normally provided by a
colony of O. formigenes, thus lowering urinary oxalate, and that the enzymes
could be delivered in pill form
The research version of the Ixion Oxalobacter formigenes Monitor has
been performed in preclinical studies by Ixion lab personnel on over 300 human
samples from varied populations in the Ukraine, Germany, the United States, and
India. The results of those studies include the following:
Cystic Fibrosis. Oxalate kidney stones are a known complication of
cystic fibrosis. The incidence in cystic fibrosis populations over 12
years old approaches 3% to 4% as compared to 0.2% in normal
populations. Renal autopsies show greater than 90% nephrocalcinosis. In
an Ixion sponsored clinical study conducted with collaborators at
Northwestern University, the University Children's' Hospital, Cologne,
Germany, and University Children's Hospital, Halle, Germany, 43 cystic
fibrosis patients were examined for colonization with O. formigenes. 36
of the 43 patients were non-colonized, and of these, 19 were
hyperoxaluric and eight had urinary oxalate levels in the upper normal
range. The seven patients who were colonized with O. formigenes all
showed normal levels of urinary oxalate.
Recurrent Stone Formers. In another study on O. formigenes colonization
in adult calcium oxalate stone formers, preliminary data have revealed
that the majority of recurrent stone formers (five or more stone
episodes) are non-colonized with this bacteria. Studies in the
literature suggesting a decrease in the colony forming units of O.
formigenes in patients with oxalate calculi, rather than complete
non-colonization, has led to the development by Ixion of a Quantitative
Oxalobacter formigenes Monitor. The Quantitative Oxalobacter formigenes
Monitor is now being used in additional research in collaboration with
researchers at Wake Forest Medical School to detect and quantitate O.
formigenes in hyperoxaluric oxalate stone formers to determine if the
number of colony forming units is a relevant risk factor.
Vulvodynia. A new preclinical study is scheduled in cooperation
with the Diagnostic Reference Laboratory at the Shands Hospital at
the University of Florida to examine 25 to 40 vulvodynia patients
for colonization with O.formigenes.
Over 65 percent of kidney stones are calcium-oxalate stones, and excess
oxalate is implicated in other diseases as set forth above. Oxalate is present
in many common foods, including tea, broccoli, and spinach. O. formigenes is
involved in degradation of dietary oxalate and its secretion from plasma into
the gut. The Company believes that a robust colony of O. formigenes prevents
recurrent calcium-oxalate kidney stone formation and may ameliorate other
disease states. Management believes that Ixion is the only company world-wide
which is examining the role of O. formigenes in human and animal disease states.
Blood Oxalate Assay. The combination of the oxc and frc enzymes and
cofactors also serve as the basis for a planned blood oxalate assay. The
recurrence rate of calcium oxalate kidney stone formation is very high, with
hyperoxaluria as the major predisposing factor to stone formation. Accurate
measurements of blood oxalate levels, together with the presence or absence of
O. formigenes, are important requirements for predicting the risk of
calculogenesis in an individual and stratifying urological patients for clinical
intervention. Development is planned in 1998 on an additional oxalate product: a
blood oxalate assay, to be designed for clinical use by hospitals, independent
labs, and doctors.
The following table summarizes the current status of the Company's
oxalate product research and development program.
Product Development-Oxalate Technology
Product Planned Research Products Status (1)
Indications
Ixion Oxalobacter
formigenes Monitor Detection of O. formigenes in stool Preclinical
Stone research
Blood Oxalate Measurement of oxalate levels in blood Concept
Assay for research in kidney stone, hyperoxaluria,
cystic fibrosis, Crohn's disease, vulvodynia,
Planned Clinical Products
Oxalobacter
formigenes Monitor Detection of O. formigenes in stool for Preclinical
oxalate-related and other oxalate-related
diseases disorders
IxC1-62/47 Treatment of oxalate-related disorders: Preclinical
Enzyme Kidney Stones
Therapy Crohn's Disease
Cystic Fibrosis
Hyperoxaluria
Vulvodynia
Other oxalate-related diseases
Blood Oxalate Diagnostic oxalate detection kit for blood Concept
Assay
Dialysis Rapid removal of excess oxalate in blood Concept
Cartridge
Oxalate-Resistant Catheter coated to Concept
Catheter avoid oxalate encrustation
as a method to reduce
the incidence of infection
(1) "Concept" includes feasibility, theoretical market, and product design
studies based on laboratory or other data. "Research" includes discovery
research, development of the product's physical form and specifications,
and its initial production. "Preclinical" denotes efficacy, pharmacology,
safety, or toxicology studies in animal models. "Clinical" denotes testing
for safety and efficacy.
Licensed Technology
The Company has been licensed, on an exclusive world-wide basis,
commercial rights under one issued U.S. patent, relating to its oxalate
technology, issued February 1997 and expiring in 2014, and one U.S. patent,
relating to its IPSC technology allowed June 1997, as well as several pending
patent applications, divisional applications, continuations, and
continuations-in-part, held by the University of Florida Research Foundation,
Inc. ("UFRFI"), the technology transfer organization of the University of
Florida. The licensed technology relates to two areas: in vitro grown Islet
Progenitor/Stem Cells ("IPSCs") for curing diabetes, and materials and methods
for detection of oxalate and Oxalobacter formigenes.
The license agreements pursuant to which the Company has the rights to
these patent applications require UFRFI to file and prosecute the patents
relating to the technology licensed to the Company, the costs of which are
required to be reimbursed by the Company, and to take all steps to defend such
patent rights. If UFRFI fails to take any such action, the Company has the right
to defend such rights at its own expense.
The Company and UFRFI entered into a Patent License Agreement relating
to materials and methods for detection of oxalate on January 11, 1996, and
another Patent License Agreement relating to in vitro grown IPSCs for curing
diabetes on February 17, 1995 (the "University Patent Licenses"). Except for
royalty rates and certain other immaterial differences, the terms of these
licenses are substantially identical. Pursuant to the University Patent
Licenses, UFRFI licensed its rights under patent applications on an exclusive,
worldwide basis to the Company for the life of the patents granted thereunder.
The Company has rights under the University Patent Licenses to all possible uses
of the patent applications, any patents issued from such applications, any
divisionals and continuations of such applications, and to any claims of U.S.
and foreign continuation-in-part applications, and of the resulting patents,
which are directed to subject matter specifically described in such
applications. In order to maintain its license, the Company is required to use
its best efforts to bring one or more licensed products or processes to market
through a thorough, vigorous, and diligent program for exploitation of the
patent rights. In addition, it must provide annual business plans to the
University showing the plan for product development regarding the
commercialization of licensed products.
Under the University Patent Licenses, the Company paid a license issue
fee, is obligated to pay royalties on net sales by Ixion or its sublicensees of
licensed products or licensed processes, and must reimburse UFRFI for patent
costs incurred in prosecuting the patent applications. There are no minimum
annual royalties. The Company is also obliged to obtain product liability
insurance prior to the sale for commercial purposes of licensed products. There
is no assurance that the Company will be able to obtain such insurance on
reasonable terms.
A number of pharmaceutical companies, biotechnology companies,
universities and research institutions, and individuals have filed patent
applications or received patents to technologies that are similar to the
technologies licensed by the Company. The Company is aware of certain patent
applications previously filed by and patents already issued to others that could
conflict with patents or patent applications licensed to the Company, either by
claiming the same methods or compounds or by claiming methods or compounds that
could dominate those licensed to the Company. In addition, there can be no
assurance that the Company is aware of all patents or patent applications that
may materially affect the Company's ability to make, use, or sell any products.
United States patent applications are confidential while pending in the United
States Patent and Trademark Office ("PTO"), and patent applications filed in
foreign countries are often first published six months or more after filing. Any
conflicts resulting from third party patent applications and patents could
significantly reduce the coverage of the patents or patent applications licensed
to the Company and limit the ability of the Company to obtain meaningful patent
protection. If patents are issued to other companies that contain competitive or
conflicting claims, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. There can be no
assurance that the Company will be able to obtain any such license on acceptable
terms or at all. If such licenses are not obtained, the Company could be delayed
in or prevented from the development or commercialization of its product
candidates, which would have a material adverse effect on the Company.
The Company is aware of potentially significant risks regarding the
patent rights licensed by the Company relating to Islet Progenitor/Stem Cells
and to its oxalate technology, particularly bacterial oxalyl-CoA decarboxylase,
an enzyme used in the Company's proposed oxalate-related products including the
Ixion Oxalobacter formigenes Monitor and the IxC1-62/47 enzyme therapy. The
Company may not be able to commercialize its proposed diabetic products based on
its method of proliferating IPSCs in vitro or its proposed oxalate-related
disease management products, both due to patent rights held by third parties
other than the Company's licensors. As a result, the positions of the Company
and its licensors with respect to the use of IPSCs or products containing
oxalyl-CoA decarboxylase are uncertain and involve legal and factual questions
that are unknown or unresolved. Although management believes its patents and
patent applications provide a competitive advantage in its efforts to discover,
develop, and commercialize useful products, if any of these questions is
resolved in a manner that is not favorable to the Company's licensors or the
Company, the Company may not have the right to commercialize products relating
to certain aspects of IPSC technology or products containing oxalyl-CoA
decarboxylase in the absence of a license from one or more third parties, which
may not be available on acceptable terms or at all. The Company's inability to
commercialize any of these products would have a material adverse effect on the
Company.
As mentioned above, the Company obtained its rights to IPSCs under a
license from the University of Florida Research Foundation, Inc. ("UFRFI") in
February 1995. In 1994 and 1995, UFRFI filed in the United States and thereafter
in numerous foreign countries patent applications covering IPSCs.
In 1981, the Ontario Cancer Institute filed a patent application in the
United States and was issued a patent in 1984 covering a method for producing
pancreatic islet-like structures having histology and insulin-producing
properties corresponding to those of fetal pancreatic islets and islets from
adult animals maintained in culture, based on discoveries by Michael Archer (the
"Archer Patent"). The patented method is similar, but not identical, to the
Company's IPSC technology. The Archer Patent was licensed to CytoTherapeutics,
Inc. in 1991. CytoTherapeutics may have filed patent applications in foreign
countries based upon the Archer Patent and may have additional patent
applications on the same general subject matter pending in the United States.
The Company is also aware that in 1993, Human Cell Cultures, Inc.,
filed a first U.S. patent application which was rapidly abandoned in favor of a
second U.S. continuation-in-part application, and that these U.S. applications
together were the basis of an international application which claimed a cell
culturing method and medium to form pancreatic "pseudotissues" composed of
"pseudoislets" to treat blood sugar disorders in mammals, based on discoveries
by Hayden Coon and others (the "Coon Patent Application"). Subsequently, on June
7, 1995, Human Cell Cultures filed in the U.S. a continuation of its second (now
abandoned) U.S. application, and in July 1997 was issued a United States patent
(the "Coon Patent") claiming a somewhat narrower scope of subject matter and
methods as were claimed in the Coon Patent Application. The Coon Patent
Application and the Coon Patent claim a method which is also similar, but not
identical, to the Company's IPSC technology. At the date of this report, the
Company is not aware of any U.S. or foreign patents which have issued relating
to the Coon Patent Application other than the Coon Patent. However, such patents
may have been issued and there may have been additional patent applications
filed in the United States or foreign countries based upon the Coon Patent
Application.
In the United States, one must be the first to invent a subject matter
in order to be entitled to patent protection on that invention. With respect to
patent applications filed prior to January 1, 1996, United States patent law
provides that if a party invented a technology outside the United States, then
for purposes of determining the first to invent the technology, that party is
deemed to have invented the technology on the earlier of the date it introduced
the invention in the United States or the date it filed its patent application.
In foreign countries, the first party to file a patent application on an
invention, not the first to invent the subject matter, is entitled to patent
protection on that invention, assuming that the invention meets the other
requirements for patentability. There can be no assurance that the owners of the
Archer Patent nor the owners of the Coon Patent Application will not make
challenges to any UFRFI patents or patent applications relating to IPSCs, or
that UFRFI will succeed in defending any such challenges. There can be no
assurance that the sale of IPSC products by the Company would not be held to
infringe United States and foreign patent rights of the owners of the Archer
Patent, the Coon Patent, or the Coon Patent Application. Under the patent laws
of most countries, a product can be found to infringe a third party patent
either if the third party patent expressly covers the product or method of
treatment using the product, or in certain circumstances, if the third party
patent, while not expressly covering the product or method, covers subject
matter that is substantially equivalent in nature to the product or method. If
it is determined that products derived from the Company's IPSC technology
infringe the Archer Patent or the Coon Patent, or infringe a patent, if any,
issued pursuant to the Coon Patent Application, the Company would not have the
right to make, use, or sell its IPSC products in one or more countries in the
absence of a license from the owners of such patents. There can be no assurance
that the Company could obtain a license from such owners on acceptable terms or
at all.
As mentioned above, the Company obtained its rights to its oxalate
technology under a license from UFRFI in January 1995. In 1995, UFRFI filed in
the United States and thereafter in numerous foreign countries patent
applications covering its oxalate technology with claims which cover the Ixion
Oxalobacter formigenes Monitor and its IxC1-62/47 therapy for oxalate-related
disorders, both of which involve the use of an enzyme called oxalyl-CoA
decarboxylase derived from the anaerobic bacteria, Oxalobacter formigenes.
In June, 1995, Human Genome Sciences, Inc., filed a patent application
in the United States, and thereafter in foreign countries, relating to a claimed
human oxalyl-CoA decarboxylase and the DNA(RNA) encoding such polypeptide, as
well as a procedure for producing such polypeptide and for producing an antibody
relating to such polypeptide for use in the treatment of calcium oxalate kidney
stones and hyperoxaluria. A U.S. Patent was issued on June 3, 1997 (the "HGS
Patent"). The HGS Patent purports to relate to a human version of oxalyl-CoA
decarboxylase which is stated to be 50% to 60% homologous to the oxalyl-CoA
decarboxylase from the anaerobic bacteria, Oxalobacter formigenes. If the use of
the Company's bacterial oxalyl-CoA decarboxylase is found to infringe the patent
owned by Human Genome Sciences, then the Company would not have the right to
sell such products in one or more countries without a license from Human Genome
Sciences. There can be no assurance that the Company would be able to obtain a
license from Human Genome Sciences on acceptable terms or at all.
Litigation, which could result in substantial cost to the Company, may
also be necessary to enforce any patents to which the Company has rights or to
determine the scope, validity, and enforceability of other parties' proprietary
rights, which may affect the Company's product candidates and technology. United
States patents carry a presumption of validity and generally can be invalidated
only through clear and convincing evidence. The Company's licensors may also
have to participate in interference proceedings declared by the PTO to determine
the priority of an invention, which could result in substantial cost to the
Company. There can be no assurance that the Company's licensed patents would be
held valid by a court or administrative body or that an alleged infringer would
be found to be infringing. Further, with respect to the technology licensed by
the Company from UFRFI, UFRFI is primarily responsible for any litigation,
interference, opposition, or other action pertaining to patents or patent
applications related to the licensed technology, and the Company is required to
reimburse it for the costs it incurs in interference or opposition. As a result,
the Company generally does not have the ability to institute or determine the
conduct of any such patent proceedings unless UFRFI does not elect to institute
or elects to abandon such proceedings. In cases where UFRFI elects to institute
and prosecute patent proceedings, the Company's rights will be dependent in part
upon the manner in which UFRFI conducts the proceedings. UFRFI could, in any of
these proceedings that it elects to initiate and maintain, elect not to
vigorously pursue or defend or to settle such proceedings on terms that are not
favorable to the Company. An adverse outcome in any patent litigation or
interference proceeding could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties, or
require the Company to cease using such technology, any of which could have a
material adverse effect on the Company.
No assurance can be given that any existing patent application, or any
future patent application will issue or that any patents, if issued, will
provide the Company with adequate patent protection with respect to the covered
products, their uses, technology, or processes. In addition, under its licenses
with UFRFI, the Company is required to meet specified diligence requirements to
retain its license of these patents. No assurance can be given that the Company
will satisfy any of these requirements.
In January 1997, Ixion entered into a patent license agreement
obtaining exclusive rights to the issued patent of Dr. Randy S. Fischer and Dr.
Roy A. Jensen, faculty members at the University of Florida, for identifying a
difference which exists between the metabolic pathway of a microbial or plant
target organism and a non-target host specie and then preparing a control agent
which perturbs the metabolic pathway of the target without significantly
perturbing the metabolic pathway of the host. This patent may be useful in the
development of microbicides for drug resistant pathogens such as staphyloccus,
enterococcus, and neisseria. Under the Fischer/Jensen license agreement, the
Company paid a license issue fee of 1,000 shares of its Common Stock and is
obligated to pay royalties of 2% on net sales of the licensed products by Ixion
or its sublicensees. There are no minimum annual royalties or due diligence
milestones. The Fischer/Jensen license is for the remainder of the legal life of
the patent which expires in 2009.
Because the inventions covered by the University Patent Licenses and
the Fischer/Jensen license were inventions made with federal assistance (which
is typical of university-based discoveries), they are subject to certain rights
of the federal government under 35 USC Title 18, "Patent Rights in Inventions
Made with Federal Assistance." These rights (the "Government Rights") include
"march in" rights under which the government has the right to require the
Company to grant an exclusive license under any of such inventions to a third
party if the government determines that (i) adequate steps have not been taken
to commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs, or (iii) such action is necessary to meet requirement
for public use under federal regulations. The Government Rights include a
non-exclusive, paid-up, worldwide license under such inventions for any
governmental purpose. The law also requires any licensor of an invention that
was partially funded by federal grants to obtain a covenant from its exclusive
licensee to substantially manufacture products using the invention in the United
States, although this covenant is subject to a discretionary waiver by the
government.
Patents and Trade Secrets
Dr. Peck, as an employee of the University of Florida, is bound by the
terms of the University's patent policy, which requires that any invention
conceived of or developed in the area in which he is employed belongs to the
University (subject to the Government Rights described above, and to Ixion's
rights under the consulting agreement it has with him).
It is the Company's policy to require its directors, material
investors, employees, consultants, outside scientific collaborators, and
sponsored researchers, and other advisors to execute confidentiality agreements
upon investment or upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of his
or her relationship with the Company is to be kept confidential and not
disclosed to third parties. Ixion also requires signed confidentiality or
material transfer agreements from any company that is to receive confidential
data or proprietary compounds. In the case of employees and consultants, the
confidentiality agreements also generally provide that all inventions conceived
by the individual while rendering services to the Company shall be assigned to
Ixion as the exclusive property of Ixion (subject, in the case of Dr. Peck, to
the prior rights of the University of Florida). There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets or other proprietary information in the
event of an unauthorized disclosure or will be effective to assign inventions.
Certain of the Company's research has been funded in part by Small
Business Innovation Research grants ("SBIRs") and may be funded in the future by
such grants and by Small Business Technology Transfer Research grants ("STTRs").
In connection with any such funding, the U.S. Government will have the
"Government Rights" described above.
In order to produce or use the Ixion Oxalobacter formigenes Monitor in
its current formulation or to produce the Blood Oxalate Assay (and other
immunodiagnostic products) in commercial quantities for resale, it may be
necessary to license certain rights from Roche Molecular Systems, Inc., the
holder of patents on a nucleic acid amplification process known as the
polymerase chain reaction ("PCR") process. If Ixion finds it necessary to use
PCR to produce commercial products, it will enter into such a license with
Roche, which makes non-exclusive licenses generally available. The Company does
not anticipate that the terms of such license will have a materially adverse
effect on the Company.
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical, and specialized biotechnology companies,
many of which have larger R&D budgets, as well as substantially greater
experience in developing products, in obtaining regulatory approvals, and in
manufacturing and marketing diagnostic and pharmaceutical products. In addition,
many biotechnology companies have formed collaborations with large, established
companies to support research, development, and commercialization of products
that may be competitive with those of the Company. 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 ventures.
The Company's products under development are expected to address a
broad range of markets. The Company's competition will be determined in part by
the potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. See "Business - Government
Regulation." In addition, the first pharmaceutical product to reach the market
in a therapeutic or preventive area is often at a significant competitive
advantage relative to later entrants to the market. Accordingly, the relative
speed with which Ixion or its future corporate partners can develop products,
complete the preclinical and clinical trials and approval processes, and supply
commercial quantities of the products to the market are expected to be important
competitive factors. The Company's competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, develop and implement production and marketing
plans, contract for and manage third-party service providers, obtain and
maintain patent protection, and secure adequate capital resources. The Company
expects its products, if approved for sale, to compete primarily on the basis of
product efficacy, safety, patient convenience, reliability, value, and scope of
patent rights.
Government Regulation
In the United States, the Food and Drug Administration ("FDA")
regulates distribution, manufacture, labeling, and promotion of drugs, medical
devices, and biologics. In addition, manufacturers of these products are subject
to other federal, state, and local environmental and safety laws and
regulations. Governments in other countries may impose additional requirements.
FDA Authorization to Market. Drugs, medical devices, or biologics may
not be commercially distributed in the United States unless they have FDA
authorization. Obtaining FDA authorization to market a regulated product
generally involves the submission of preclinical, product characterization,
clinical, and manufacturing information. The process can take a number of years
and the expenditure of significant resources, and there is no guarantee that the
FDA will ever authorize marketing of the product.
Drugs and Biologics. Some of the Company's planned products, such as
the diabetes treatment products, will be regulated as drugs and biologics. The
Food, Drug, and Cosmetic Act ("FDCA") and the Public Health Service Act ("PHSA")
provide that drugs and biologics may not be commercially distributed within the
United States unless they have been approved by the FDA. The process required by
the FDA before drugs and biologics may be marketed in the United States
generally involves five steps: (1) preclinical laboratory and animal testing,
(2) submission to the FDA of an Investigational New Drug ("IND") application
which must be effective prior to the initiation of human clinical studies, (3)
adequate and well-controlled clinical trials to establish safety and efficacy
for its intended use, (4) submission to the FDA of an New Drug Application
("NDA") or Biologics License Application, ("BLA"), and (5) review and approval
of the NDA or BLA by the FDA.
Preclinical testing covers laboratory evaluation of product chemistry
and formulation as well as animal studies to assess the safety, pharmacology,
toxicology, and efficacy of the product. The results of these tests are
submitted to the FDA as part of the IND. If a company is not notified by the FDA
within 30 days of submission of the IND, Phase I clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. Phase I represents the initial administration
of the drug or biologic to a small group of humans, healthy volunteers, to test
for safety, dosage tolerance, absorption, distribution, metabolism, excretion,
and clinical pharmacology. Phase II involves studies in a small number of
patients to assess the efficacy of the product, to ascertain dose tolerance and
the optimal dose range, and to gather additional data relating to safety and
potential adverse effects. Once an investigational drug is found to have some
efficacy and an acceptable safety profile in the targeted patient population,
Phase III studies are initiated to establish safety and efficacy in an expanded
patient population and multiple clinical study sites. The FDA reviews both the
clinical plans and the results of the trials and may request that the Company
discontinue or expand the trials at any time if there are significant safety
issues.
The results of the preclinical tests and clinical trials of drugs and
biologics are submitted to the FDA in the form of an application for an NDA (in
the case of a drug) or BLA (in the case of a biologic). Additional information,
including additional animal studies or clinical trials, may be requested during
the FDA review period that may extend the review process and delay marketing
approval. The manufacturer must also pass a premarket inspection of its
compliance with good manufacturing practices. There can be no assurance that the
FDA will authorize marketing of the product, or that it will do so in a timely
manner. Once granted, an NDA or PLA may place substantial restrictions on how
the product is marketed. After FDA approval of the NDA or BLA for the initial
indications, further clinical trials may be necessary to gain approval for the
labeling of the product for additional indications.
Medical Devices. Many of the Company's planned products (e.g., the in
vitro diagnostic products such as the Ixion Oxalobacter formigenes Monitor),
will be regulated as medical devices. Pursuant to the FDCA, the FDA regulates
the clinical testing, manufacture, labeling, distribution, and promotion of
medical devices. The FDCA further provides that, unless exempted by regulation,
medical devices may not be commercially distributed in the United States unless
they have been approved or cleared by the FDA.
In the United States, medical devices are classified into one of three
classes (class I, II, or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, class I devices are subject to general controls (for example,
labeling, premarket notification, and adherence to GMPs), and class II devices
are subject to general and specific controls (for example, performance
standards, patient registries and FDA guidelines). Generally, class III devices
are those which must receive a PMA by the FDA to ensure their safety and
effectiveness (for example, life sustaining, life-supporting, and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices).
There are two review procedures by which medical devices can receive
such approval or clearance. Some products may qualify for clearance under a
Section 510(k) ("510(k)") procedure, in which the manufacturer provides a
premarket notification that it intends to begin marketing the product, and shows
that the product is substantially equivalent to another legally marketed product
(i.e., that it has the same intended use and is as safe and effective as a
legally marketed device and does not raise different questions of safety and
effectiveness than does a legally marketed device). In some cases, the
submission must include data from human clinical studies. Marketing may commence
when the FDA issues a clearance letter finding such substantial equivalence.
If the medical device does not qualify for the 510(k) procedure (either
because it is not substantially equivalent to a legally marketed device or
because it is a Class III device required by the statute and implementing
regulations to have an approved application for premarket approval), the FDA
must approve a premarket approval ("PMA") application before marketing can
begin. PMA applications must demonstrate, among other matters, that the medical
device is safe and effective. A PMA application is typically a complex
submission, usually including the results of preclinical and clinical studies,
and preparing an application is a detailed and time-consuming process. Once a
PMA application has been submitted, the FDA's review may be lengthy and may
include requests for additional data. The manufacturer must also pass a
premarket inspection of its compliance with the quality systems regulations.
There can be no assurances that the FDA will authorize marketing of the product
under a 510(k) or a PMA, or that it will do so in a timely manner. After FDA
approval of the initial indication, further clinical trials may be necessary to
gain approval of the product for additional indications.
Clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, which usually involve FDA
review of the investigation before it may begin. Clinical investigations of many
in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
provided the testing meets certain exemption criteria, including labeling as an
Investigational Use Only ("IUO") product. In addition, IVDs may be distributed
for research use only ("RUO"), provided they are intended for laboratory
research and labeled for research use. Pursuant to current FDA policy,
manufacturers of IVDs for IUO or RUO are encouraged by the FDA to establish a
certification program under which these IVDs are distributed to or utilized only
by individuals, laboratories, or health care facilities that have provided the
manufacturer with a written certification of compliance indicating that the IUO
or RUO product will be restricted in use and will, among other things, meet
institutional review board and informed consent requirements.
Once granted, a 510(k) clearance or PMA approval may place substantial
restrictions on how a device is marketed. Even where a device is exempted from
510(k) clearance or PMA approval, FDA may impose restrictions on marketing. For
example, FDA has exempted many analyte specific reagents not sold as finished
test kits from obtaining 510(k) clearance or PMA approval. These reagents,
however, may be marketed only to clinical laboratories certified under the
Clinical Laboratoies Improvements ACT ("CLIA") to conduct tests of high
complexity and are subject to a number of labeling requirements.
The Company's Products. The Ixion Oxalobacter formigenes Monitor and
Blood Oxalate Assays will be distributed initially for research use and will not
require FDA review prior to distribution for those uses. To market these
products for diagnostic use, the Company intends to request authorization under
the 510(k) procedure for the Ixion Oxalobacter formigenes Monitor and perhaps
the Blood Oxalate Assay. PMAs may, however, be required for each of these
products. The Company believes that its diabetes treatment products and enzyme
therapy for treatment of oxalate-related disorders will require either an NDA or
a BLA before they may be commercially distributed. There can be no assurance
that the FDA will accept the Company's views on the regulatory status of its
products, or that the FDA will authorize marketing or clinical investigation of
any product, or that it will do so in a timely manner. Additional studies or
other information may be requested during the FDA review period that may delay
marketing authorization. The law or government regulations may change in ways
that could prevent or delay marketing authorization for the Company's products.
Delays in receipt of, failure to receive, or loss of previously received
approvals could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Other FDA Obligations. Each manufacturing facility for drugs, medical
devices, or biologics, must be registered with the FDA, and the products
manufactured at that facility must be listed with the FDA. A manufacturer's
quality control and manufacturing procedures must conform on an ongoing basis
with good manufacturing practices. Certain adverse effects and product
malfunctions must be reported to the FDA. Product labeling and advertising must
comply with FDA requirements. In some cases, postmarket testing may be required,
or other requirements imposed. Complying with these requirements requires
substantial time, money, and effort. The Company intends to rely on its
strategic partners for assistance with these matters.
FDA Enforcement. The FDA inspects manufacturers of drugs, medical
devices, and biologics on a regular basis. Failure to comply with applicable
requirements can, among other consequences, result in civil penalties,
injunctions, suspensions and losses of regulatory approvals, product recalls,
seizure of products, refusal to allow the Company to enter into supply contracts
with the government, and criminal prosecution.
Non-U.S. Marketing. For marketing outside the United States, the
Company is also subject to foreign regulatory requirements. Requirements
governing the conduct of clinical trials, product licensing, pricing, and
reimbursement vary widely from country to country. The time required to obtain
approvals by foreign countries may be longer or shorter than that required for
FDA approval, and regulatory requirements for foreign countries may differ
significantly from those of the FDA. In some cases, products may not be exported
until FDA approval is obtained. The Company intends to rely on its strategic
partners both in the United States and abroad for assistance with these matters.
Florida Conflicts of Interest. Because Dr. Peck, the Company's Chief
Scientist, and Dr. Schuster and Dr. Khan, members of the Company's Scientific
Advisory Board, are employees of the Florida State University System, they, and
consequently the Company, are subject to Florida statutes relating to conflicts
of interest. In order for Ixion to conduct business with the University
(including licensing University technology or entering into CRADAs), it is
necessary to obtain and maintain an exemption for Dr. Peck from the application
of the Florida conflict of interest statutes, and to obtain approvals for
outside activities for Dr. Schuster and Dr. Khan.
Exemptions for Dr. Peck are issued pursuant to a monitoring plan which
requires the Company, among other things, to promptly disclose every material
transaction between the Company and any employee of the University. Dr. Peck
obtained his initial exemption from the Florida conflict of interest statutes on
January 5, 1995, relating to the academic year ended June 30, 1995. Exemptions
must be renewed annually at the beginning of each academic year (or upon
material alterations in the terms of the relations between the Company and Dr.
Peck). The approval of the request for renewal for the academic year ended June
30, 1997 was received on September 29, 1997. The request to renew Dr. Peck's
exemption for the current academic year ended June 30, 1998 has been filed and
is pending. The approval process can take six or more months. While the Company
has no reason to believe that Dr. Peck's request for renewal will not be
approved, there is no assurance that the exemption will be renewed, or, if
renewed, that it will be renewed on reasonable terms.
Manufacturing and Marketing
The Company has no experience in manufacturing or marketing products on
a commercial scale. Marketing rights for products may be licensed to corporate
partners. Co-marketing arrangements may also be feasible for some products.
Ixion intends to seek distribution arrangements for its products in other
countries outside of the United States. While using third parties for
distribution or marketing permits the Company to avoid the costs of establishing
a distribution or marketing network in a particular area, this strategy also
makes the Company more dependent on the efforts of third parties, involves a
potential reduction in profit margins, and may complicate negotiations and other
matters associated with technology licenses.
Target Markets. Management believes there will be substantial demand
for the Ixion Oxalobacter formigenes Monitor in the research market and, upon
acceptance by urologists and nephrologists as a clinically useful test, by
certain specialized kidney, nephrogenic, and urologic reference labs. The target
markets for a new blood oxalate assay include approximately 5,000 hospital labs,
the several major independent labs, and the same specialized kidney,
nephrogenic, and urologic reference labs as for the Ixion Oxalobacter formigenes
Monitor.
For the use of the Ixion Oxalobacter formigenes Monitor, the blood
oxalate assay, and its IxC1-62/47 enzyme therapy in the management of kidney
stones, the Company plans to target the country's approximately 7,300 in-office
urologists. For the use of the Ixion Oxalobacter formigenes Monitor and
IxC1-62/47 enzyme therapy for managing kidney stone risk in cystic fibrosis
patients, the Company plans to target the cystic fibrosis treatment centers in
the United States. For the use of the Ixion Oxalobacter formigenes Monitor and
IxC1-62/47 enzyme therapy in the diagnosis and treatment of vulvodynia, the
Company intends to approach the market through the 35,000 gynecologists
practicing in the United States.
Marketing Strategy. The strategy for marketing IPSC-related products
will depend on collaborations with third parties with greater marketing
resources than the Company.
The marketing strategy for the Ixion Oxalobacter formigenes Monitor
depends upon educating urologists and nephrologists of the clinical usefulness
of the diagnostic test. Over 65% of all kidney stones are composed predominantly
of calcium oxalate. Oxalate plays a crucial role in the formation of renal
stones and in this respect hyperoxaluria constitutes a special problem in
management of kidney stones. The Ixion Oxalobacter formigenes Monitor would be
used to screen and manage known stone formers in order to assist the urologist
in stratifying and treating kidney stone patients. The use of the Ixion
Oxalobacter formigenes Monitor will allow the urologist to make a determination
of which of his or her hyperoxaluric patients have an exogenous hyperoxaluria
caused by hyperabsorption from the diet, resulting from diminished or decimated
populations of O. formigenes. The clinical relevance of the resulting data is
the urologist's capability to identify a specific cause of urolithiasis and to
treat it effectively. Ixion Oxalobacter formigenes Monitor data will be more
meaningful than 24 hour urinary oxalate data alone in that it accurately
identifies and quantifies the high-risk population of kidney stone formers and
stratifies them with respect to cause.
Kidney stones, while prevalent, are not generally recognized as
predictable or avoidable by many physicians and their patients. Consequently,
the promotional task will be difficult. To meet this challenge, the Company
intends to invest in both physician education programs, and, assuming funds are
available, consumer awareness campaigns. The Company can reach the country's
over 7,300 in-office urologists through a direct mail campaign. In addition,
working with specialized companies in the urology market, the Company proposes
to inform urologists about the Company's planned new kidney stone disease
management products. In addition, the Scientific Advisory Board members and
other recognized scientists will be encouraged to write articles for peer review
scientific journals to stimulate interest and establish further credibility in
the scientific and medical communities.
A similar approach will be used to approach the gynecological market
for the Company's vulvodynia products and the cystic fibrosis market for the
management of kidney stone risk.
In each case, the Company intends to participate in urology,
nephrology, gynecology, and other industry trade meetings and to exploit on-line
medical databases and its own web site. Finally, as stated above, the Company
intends to use third-party sales forces to amplify its efforts. See "Business -
Business Strategy."
Employees.
The Company has five full time employees and nine part time employees,
including Dr. Peck, who is an exclusive consultant, Mr. Peck, President and
Chief Financial Officer, Mr. Tedesco, Vice President - Operations and Regulatory
Affairs, and Ms. Ramsey, Controller. The Company is not subject to any
collective bargaining agreements and believes that its relationship with its
employees is good.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements herein regarding the dates on which the Company anticipates
commencing clinical trials or filing of an Investigational New Drug Exemption
Application ("IND") or application under Section 510(k) of the Food, Drug, and
Cosmetic Act with respect to its product candidates, constitute forward-looking
statements under the federal securities laws. Such statements are subject to
certain risks and uncertainties that could cause the actual timing of such
clinical trials or filings to differ materially from those projected. With
respect to such dates, the Company's management team has made certain
assumptions regarding, among other things, the successful and timely completion
of preclinical tests, the approval of INDs for each of the Company's drug
candidates by the FDA, the availability of Section 510(k) for its device
candidates, the availability of adequate clinical supplies, the absence of
delays in patient enrollment, and the availability of the capital resources
necessary to complete the preclinical tests and conduct the clinical trials. The
Company's ability to commence clinical trials or file an IND or 510(k) on the
dates anticipated is subject to certain risks including the risks discussed
elsewhere in this report.. Undue reliance should not be placed on the dates on
which the Company anticipates filing an IND or 510(k) or commencing clinical
trials with respect to any of its product candidates. Statements herein
regarding the Company's research and development plans also constitute
forward-looking statements under the federal securities laws. Actual research
and development activities may vary significantly from the current plans
depending on numerous factors including changes in the costs of such activities
from current estimates, the results of the programs, the results of clinical
studies referred to above, the timing of regulatory submissions, technological
advances, determinations as to commercial potential, and the status of
competitive products.
All of the above estimates are based on the current expectations of the
Company's management team, which may change in the future due to a large number
of potential events, including unanticipated future developments.
Item 2. Description of Property.
As an affiliate of the University of Florida's Biotechnology Program,
the Company has leased approximately 1,900 square feet of equipped laboratory
space and approximately 500 square feet of administrative office space in the
business incubator at Progress Park (the University of Florida biotechnology
industrial park), called the Biotechnology Development Institute. As a resident,
the Company shares (at no additional cost) specialized facilities such as animal
rooms, small-scale fermentation capabilities, and glass washing and autoclaving
facilities. Further, the Company uses (again at no additional cost) expensive
and specialized equipment located in the centralized instrument lab. Finally,
the Company has available the services of the University Biotechnology Core
Laboratories including the Recombinant Protein Expression Core, the DNA
Synthesis Core, the Flow Cytometry Core, the Protein Chemistry Core, and the
Electron Microscopy Core.
The Company has developed a small scale facility in its BDI lab suite
to produce preclinical quantities of the Ixion Oxalobacter formigenes Monitor as
well as IxC1-62/47. Commercial scale production, if any, will be subcontracted
to third party contract manufacturers. See "Business - Business Strategy." The
facilities license agreement for the Company's laboratory and administrative
offices at the BDI expires July 31, 1998 at which time the Company will
relocate. Annual payments (including utilities) are approximately $43,200,
$14,000 of which is deferred under the agreement with the University. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources
Comparable rental facilities are available near it's the Companny's
present location at the BDI at rents which are not materially more than the rent
at the BDI. As an incubator graduate, the Company would continue to have access
to the Biotechnology Program's specialized facilities, centralized equipment,
and core laboratories. Relocation will not materially affect the Company's
research and development operations.
Contract Suppliers and Manufacturers. It is the Company's present
intention to enter into agreements with contract testing and manufacturing
entities to test and manufacture commercial quantities of the Company's planned
products in order to avoid the expenditure of significant funds to hire and
train personnel and comply with the extensive regulations, including "good
manufacturing practice" ("GMP") requirements applicable to such a facility.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings and is not aware of
any threatened litigation or regulatory action that could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
Item 4. Submission of matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's fiscal year.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company has registered 400,000 newly-issued Units of its securities
for direct sale on Form SB-2 at a price of $10.00 per Unit for an aggregate
offering price of $4,000,000. Each Unit consists of one share of common stock,
$0.01 par value, and .25 Charitable Benefit Warrant. There is no minimum number
of Units to be sold in the Offering, and all funds received will go immediately
to the Company. The registration statement, Commission Registration No.
333-334765, was declared effective on December 10, 1997. Post-Effective
Amendment No. 1 was declared effective on March 19, 1998. The offering has not
terminated and is not scheduled to terminate until the earliest of: the sale of
all Units, December 10, 1998 (unless extended), or the date on which the Company
decides to close the offering. The securities are being sold directly by the
Company (except when sales are to Florida residents, in which case sales must be
made through Unified Management Corporation, a Florida-registered broker
dealer).
As of March 27, 1998, a total of 18,050 Units at an aggregate price of
$180,500 have been sold, of which 1,000 Units for an aggregate of $10,000 was
sold through December 31, 1997. From the effective date of the offering to
December 31, 1997, no expenses were paid to or incurred by underwriters, no
commissions or discounts have been paid to underwriters and there have been no
finders' fees. Other offering related expenses through December 31, 1997,
amounted to $78,974, all of which were deferred and will be offset against
future proceeds. No payments were made to directors, officers, general partners
of the Company, or to their associates through December 31, 1997 in connection
with the offering.
Because the total proceeds received through December 31, 1997 was
$10,000 and the offering expenses were in excess of that amount, there were no
net offering proceeds as of December 31, 1997. The use of proceeds to be
received from the offering is not expected to vary materially from the use of
proceeds described in the prospectus dated March 19, 1998.
There is no public trading market for the Company's securities.
Set forth below is information as to securities sold by Ixion within
the past three years which were not registered under the Securities Act of 1933
(the "Act"). No underwriters were involved in any of the sales, so there were no
underwriting discounts or commissions. All outstanding securities are deemed to
be restricted securities for the purposes of the Act. All certificates
representing such issued and outstanding restricted securities of the Company
have been properly legended and the Company has issued "stop transfer"
instructions to its transfer agent with respect to such securities, which
legends and stop transfer instructions are presently in effect unless such
securities have been registered under the Securities Act or have been
transferred pursuant to an appropriate exemption from the registration
provisions of the Securities Act.
Restricted shares of Common Stock have been issued to Members of the
Board of Directors, Members of the Scientific Advisory Board, and key employees
under the Company's Board Retainer Plan as follows:
On May 31, 1995, 10,000 shares of Common Stock (5,000 shares to each of
two directors) for services as directors valued at an aggregate of
$7,500 or $.75 per share.
On June 10, 1996, 34,000 shares of Common Stock (5,000 shares to each
of two directors, 5,000 shares to each of two members of the Scientific
Advisory Board, for services as directors or scientific advisors and
14,000 shares of Common Stock to its Vice President - Research and
Development as a hiring bonus for services to be rendered) valued at an
aggregate of $92,000 (a portion of which is unearned compensation) or
$3.00 per share.
On September 15, 1996, 10,000 shares of Common Stock (5,000 shares to
each of two members of the Scientific Advisory Board) for services as
scientific advisors valued at $100,000 (a portion of which is unearned
compensation) or $10.00 per share.
On October 10, 1996, 5,000 shares of Common Stock to a member of the
Scientific Advisory Board for services as a scientific advisor valued
at $50,000 (a portion of which is unearned compensation) or $10.00 per
share.
On February 11, 1997, 10,000 shares to its Director of Research,
Oxalate Division, as a hiring bonus for services to be rendered valued
at $100,000 (a portion of which is unearned compensation) or $10.00 per
share.
On June 27, 1997, 7,000 shares of Common Stock (1,000 shares to each of
two directors, and 1,000 shares to each of five members of the
Scientific Advisory Board, for services as directors or scientific
advisors) valued at $70,000 (a portion of which is unearned
compensation) or $10.00 per share.
On July 1, 1997, 3,000 shares to its Associate Director of Research,
Diabetes Division, as a hiring bonus for services to be rendered (a
portion of which is unearned compensation) valued at $30,000 or $10.00
per share.
The Company issued the above securities without registration in reliance upon
the exemption provided by Section 4(2) of the Act as a transaction to a limited
number of sophisticated investors which did not involve a public offering,
general solicitation, or general advertisement and the exemption provided by
Rule 701 promulgated under the Act.
From March 20, 1995 to May 31, 1995, the Company sold an aggregate of
500,000 shares of Common Stock to 26 accredited investors and three unaccredited
investors for an aggregate of $375,000 or $.75 per share. The Company issued the
above securities without registration in reliance upon the exemption provided by
Section 4(2) of the Act as a transaction to a limited number of sophisticated
investors which did not involve a public offering, general solicitation, or
general advertisement and in reliance upon the exemption provided by Rule 504 of
Regulation D of the Act as a sale of securities which, together with all sales
within 12 months, aggregated less than $1,000,000.
On September 21, 1995, the Company sold 3,000 shares of Common Stock
(together with 2,000 warrants to purchase Common Stock at an exercise price of
$2.00 per share expiring in 2000) to an accredited investor for $5,000 in cash
and a note due April 1997 for $6,000 or a price of $3.00 per share and $1.00 per
warrant. The Company issued the above securities without registration in
reliance upon the exemption provided by Section 4(2) of the Act as a transaction
to a limited number of sophisticated investors which did not involve a public
offering, general solicitation, or general advertisement.
Warrants have been issued to an institution in partial payment of rent
for the Company's facilities pursuant to the License Agreement between the
University of Florida Research Foundation, Inc., and the Company as follows:
On November 11, 1995, the Company issued warrants to purchase 7,608
shares of Common Stock at an exercise price of $2.00 per share expiring
in 2000, valued at $1.00 per warrant.
In August, October, and November, 1996, the Company issued warrants to
purchase an aggregate of 8,022 shares of Common Stock at an exercise
price of $2.00 per share expiring in 2000, valued at $1.35 per warrant.
The Company issued the above securities without registration in reliance upon
the exemption provided by Section 4(2) of the Act as transactions to a limited
number of sophisticated investors which did not involve a public offering,
general solicitation, or general advertisement.
On June 30, 1996, two directors and senior officers of the Company, who
may be deemed promoters, converted an aggregate of $16,158 of cash loans made to
the Company under the terms of a subordinated convertible note agreement into a
total of 21,544 shares of Common Stock, at a price of $.75 per share. The
Company issued the above securities without registration in reliance upon the
exemption provided by Section 4(2) of the Act as a transaction to a limited
number of sophisticated investors which did not involve a public offering,
general solicitation, or general advertisement.
In October and November, 1996, the Company issued an aggregate of
$787,270 of Convertible Unsecured Notes due 2001 to 35 accredited and one
unaccredited investors. The Notes are convertible at any time prior to maturity
into a maximum of 323,557 shares of Common Stock at conversion prices ranging
from $4.20 to $2.10. The conversion prices are based on the length of time the
investor holds the Notes prior to conversion. The Company issued the above
securities without registration in reliance upon the exemption provided by
Section 4(2) of the Act as a transaction to a limited number of sophisticated
investors which did not involve a public offering, general solicitation, or
general advertisement and in reliance upon the exemption provided by Rule 505 of
Regulation D of the Act as a sale of securities which, together with all sales
within 12 months, aggregated less than $5,000,000 and were made to fewer than 35
investors.
On February 11, 1997, the Company issued 1,000 shares of Common Stock
to two inventors in exchange for an exclusive license of a patent entitled
"Method for the Selective Control of Weeds, Pests and Microbes," valued at
$10,000 or $10.00 per share. The Company issued the above securities without
registration in reliance upon the exemption provided by Section 4(2) of the Act
as a transaction to a limited number of sophisticated investors which did not
involve a public offering, general solicitation, or general advertisement.
Warrants have been issued to Brandywine Consultants, Inc., pursuant to
the Consulting Agreement between the Company and Brandywine Consultants, Inc.,
dated December 12, 1996, for certain milestones as follows:
On June 23, 1997, 3,000 warrants at an exercise price of $5.00 per
share of Common Stock, expiring June 2002.
On October 24, 1997, 3,000 warrants at an exercise price of $5.00 per
share of Common Stock, expiring October 2002.
The Company issued the above securities without registration in reliance upon
the exemption provided by Section 4(2) of the Act as a transaction to a limited
number of sophisticated investors which did not involve a public offering,
general solicitation, or general advertisement.
As of March 11, 1998, there were approximately 75 shareholders of
record of the Company's common stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to pay any cash dividends on its Common Stock for the
foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis should be read in conjunction
with the Financial Statements and the related Notes thereto included elsewhere
in this report. This report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Special Note Regarding Forward-Looking Statements."
Overview
The Company is a development stage, biotechnology company. The Company
is considered to be in the development stage because it is devoting
substantially all of its efforts to establishing its business and its planned
principal operations have not commenced.
Since its inception in March of 1993, the Company's efforts have been
principally devoted to research and development, securing patent protection, and
raising capital. The Company has not received any revenues from the sale of
products. The Company expects its initial product, a molecular diagnostic test,
the Ixion Oxalobacter formigenes Monitor, will generate revenue during 1998;
however it does not expect any of its other product candidates to be
commercially available for at least the next several years. From inception
through December 31, 1997, the Company has sustained cumulative losses of
$1,979,359. These losses have resulted primarily from expenditures incurred in
connection with general and administrative activities, research and development,
patent preparation and prosecution, and interest.
The Company expects to continue to incur substantial research and
development costs in the future resulting from ongoing research and development
programs, manufacturing of products for use in clinical trials and preclinical
and clinical testing of the Company's products. The Company also expects that
general and administrative costs, including patent and regulatory costs,
necessary to support clinical trials, research and development, manufacturing,
and the creation of a marketing and sales organization, if warranted, will
increase in the future. Accordingly, the Company expects to incur increasing
operating losses for the foreseeable future. There can be no assurance that the
Company will ever achieve profitable operations.
The Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The risks, expenses
and difficulties encountered by companies at an early stage of development must
be considered when evaluating the Company's prospects. To address these risks,
the Company must, among other things, successfully develop and commercialize its
product candidates, secure all necessary proprietary rights, respond to
competitive developments, and continue to attract, retain and motivate qualified
persons. There can be no assurance that the Company will be successful in
addressing these risks.
The operating expenses of the Company will depend on several factors,
including the level of research and development expenses. Research and
development expenses will depend on the progress and results of the Company's
product development efforts, which the Company cannot predict. Management may in
some cases be able to control the timing of development expenses in part by
accelerating or decelerating preclinical testing and clinical trial activities.
As a result of these factors, the Company believes that period-to-period
comparisons in the future are not necessarily meaningful and should not be
relied upon as an indication of future performance. Due to all of the foregoing
factors, it is possible that the Company's operating results will be below the
expectations of market analysts, if any, and investors. In such event, the
prevailing market price, if any, of the Common Stock would likely be materially
adversely affected.
<PAGE>
Results of Operations
Years Ended December 31, 1996 and 1997
The Company's revenues under the GI research agreement decreased 2.3%
from $139,079 in 1996 to $135,922 in 1997. In both years these revenues relate
entirely to recognition and receipt of income from a research support agreement
with Genetics Institute, Inc. Revenues under the Genetics Institute agreement
ceased at the end of the agreement in 1997. Income from the Company's SBIR grant
increased from $20,000 in 1996 to $71,650 for 1997. That grant expired on
September 30, 1997 and no further revenues are expected under it.
Interest income increased 31% from $7,760 in 1996 to $10,147 in 1997.
This increase was attributable to the proceeds from the sale of Unsecured
Convertible Notes in the last quarter of 1996, which were invested for only one
quarter in 1996 compared to the full year in 1997. Interest income relating to
the proceeds of the Unsecured Convertible Notes will decline in 1998, but will
be replaced, in part, with income from the investment of the proceeds of the
Company's public offering of Units in 1998.
Operating, general and administrative expenses increased 21.7% from
$276,642 in 1996 to $336,572 in 1997. These increased expenses reflect increased
personnel, increased patent amortization expenses, amortization of certain
capitalized costs incurred in connection with the offering of Unsecured
Convertible Notes in the fourth quarter of 1996, offset to some degree by a
decline in legal expenses in 1997 compared to 1996. Both the amortization
expenses commenced during 1997. The Company expects its general and
administrative expense to increase during 1998 as a result of the hiring of
additional personnel, increased amortization of capitalized patent costs as new
patents are issued, and continued amortization of capitalized private placement
expenses.
Research and development expenditures consist primarily of
payroll-related expenses of research and development personnel, laboratory
supplies, animal supplies, laboratory rent, depreciation on laboratory
equipment, development activities, payments for sponsored research, and payments
to scientific and regulatory consultants. Research and development expenses
increased 41.5% from $392,010 in 1996 to $554,751 in 1997, primarily as a result
of additional research and development personnel, and increased research
activities. The Company anticipates that its research and development expenses
will continue to increase during the next 12 months as the Company expands
research and development programs and preclinical and clinical testing for its
product candidates and technologies under development.
Interest expense increased 99.5% from $56,192 in 1996 to $112,083 in
1997 due primarily to cash interest on the Company's 10% Notes, the amortization
of debt discount (initially $285,835) attributable to the beneficial conversion
feature of the Company's Variable Notes, both issued in the last quarter of
1996, and the compounding of interest on deferred fees and salaries, including
deferred interest, payable to related parties. Interest expense will continue to
increase during 1998, primarily as a result of the continued compounding of
interest on deferred fees and salaries accounts.
Years Ended December 31, 1995 and 1996
The Company recognized contract research and development revenues of
$159,079 for the first time in the year ended December 31, 1996. This revenue
consisted of a portion of the $200,000 payment under a research support
agreement between the Company and Genetics Institute, Inc. (received upon
execution of the agreement), which the Company recognized, ratably over the
12-month life of the research project, ending June 30, 1997. Revenues also
included funds received under a grant from the National Institutes of Health
under the Small Business Innovation Research ("SBIR") Program. Prior to this,
the Company's only revenues had been from interest income and nominal consulting
fees for services rendered by Ixion personnel to the Biotechnology Development
Institute. Revenues under the Genetics Institute Agreement ceased in June 1997.
Payments of up to $71,650 under the SBIR continued in 1997, but terminated in
September 1997.
Interest income increased 53% from $5,060 in 1995 to $7,760 in 1996,
primarily as a result of the investment of the proceeds of the Company's
offering of 10% Notes and Variable Notes in the last quarter of 1996. Other
income increased 43% from $3,062 in 1995 to $4,366 in 1996 due primarily to an
increase in consulting fees for services rendered by Ixion personnel to the
Biotechnology Development Institute.
Operating, general and administrative expenses increased 20% from
$230,423 in 1995 to $276,642 in 1996, primarily due to additions to the
Company's personnel.
Research and development expenses increased 199% from $130,984 in 1995
to $392,010 in 1996. This increase was primarily attributable to increases in
research personnel and the scale of research operations during the year. The
Company recorded non-cash compensation expense in the amount of $139,295 in 1996
related to the issuance of compensatory options and restricted stock.
Interest expense increased 169% from $20,927 in 1995 to $56,192 in
1996, due primarily to additions to deferred fees and salaries, including
deferred interest payable to related parties, arising from the deferral of fees
and salaries in 1993, 1994, 1995, and 1996 by Company officers and consultants,
and the compounding of deferred interest in those accounts, to the cash interest
on the Company's 10% Notes, and the amortization of debt discount (initially
$285,835) attributable to the beneficial conversion feature of the Company's
Variable Notes, both issued in the last quarter of 1996.
Liquidity and Capital Resources
In December, 1997, the Company commenced the public offering of 400,000
Units of newly issued securities, for an aggregate of $4,000,000. Each Unit
consists of one share of Common Stock, $0.01 par value, and .25 Charitable
Benefit Warrants. Each whole Charitable Benefit Warrant entitles the holder to
purchase one share of Common Stock at a price of $20.00 per share. The Offering
is being made in nine states, primarily over the Internet, directly by the
Company, except in Florida where sales must be made through a broker. There is
no minimum number of Units to be sold in the Offering, and all funds received
will go immediately to the Company. The offering will be terminated upon the
earliest of: the sale of all Units, December 10, 1998 (unless extended), or the
date on which the Company decides to close the offering. At March 27, 1998, a
total of 18,050 Units ($180,500) had been sold pursuant to the offering.
During 1997, the Company's development activities were funded primarily
by a private placement transaction in which it sold Unsecured Convertible Notes
for an aggregate gross consideration of $787,270. In addition, the Chairman and
Chief Executive Officer and the President of the Company have entered into an
agreements to extend the Company up to $150,000 and up to $25,000, respectively,
in the form of bridge loans. Interest on the loans is at 8% but can be reset
annually, at the election of either party, to the prime rate in effect on
January 1 of any given year, plus 3%. Under these agreements, the Company
borrowed a total of $75,000, which was still outstanding at December 31, 1997
The Company expects to borrow and repay under these facilities from time to time
to meet working capital needs. The Company does not have any bank financing
arrangements. The Company's long-term indebtedness consists primarily of
deferred fees and salaries payable to related individuals and a chattel mortgage
agreement.
At December 31, 1997, the Company had $44,443 in cash and cash
equivalents.
On January 1, 1996, the Company purchased laboratory equipment pursuant
to a chattel mortgage agreement in the amount of $32,309. The agreement calls
for monthly payments of $897, commencing August 1, 1996. At December 31, 1997,
$17,052 in principal remains outstanding under this agreement. The Company made
capital expenditures of $5,800 for the year ended December 31, 1997, primarily
for acquisitions of additional laboratory and office equipment.
For the period March 25, 1993 (date of inception) through December 31,
1997, the Company made payments of approximately $210,000 associated with the
prosecution of various patent applications. As further research continues and
the Company acquires additional patent rights, management expects the
patent-related payments to increase.
In connection with the GI sponsored research agreement described above,
certain patent-related expenses were paid by the Company and reimbursed by GI.
The Company is contractually obligated to repay these reimbursed expenses in
installments over a 36 month period upon a determination by GI not to exercise
an option contained in the sponsored research agreement. Reimbursement has not
commenced, and the Company has accrued $42,317 as a long term liability pending
final action under the agreement.
Through December 31, 1997, the Company had paid offering-related
expenses of $78,974 which will be applied against the proceeds of the public
offering.
The Company has incurred negative cash flows from operations since its
inception, and has expended and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, commence
clinical trials, and diversify its technology. The Company's future capital
requirements and the adequacy of available funds will depend on numerous
factors, including the successful commercialization of the Ixion Oxalobacter
formigenes Monitor and IxC1-62/47, progress in its product development efforts,
the magnitude and scope of such efforts, progress with preclinical studies and
clinical trials, the cost of contract manufacturing and research organizations,
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
and the development of strategic alliances for the development and marketing of
its products. The Company requires the proceeds of the public offering commenced
in December 1997 to meet its planned operating requirements through December 31,
1998. In the event the Company's plans change or its assumptions change or prove
to be inaccurate or the proceeds of the Offering prove to be insufficient to
fund operations (due to unanticipated expenses, delays, problems or otherwise),
the Company could be required to seek additional financing sooner than currently
anticipated. In addition, the Company will be required to obtain additional
funds in any event through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources in order to bring its
products through regulatory approval to commercialization. The terms and prices
of any equity or debt financings may be significantly more favorable than those
of the Units sold in the offering. The Company does not have any material
committed sources of additional financing, and there can be no assurance that
additional funding, if necessary, will be available on acceptable terms, if at
all. If adequate funds are not available, the Company may be required to delay,
scale-back, or eliminate certain aspects of its operations or attempt to obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, products, or potential markets. If adequate funds are not available,
the Company's business, financial condition, and results of operations will be
materially and adversely affected.
Until required for operations, the Company's policy is to invest its
cash reserves in bank deposits, money market funds, certificates of deposit,
commercial paper, corporate notes, U.S. government instruments and other
investment-grade quality instruments.
Product Research and Development Plan
The Company's plan of operation for 1998 consists primarily of research
and development and related activities including:
C further development of the Company's IPSC research programs aimed at
proprietary populations of functioning islets for transplantation into
diabetic patients;
C continuing the funding of the ongoing discovery program in which the
Company intends to identify and characterize novel growth factors
associated with the IPSCs, to discover factors important in islet cell
differentiation and possible regulation of diabetes and to identify
stem cell markers to which the Company hopes to produce antibodies
useful in stem cell isolation;
C further preclinical development of a quantitative version of the
Company's molecular diagnostic, the Ixion Oxalobacter formigenes
Monitor,
C further development of IxC1-62/47, including formulation, product
characterization, method development, testing (including toxicology),
cell line characterization, process development, clinical lot
manufacturing, stability, research protocols, and preclinical studies
for the Company's proposed products, primarily its oxalate-related
products;
C continuing the prosecution and filing of patent applications; and
hiring additional employees.
The actual research and development and related activities of the
Company may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, and other factors.
There can be no assurance that the Company will be able to
commercialize its technologies, or that profitability will ever be achieved. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future and will depend on a number of factors, many of
which are outside the Company's control.
Year 2000 Issues
The Company has reviewed the potential effect of Year 2000 compliance
issues on the Company and has determined that those issues are not material to
the Company's business, operations, or financial condition.
Item 7. Financial Statements.
The financial statements of the Company are set forth beginning on page
F-1, immediately following the signature page of this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.
The information required under Part III, Items 9, 10, 11, and 12, has
been omitted from this report since the Company intends to file with the
Securities and Exchange Commission (the "Commission"), not later than 120 days
after the close of its fiscal year, a definitive proxy statement prepared
pursuant to Regulation 14A, which information is hereby incorporated by
reference.
Item 13. Exhibits and Reports on Form 8-K.
Exhibits marked by asterisk(s) have not been included with this Annual
Report on Form 10-KSB, but instead have been incorporated by reference to other
documents filed by the Company with the Commission.
Exhibit Description
Number
*3.1 Certificate of Incorporation of Registrant
*3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant
*3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant
*3.4 Bylaws of Registrant, as amended and restated
**4.3 Charitable Benefit Warrant Agreement
*4.4 Warrant Agreement with Jeffrey W. Seel, dated November 7, 1995
*4.5 Warrant Agreement with the University of Florida Research
Foundation, Inc., dated November 7, 1995
*4.6 Warrant Agreement with the University of Florida Research
Foundation, Inc., dated August 1, 1996
*4.7 Warrant Agreement with the University of Florida Research
Foundation, Inc., dated October 1, 1996
*4.8 Warrant Agreement with the University of Florida Research
Foundation, Inc., dated November 7, 1996
**4.9 Warrant Agreement with Brandywine Consultants, Inc., dated June 23,
1997
**4.10 Warrant Agreement with Brandywine Consultants, Inc., dated October
24, 1997
*10.1 Chattel Mortgage Agreement with Carl Therapeutic, Inc., dated as of
January 1, 1996
*10.2 Consulting Agreement with Brandywine Consultants, Inc., dated
December 12, 1996
*10.3 Consulting Agreement with Ammon B. Peck, dated February 21, 1997
*10.4 Consulting Agreement with David C. Peck, dated July 1, 1996
*10.5 Convertible Promissory Note with Weaver H. Gaines, dated March 31,
1993
*10.6 Convertible Promissory Note with David C. Peck, dated October 15,
1993
*10.7 Demand Promissory Note, Bridge Loan with Weaver H. Gaines, dated
April 15, 1996
*10.8 Demand Promissory Note, Bridge Loan with David C. Peck, dated
April 15, 1996
*10.9 Deferred Compensation Plan Agreement with Weaver H. Gaines, dated
January 1, 1994
*10.10 Deferred Compensation Plan Agreement with Ammon B. Peck, dated
June 1, 1994
*10.11 Deferred Compensation Plan Agreement with David C. Peck, dated
April 1, 1994
*10.12 Agreement to Purchase Shares, dated as of October 10, 1994
*10.13 Note Purchase Agreement, dated as of September 13, 1996
*10.14 Incubator License Agreement with the University of Florida Research
Foundation, Inc., dated June 26, 1995
*10.15 Amendment No. 1, dated July 31, 1996 to Incubator License Agreement
with the University of Florida Research Foundation, Inc.
*10.16 Amendment No. 2, dated October 1, 1996 to Incubator License
Agreement with the University of Florida Research Foundation,
Inc.
*10.17 Amendment No. 3, dated November 7, 1996 to Incubator License
Agreement with the University of Florida Research Foundation,
Inc.
*10.18 Amendment No. 4, dated January 21, 1997 to Incubator License
Agreement with the University of Florida Research Foundation,
Inc.
*10.19 Patent License Agreement with Randy S. Fischer and Roy A. Jensen
for U.S. Patent No. 5,187,071, "Method for the Selective Control
of Weeds, Pests, and Microbes," dated February 11, 1997
****10.20 Patent License Agreement with Research Component with the
University of Florida Research Foundation, Inc. relating to
Oxalobacter formigenes, dated January 11, 1995 (1)
****10.21 Amendment No. 1 to Patent License Agreement with Research Component
with the University of Florida Research Foundation, Inc.
relating to Oxalobacter formigenes, dated December 20, 1995
****10.22 Amendment No. 2 to Patent License Agreement with Research Component
with the University of Florida Research Foundation, Inc.
relating to Oxalobacter formigenes, dated October 9, 1996 (1)
****10.23 Patent License Agreement with Research Component with the
University of Florida Research Foundation, Inc. relating to
Pancreatic Stem Cells, dated February 17, 1995 (1)
****10.24 Amendment No. 1 to Patent License Agreement with Research Component
with the University of Florida Research Foundation, Inc.
relating to Pancreatic Stem Cells, dated October 9, 1996 (1)
****10.25 Patent License Agreement with Milton J. Allison, dated June 23,
1997. (1)
****10.26 Sponsored Research Agreement with Genetics Institute, Inc., dated
June 5, 1996 (1)
*10.27 Employment Agreement with Weaver H. Gaines, dated August 31, 1994
*10.28 Employment Agreement with David C. Peck, dated August 31, 1994
*10.29 1994 Stock Option Plan, as amended
**10.30 1994 Board Retainer Plan, as amended
*10.31 Consulting Agreement with Ammon Peck, dated October 6, 1994
*10.32 Amendment No. 5 to Incubator License Agreement
11.1 Statement regarding computation of earnings per share (included as
Note 1 in financial statements)
27 Financial Data Schedule
(1) Confidential information has been omitted from these document and
filed separately with the Commission pursuant to a request for Confidential
Treatment. * Incorporated by reference to Form SB-2, File No. 333-334765, dated
August 29, 1997.** Incorporated by reference to Amendment 1 to Form SB-2, File
No. 333-334765, dated November 7, 1997. *** Incorporated by reference to
Amendment 2 to Form SB-2, File No. 333-334765, dated December 2, 1997. ****
Incorporated by reference to Amendment 3 to Form SB-2, File No. 333-334765,
dated December 9, 1997.Item 13(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Ixion Biotechnology, Inc.
By: /S/ Weaver H. Gaines
Weaver H. Gaines
Chairman and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report
has been signed by the following persons on behalf of the Company and in the
capacities indicated on March 30, 1998.
SIGNATURE TITLE
/S/ Weaver H. Gaines Chairman of the Board, Chief Executive
Weaver H. Gaines Officer, and Director
/S/ David C. Peck President, Chief Financial Officer and
David C. Peck Director
/S/ Kimberly A. Ramsey Controller
Kimberly A. Ramsey
/S/David M. Margulies Director
David M. Margulies
/S/ Vincent P. Mihalik Director
Vincent P. Mihalik
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and
for the Period March 25, 1993 (Date of Inception)
through December 31, 1997
F-1
<PAGE>
Ixion Biotechnology, Inc.
Contents
Page
Report of Independent Accountants F-3
Financial Statements:
Balance Sheet F-4
Statements of Operations F-5
Statements of Capital Deficiency F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
F-2
<PAGE>
Report of Independent Accountants
The Board of Directors
Ixion Biotechnology, Inc.
We have audited the balance sheet of Ixion Biotechnology, Inc. (A Development
Stage Company) as of December 31, 1997, and the related statements of
operations, capital deficiency and cash flows for the years ended December 31,
1997 and 1996 and for the period March 25, 1993 (date of inception) through
December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 financial statements referred to above present fairly, in
all material respects, the financial position of Ixion Biotechnology, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996 and for the period March 25, 1993 (date
of inception) through December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company requires additional financing to continue its
development stage activities which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/
Orlando, Florida
February 26, 1998, except as to
Note 12 for which the date
is March 27, 1998
F-3
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Balance Sheet
December 31, 1997
Assets
Current Assets:
Cash and cash equivalents ......................... $ 44,443
Accounts receivable ............................... 1,770
Prepaid expenses .................................. 1,402
Other current assets .............................. 500
Total current assets ................. 48,115
Property and Equipment, net ............................ 35,695
Patents and Patents Pending, net ....................... 216,504
Deferred Offering Costs ................................ 78,974
Other .................................................. 8,121
$ 387,409
Liabilities and Capital Deficiency
Current Liabilities:
Accounts payable ..................................... $ 64,422
Current portion of notes payable ..................... 85,570
Accrued expenses ..................................... 46,445
Total current liabilities ............... 196,437
Long-Term Liabilities:
Notes payable ........................................ 584,142
Liability under research agreement ................... 42,317
Deferred rent ........................................ 6,486
Deferred fees and salaries, including accrued
interest, payable to related part .................. 476,416
Total long-term liabilities ............. 1,109,361
Total liabilities ....................... 1,305,798
Commitments (Note 11)
Capital Deficiency:
Common stock, $.01 par value; authorized
4,000,000, issued and
outstanding 2,465,544 shares ...................... 24,655
Additional paid-in capital ........................... 1,239,003
Deficit accumulated during the development stage ..... (1,979,359)
Less unearned compensation ........................... (202,688)
Total capital deficiency ................ (918,389)
Total Liabilities and Capital Deficiency .................. $ 387,409
See accompanying notes to financial statements.
F-4
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
For the Period
March 25,
1993 (Date
of Inception)
Year Ended through
December 31, December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Income under research agreement ..... $ 135,922 $ 139,079 $ 275,001
Income from SBIR grant .............. 71,650 20,000 91,650
Interest income ..................... 10,147 7,760 22,967
Other income ........................ 3,733 4,366 14,548
Total revenues .......... 221,452 171,205 404,166
Expenses:
Operating, general and administrative 336,572 276,642 1,098,110
Research and development ............ 554,751 392,010 1,086,131
Interest ............................ 112,083 56,192 199,284
Total expenses .......... 1,003,406 724,844 2,383,525
Net Loss ................................. $ (781,954) $ (553,639) $ (1,979,359)
Net Loss per Share (Basic) ............... $ -0.32 $ -0.23
Weighted Average Common Shares ........... 2,458,440 2,407,224
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Capital Deficiency
For the Period March 25, 1993 (Date of Inception) through December 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Unearned
Common Stock Paid-In Development Note Compen-
Shares Amount Capital Stage Receivable sation Total
<S> <C> <C> <C> <C> <C> <C> <C>
Initial sale of common stock, .... 100,000 $ 1,000 $ -- $ -- $ -- $ -- $ 1,000
$.01 per share
Sale of common stock, $.01 per ... 50,000 500 -- -- -- -- 500
share
Net loss for the period March 25,
1993 (date
of inception) through December -- -- -- (54,268) -- -- (54,268)
31, 1993
Balance, December 31, 1993 .......... 150,000 1,500 -- (54,268) -- -- (52,768)
Conversion of subordinated notes
payable,
$0.02 per share ............... 900,000 9,000 9,000 -- -- -- 18,000
Issuance of stock under Board
Retainer
Plan, $0.02 per share ......... 5,000 50 50 -- -- -- 100
Sale of stock, $0.02 per share ... 5,000 50 50 -- -- -- 100
Issuance of stock in exchange for
certain
intellectual property, $0.02 .. 650,000 6,500 6,500 -- -- -- 13,000
per share
Conversion of deferred consulting
fees,
$0.10 per share ............... 10,000 100 900 -- -- -- 1,000
Sale of stock, $0.10 per share ... 140,000 1,400 12,600 -- -- -- 14,000
Net loss ......................... -- -- -- (215,286) -- -- (215,286)
Balance, December 31, 1994 ..........1,860,000 18,600 29,100 (269,554) -- -- (221,854)
Sale of stock, $0.75 per share ... 500,000 5,000 370,000 -- -- -- 375,000
Issuance of stock under Board
Retainer
Plan, $0.75 per share ......... 10,000 100 7,400 -- -- -- 7,500
Issuance of 9,608 common stock ... -- -- 9,608 -- -- -- 9,608
warrants
Sale of stock, $3.00 per share ... 3,000 30 8,970 -- -- -- 9,000
Note received from shareholder
for common
stock and warrants ............ -- -- -- -- (6,000) -- (6,000)
Net loss ......................... -- -- -- (374,212) -- -- (374,212)
Balance, December 31, 1995 ..........2,373,000 23,730 425,078 (643,766) (6,000) -- (200,958)
Issuance of stock under Board
Retainer
Plan, $3.00 per share ......... 20,000 200 59,800 -- -- (26,166) 33,834
Issuance of stock, $3.00 per share 14,000 140 41,860 -- -- (36,540) 5,460
Issuance of stock under Board
Retainer
Plan, $10.00 per share ........ 15,000 150 149,850 -- -- (50,000) 100,000
Issuance of 8,022 common stock ... -- -- 10,857 -- -- -- 10,857
warrants
Conversion of subordinated notes
payable to
related parties, $0.75 per .... 21,544 215 15,943 -- -- -- 16,158
share
Issuance of variable notes with
beneficial
conversion feature ............ -- -- 285,835 -- -- -- 285,835
Net loss ......................... -- -- -- (553,639) -- -- (553,639)
Balance, December 31, 1996 ..........2,443,544 24,435 989,223 (1,197,405) (6,000) (112,706) (302,453)
Issuance of stock, $10.00 per .... 14,000 140 139,860 -- -- (111,382) 28,618
share
Issuance of stock under Board
Retainer
Plan, $10.00 per share ........ 7,000 70 69,930 -- -- (43,000) 27,000
Payment received from shareholder
for note
received for common stock and . -- -- -- -- 6,000 -- 6,000
warrants
Amortization of unearned
compensation
over service period ........... -- -- -- -- -- 64,400 64,400
Stock warrants issued for services -- -- 30,000 -- -- -- 30,000
Sale of stock, $10.00 per share .. 1,000 10 9,990 -- -- -- 10,000
Net loss ......................... -- -- -- (781,954) -- -- (781,954)
Balance, December 31, 1997 .......... 24,655 $24,655 $ 1,239,003 $1,979,359 $ -- $(202,688) $ (918,389)
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period
March 25,
1993 (Date
of Inception)
Year Ended through
December 31, December 31,
1997 1996 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (781,954) $ (553,639) $(1,979,359)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 11,471 8,546 24,400
Amortization 3,019 738 3,844
Stock warrants issued under license agreement - 10,857 20,465
Amortization of debt discount 57,168 19,056 76,224
Stock warrants/options issued for consulting services 30,000 - 30,000
Stock compensation 110,018 139,295 256,813
Decrease (increase) in employee advance - 900 -
Decrease (increase) in prepaid expenses and
other current assets 6,376 7,932 (1,727)
Decrease (increase) in accounts receivable 6,389 (8,159) (1,770)
Increase (decrease) in deferred revenue (100,000) 100,000 -
Increase in liability under research agreement 42,317 - 42,317
Increase in accounts payable and
accrued expenses 28,881 24,869 95,193
Increase in deferred fees and salaries 91,378 83,256 449,864
Increase in deferred rent 6,486 - 6,486
Increase in interest payable - 2,325 33,198
Net cash used in operating activities (488,451) (164,024) (944,052)
Cash Flows from Investing Activities:
Purchase of property and equipment (5,757) (13,993) (31,897)
Organization costs - - (436)
Payments for patents and patents pending (90,289) (67,053) (209,770)
Net cash used in investing activities (96,046) (81,046) (242,103)
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated notes
payable to related parties 75,000 - 105,307
Proceeds from issuance of convertible notes payable - 787,270 787,270
Proceeds from sale of common stock 10,000 - 416,700
Proceeds from collection of note receivable 6,000 - 6,000
Payment of loan costs - (11,080) (11,080)
Payment of deferred offering costs (62,629) - (62,629)
Principal reductions in note payable (10,970) - (10,970)
Net cash provided by financing activities 17,401 776,190 1,230,598
Net Increase in Cash and Cash Equivalents (567,096) 531,120 44,443
Cash and Cash Equivalents at Beginning of Period 611,539 80,419 -
Cash and Cash Equivalents at End of Period $ 44,443 $ 611,539 $ 44,443
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
For the Period
March 25,
1993 (Date
of Inception)
Year Ended through
December 31, December 31,
1997 1996 1997
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 21,887 $ 5,761 $ 28,156
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Common stock issued for subordinated notes
payable $ - $ 16,158 $ 34,158
Common stock, stock warrants and stock options
issued for services or technology $ 30,000 $ 10,857 $ 49,457
Common stock issued for note receivable $ - $ - $ (6,000)
Common stock issued for purchase of patent $ 10,000 $ - $ 10,000
Equipment purchased under an installment
note arrangement $ - $ 28,022 $ 28,022
Common stock issued under Board Retainer Plans $ 70,000 $ 210,000 $ 287,500
Other common stock issued as compensation $ 130,000 $ 42,000 $ 172,000
Deferred offering costs included in
accounts payable $ 16,345 $ - $ 16,345
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements
YearsEnded December 31, 1997 and 1996 and the Period March 25, 1993 (Date of
Inception) through December 31, 1997
1.Significant Accounting Policies:
Organization - Ixion Biotechnology, Inc., a Delaware corporation (the
"Company"), was incorporated on March 25, 1993 and has been in the
development stage since its formation. The Company is in business to
develop pharmaceutical products and medical devices to detect, diagnose,
treat or prevent diabetes and oxalate-induced diseases. The Company has
not generated significant revenues to date and has experienced operating
losses since its inception. The Company expects to incur additional
operating losses for the next several years as the Company expands its
research and development and regulatory activities and prepares for the
manufacturing and marketing of its products.
Basis of Presentation - The Company is in the development stage since it
is devoting substantially all of its efforts to establishing its business
and its planned principal operations have not commenced. Successful
completion of the Company's development program, and its transition to
profitable operations, is dependent upon obtaining approval to market its
products from the United States Food and Drug Administration and
achieving revenues from the commercial development of its products.
The Company's financial statements for the year ended December 31, 1997
have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments
in the normal course of business. The Company incurred a net loss of
$781,954 for the year ended December 31, 1997 and, as of December 31,
1997, had a total capital deficiency of $1,979,359.
In December, 1997, the Company commenced the public offering of 400,000
units of newly issued securities for an aggregate of $4,000,000. Each
unit consists of one share of Common Stock, $.01 par value, and a .25
Charitable Benefit Warrant. Each whole Charitable Benefit Warrant
entitles the holder to purchase one share of the Common Stock at a price
of $20.00 per share. The Company requires the proceeds of the public
offering to meet its planned operating requirements through December 31,
1998. The Company had received proceeds of $10,000 as of December 31,
1997. If the proceeds from the offering prove to be insufficient, then
the Company would be required to obtain additional funds through equity
or debt financing, strategic alliances with corporate partners, or
through other sources.
There can be no assurance that the Company will be successful in
obtaining the required financing. Under current circumstances, the
Company's ability to continue as a going concern depends upon obtaining
additional financing.
Cash and Cash Equivalents - The Company considers all highly liquid
instruments with a maturity of three months or less at time of purchase
to be cash equivalents.
F-9
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
YearsEnded December 31, 1997 and 1996 and the Period March 25, 1993 (Date of
Inception) through December 31, 1997
Significant Accounting Policies - Continued:
Income Taxes - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year
end based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Property and Equipment - Property and equipment are stated at cost. Gains
and losses on disposition are recognized in the year of the disposal.
Expenditures for maintenance and repairs are expensed as incurred.
Depreciation is computed using the straight-line method over the
estimated lives of the assets (5 years).
Patents and Patents Pending - Patents pending consist of direct costs
incurred in connection with the applications for patents. Amortization of
these costs over the estimated life will begin upon issuance or they will
be expensed immediately if rejected. At December 31, 1997, the Company
has received final approvals on one patent and purchased another through
the issuance of 1,000 shares of common stock. Patents are being amortized
over 13-17 years. The Company periodically evaluates the recoverability
of intangibles and measures any impairment by comparison to estimated
undiscounted cash flows from future operations. The factors considered by
management in performing this assessment include current operating
results, trend and prospects as well as the effects of obsolescence,
demand, competition and other economic factors.
Research and Development - Research and development costs are charged to
expense as incurred.
Other Assets - Other assets consists of organizational costs and loan
costs associated with convertible notes. The organizational costs are
being amortized on a straight-line basis over five years. Loan costs are
being amortized over the term of the notes payable.
Deferred Offering Costs - Fees, costs and expenses related to the public
offering have been capitalized. These costs will be offset against the
proceeds from the offering or expensed should the offering be abandoned.
F-10
<PAGE>
1.Significant Accounting Policies - Continued:
Deferred Rent - Deferred rent represents a portion of the rent payable
under the Company's facilities license with the Biotechnology Development
Institute ("BDI") and accrued interest thereon. The deferred amount bears
non-cash interest at 12% on the outstanding balance, compounded annually.
The Company will repay the liability through a 1% royalty on net sales of
any products developed during its tenancy at the BDI, such royalty not to
exceed the outstanding balance.
Net Loss Per Share - Basic net loss per share is computed using the
weighted average number of common shares outstanding for the period.
Diluted net loss per share is not presented, as the effects of including
common equivalent shares from stock options, warrants and convertible
notes payable in the computation is antidilutive.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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.
2.Property and Equipment:
Property and equipment consists of the following as of December 31, 1997:
Computers and equipment .............................. $ 57,084
Computer software .................................... 515
Library .............................................. 1,104
58,703
Less accumulated depreciation ........................ (23,008)
$ 35,695
F-11
<PAGE>
3.Notes Payable:
On March 15, 1996, the Company entered into a written agreement to
purchase certain laboratory equipment for a sales price of $32,309,
payable in 36 monthly installments of $897, including interest, beginning
August 1, 1996. As of December 31, 1997, $17,052 in principal remains
outstanding under this agreement.
In September, 1996, the Company completed the private placement of
$787,270 in Convertible Unsecured Notes due 2001. The private placement
provided investors with the option of either 10% Convertible Unsecured
Notes ("10% Notes") or Variable Conversion Rate Convertible Unsecured
Notes ("Variable Notes"). The 10% Notes accrue interest at the stated
rate until maturity, or conversion, and pay interest quarterly commencing
on November 30, 1996. The 10% Notes are convertible into shares of the
Company's common stock, at any time prior to maturity, at a conversion
price of $4.20 per share. The Variable Notes are non-interest bearing and
are convertible into shares of the Company's common stock, at any time
prior to maturity, at variable conversion prices ranging from $4.20 to
$2.10. The variable conversion prices are based on the length of time the
investor holds the notes prior to conversion, declining at the rate of
$.10 per quarter commencing November, 1996 from the initial conversion
price of $4.20 which is greater than the market value of the common stock
at the date of issuance. The fair value of the beneficial conversion
feature of $285,835 at September, 1996 has been recorded as debt
discount, reducing notes payable and increasing additional paid-in
capital. The debt discount is being amortized using the effective
interest method over the term of the Variable Notes and to the date of
the deepest discount. As of December 31, 1997, there were $215,600 of 10%
Notes and $571,670 of the Variable Notes outstanding ($362,059 net of
unamortized debt discount of $209,611 at December 31, 1997.
Accrued interest on the 10% Notes totalled $1,796 as of December 31,
1997.
In December, 1997, the Company entered into short-term loan agreements
with officers of the Company for a total of $75,000. The loans accrue
interest at 8% and are due on demand (Note 8).
Future principal maturities of notes payable for each of the five years
subsequent to December 31, 1997 are as follows:
Year Ending
1998 $ 85,570
1999 6,482
2000 --
2001 787,270
Total $ 879,322
F-12
<PAGE>
4.Income Taxes:
The components of the Company's net deferred tax asset and the tax
effects of the primary temporary differences giving rise to the Company's
deferred tax asset are as follows as of December 31, 1997:
Deferred compensation ................................ $ 188,000
Net operating loss carryforward ...................... 598,000
Deferred tax asset ................................... 786,000
Valuation allowance .................................. (786,000)
Net deferred tax asset ............................... $ --
Any tax benefits for the years ended December 31, 1997 and 1996 and the
period March 25, 1993 (date of inception) through December 31, 1997
computed based on statutory federal and state rates are completely offset
by valuation allowances established since realization of the deferred tax
benefits are not considered more likely than not.
5.Common Stock Warrants:
During 1996, the Company issued warrants to purchase 8,022 shares of
common stock to the University of Florida Research Foundation ("UFRFI").
The warrants were issued as part of a license agreement with UFRFI
whereby Ixion is authorized to occupy space at a UFRFI facility. The
agreement calls for the Company to pay $18 per square foot annually for
the space that the Company currently occupies, payable at $11 per square
foot in cash and $7 per square foot through issuance of common stock
warrants.
The 8,022 warrants issued in connection with the UFRFI license agreement
in 1996 are accounted for under the provisions of Statement of Financial
Accounting Standards Board No. 123, Accounting for Stock Based
Compensation. This standard requires equity instruments issued in
exchange for goods or services to be accounted for at the fair value of
goods or services received or equity investments issued, whichever is
more measurable. In connection with the issuance of the 1996 warrants,
the Company received cash license payment reductions of $10,857, the
value assigned to the warrants, or $1.35 per warrant, which was charged
to rent (prepaid or expense).
F-13
<PAGE>
5.Common Stock Warrants - Continued:
During 1997, the Company issued warrants to purchase 6,000 shares of
common stock to a consulting firm as part of a consulting agreement (Note
8). The warrants are accounted for under the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, as noted above. The value assigned was $5.00 per warrant,
based on the difference between the exercise price of $5.00 and a $10.00
market value at date of grant, for a total of $30,000 to consulting
expense. The value assigned approximates that derived from a
Black-Scholes valuation model assuming an average discount rate of 5.5%,
a volatility factor of 30% and an expected term of one year.
Common stock warrants outstanding at December 31, 1997 are as follows:
Number Exercise Price Expiration Date
17,630 $ 2.00 August 31, 2000
6,000 $ 5.00 February, 2002 - October, 2002
6.Stock Option Plan:
In August, 1994, the Board of Directors adopted the 1994 Stock Option
Plan, under which 250,000 shares of common stock were reserved for
issuance upon exercise of options granted to non-employee directors,
officers, employees, members of the Scientific Advisory Board and
consultants of the Company. Options vest at the rate of 20% per year and
are exercisable generally within ten years after date of grant. Activity
under the Company's stock option plan is set forth below:
Exercise
Shares ............. Price
Outstanding at January 1, 1994 ...... -- --
Granted .......................... 2,000 $ 0.02
Exercised ........................ -- --
Outstanding at December 31, 1994 .... 2,000 $ 0.02
Granted .......................... 3,500 $ 0.75
Exercised ........................ -- --
Outstanding at December 31, 1995 .... 5,500 $0.02 - $ 0.75
Granted .......................... 13,000 $ 3.00
Exercised ........................ -- --
Outstanding at December 31, 1996 .... 18,500 $0.02 - $ 3.00
Granted .......................... 25,400 $6.00 - $10.00
Exercised ........................ --
Outstanding at December 31, 1997 .... 43,900
F-14
<PAGE>
6.Stock Option Plan - Continued:
The status of options outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Exercise Average Average Number
Price Shares Remaining Life Exercise Price Exercisable
<S> <C> <C> <C> <C> <C>
$ .02 2,000 6.5 years $ .02 1,333
$ .075 3,500 7.5 years $ .075 1,808
$ 3.00 13,000 8.5 years $ 3.00 3,900
$ 6.00 3,000 9.33 years $ 6.00 -
$ 7.50 2,000 9.4 years $ 7.50 -
$10.00 20,400 9.5 years $10.00 6,250
43,900 13,291
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock issued to employees under this plan. Compensation
expense resulting from stock options is measured at the grant date based
upon the difference between the exercise price and the market value of
the common stock. All stock options issued to employees were granted at
an exercise price equal to the market value at the date of grant.
Given the limited time period that the Company's stock has been publicly
traded, as well as the lack of history to estimate patterns of exercise
and option term, fair value disclosures required under FASB Statement No.
123 are provided as a range from low to high for the expected term and
volatility. Fair value is estimated using the Black-Scholes option
pricing model and the following assumptions:
1997 1996
Low High Low High
Discount Rate ....................... 6.09% 6.38% 6.74% 7.04%
Volatility .......................... 30% 60% 30% 60%
Option Life (Years) ................. 5 9 5 9
F-15
<PAGE>
6.Stock Option Plan - Continued:
The weighted average fair value of options granted to other than
non-employee consultants during fiscal year 1997 and 1996 was in the
range of $3.82 to $7.31 and $1.17 to $2.21 per option, respectively. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for these awards
consistent with the method of FASB Statement No. 123, the Company's
reported net loss and loss per share for fiscal year 1997 and 1996 would
have been as follows:
Low High
1997 Net Loss ................... $ 792,985 $ 802,995
1997 Loss Per Share ............. -0.32 -0.33
1996 Net Loss ................... 555,414 556,991
1996 Loss Per Share ............. -0.23 -0.23
The Company applies Statement of Financial Accounting Standards No. 123
for stock options issued to non-employee consultants. In 1997, the
Company granted 5,000 options at exercise prices of $6.00 - $7.50 per
share and will record consulting expense as the options vest for the
difference between the exercise price and the market values at grant date
of $10.00.
7.Board Retainer Plan:
The Company does not pay cash compensation to outside members of the
Board of Directors or to members of the Company's Scientific Advisory
Board. Accordingly, in August, 1994, the Board of Directors adopted the
1994 Board Retainer Plan, under which 75,000 shares of common stock were
reserved for non-employee directors and members of the Scientific
Advisory Board.
New outside members of the Board or the Scientific Advisory Board receive
5,000 shares upon joining, and all will receive 1,000 shares annually
during the pendency of the Board Retainer Plan. Shares either vest upon
delivery or time of service. For the shares which vest over time of
service, unearned compensation equivalent to the fair value at the date
of grant is credited to capital deficiency and amortized over the service
period to compensation expense. Shares which vest upon delivery are
recorded as compensation expense upon issuance. At December 31, 1997, a
total of 57,000 shares had been granted under this Plan. Compensation
expense recognized in connection with such awards for the years ending
December 31, 1997 and 1996 was $83,000 and $133,834, respectively.
Unearned compensation of $202,688 remains to be recognized as expense
over future periods of service.
F-16
<PAGE>
8.Related-Party Transactions:
Commencing with the founding of the Company, two executives, the
Chairman/Chief Executive Officer and the President, made loans to the
Company pursuant to the terms of a convertible promissory note (the
"Subordinated Note Agreement"). Under the terms of the Subordinated
Notes, principal amounts were convertible into common stock at a price
per share not greater than the lowest price per share (adjusted for stock
splits, stock dividends, or other dilution) at which shares of the
Company's common stock have been issued during the 12-month period
immediately prior to the notice of election to convert.
On September 30, 1994, these officers each converted $9,000 of
Subordinated Notes into an aggregate of 900,000 shares of the Company's
common stock, at a price of $0.02 per share. On June 30, 1996, the
remaining obligation on these notes was converted by the officers into a
total of 21,544 shares of the Company's common stock, at a price of $0.75
per share.
In addition, the Company has agreed to defer the payment of the 1993,
1994 and part of the 1995, 1996 and 1997 salaries of the Chairman/Chief
Executive Officer and the President pursuant to agreements between the
Company and such executives. Similar agreements are in effect with the
Company's Senior Vice President and Chief Scientist. Payments are to be
made only upon termination of employment (which may be by death,
disability, retirement, or otherwise) and may be in a lump sum or as an
annuity. Amounts bear interest, compounded annually, at a rate
established by the Board of Directors, currently 8.0%. These obligations
are unfunded recorded liabilities of the Company.
On October 10, 1994, Dr. A.B. Peck, who is an executive officer and
consultant, assigned to the Company all his interest in certain oxalate
technology (subject to prior rights of the University of Florida) and
agreed to an exclusive consulting agreement with the Company in exchange
for an aggregate of 650,000 shares of common stock at a price of $0.02
per share. The Company has a consulting agreement with Dr. Peck for 48
days of service per year for $50,000 per year which expires on December
31, 1999.
On November 10, 1994, members of the immediate families of the founders
of the Company, including a partnership in which the Chairman/Chief
Executive Officer has an undivided 25% interest, purchased an aggregate
of 140,000 shares of the Company's common stock pursuant to an Agreement
to Purchase Shares dated as of such date, for a price of $0.10 per share,
or $14,000 in the aggregate.
F-17
<PAGE>
8.Related-Party Transactions - Continued:
On April 16, 1996, the Chairman/Chief Executive Officer and the President
of the Company each entered into an agreement to extend the Company up to
$25,000 in the form of a bridge loan. Interest on the notes is at 8%, but
can be reset annually, at the election of either party, to prime rate in
effect on January 1 of any given year, plus 3%. In addition, on June 21,
1996, the Chairman/Chief Executive Officer agreed to increase his loan
commitment to an amount up to $150,000, if necessary, to enable the
Company to continue operations. At December 31, 1997, there are total
loans of $75,000 outstanding to these officers of the Company (Note 3).
In December, 1996, the Company entered into a consulting agreement,
terminable upon 90 days notice by either party, with a company whose
president is an officer of the Company. The company is to be paid $5,000
monthly and could receive warrants for up to 20,000 shares of Common
Stock upon the achievement of certain milestones. Through December 31,
1997, the consultants had been paid $60,000 and were issued warrants for
6,000 shares of Common Stock (Note 5).
In 1997, the Company engaged the services of a printer in connection with
the offering. The printer is partially owned by the Company's Chief
Executive Officer. Through December 31, 1997, the printer has not
rendered any services, and accordingly, has not been paid.
9.Sponsored Research Agreement:
On June 5, 1996, the Company entered into an agreement with Genetics
Institute, Inc. ("GI") relating to Islet Producing Stem Cells Technology.
Under the agreement, GI sponsored certain research by the Company and
provided funding of $275,000 over a 12-month period, plus patent expenses
of approximately $35,000. The agreement with GI was not extended after
the initial 12-month period. The revenue under this contract was
recognized on a pro rata basis consistent with the period over which the
research was conducted as well as upon delivery of certain research
reports. Under the agreement, the Company is required to reimburse GI for
certain patent costs if GI does not exercise its option for an exclusive
license for the technology. As of December 31, 1997, GI has not exercised
their right for an exclusive license to this technology and such costs
are recorded as a liability.
F-18
<PAGE>
10. Risks and Uncertainties:
Approximately 61% of 1997 revenues and 80% of 1996 revenues consisted of
revenues related to a single sponsored research agreement which expired
in 1997.
The Company's product candidates are in an early stage of development.
The Company has not completed the development of any products and,
accordingly, has not received any regulatory approvals or commenced
marketing activities. No revenues have been generated from the sale of
its products.
The Company's development and commercialization rights for its proposed
products are derived from its license agreements with the University of
Florida and others. A deterioration in the relationship between the
Company and the University of Florida could have a material adverse
effect on the Company.
The Company is aware of potentially significant risks regarding the
patent rights licensed by the Company relating to Islet Progenitor/Stem
Cells and to its oxalate technology. The Company may not be able to
commercialize its proposed diabetic products due to patent rights held by
third parties other than the Company's licensors.
11. Commitments:
The Company issued 1,000 shares of restricted common stock in exchange
for a patent in February, 1997. In addition to the issuance of stock, the
Company will be required to pay royalties of 2% of net sales, if any,
generated from the patented technology.
12. Subsequent Events:
Through March 27, 1998, the Company has received proceeds of $180,500 by
selling 18,050 units of Common Stock and Charitable Benefit Warrants in
an initial public offering at $10.00 per unit.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements for the year ended December 31, 1997, and is qualified in its
entirety by reference to such Financial Statements filed with form 10KSB and for
the annual period ended December 31, 1997.
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> JAN-01-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 44,443
<SECURITIES> 0
<RECEIVABLES> 1,770
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,115
<PP&E> 58,703
<DEPRECIATION> (23,008)
<TOTAL-ASSETS> 387,409
<CURRENT-LIABILITIES> 196,437
<BONDS> 0
<COMMON> 1,263,658
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 387,409
<SALES> 0
<TOTAL-REVENUES> 221,452
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 891,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,083
<INCOME-PRETAX> (781,954)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (781,954)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
</TABLE>
