Draft of 3/25/00
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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
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 )
For the transition period from to
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)
13709 PROGRESS BLVD., BOX 13
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, 1999, was $102,636.00.
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 23, 2000, was approximately $3,949,880 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 issuers common stock, par value $.01 per
share, outstanding as of March 23, 2000, was 3,051,164
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT PART INTO WHICH INCORPORATED
-------- -------------------------------
The Proxy Statement to be used in connection with Part III
the annual meeting of stockholders to be held
June 9, 2000 (the "Proxy Statement"),
to be filed with the Commission prior to April
30, 2000, pursuant to Rule 14a-101, Schedule 14A
of the Exchange Act.
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PART I
Item 1. Description of Business.
Ixion is a development stage, discovery research biotechnology company,
with several product candidates in development. We are the holder of world-wide
exclusive licenses to patents and pending patents in two key areas: diabetes and
oxalate-related disorders.
We are developing diabetes products based on our islet producing stem
cell technology, including a proprietary line of in vitro (in test tube) islet
stem cells for use in islet replacement therapy. This development program is
aimed at optimizing the growth of functioning islets or islet progenitors in
vitro from islet producing stem cells which Ixion has established in cell
cultures. Islet replacement therapy is the only known potential cure for type 1
diabetes. We believe that islet replacement therapy, if it can be developed
successfully, will provide better management of diabetes than conventional
treatment with insulin and other metabolic regulators. Conventional treatment
results in hyper- and hypo-glycemic excursions 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 our islet transplantation therapy, we have an
ongoing discovery program to identify and characterize islet stem cells as well
as novel growth factors associated with them. The goal of this program is to
discover factors important in islet stem cell differentiation and to identify
stem cell markers to which we hope to produce antibodies useful in stem cell
isolation and research. All of our potential diabetes products are in the
discovery research stage.
Diabetes is a chronic, complex metabolic disease. Type 1 diabetes
(often referred to as insulin dependent diabetes or juvenile diabetes) is
characterized by an inability to produce insulin due to the destruction of the
insulin-producing cells of the pancreatic islets of Langerhans. Type 1 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 1 diabetes, the most severe form of the disease, and must take
insulin. An additional one and one-half million type 2 patients in the United
States also take insulin. Annual expenditures on all forms of diabetes are
nearly $100 billion.
We are also developing both Ox-Control(TM) - a nutritional supplement - and
IxC1-62/47 - a prescription drug product - based on our oxalate technology.
Ox-Control(TM) will promote healthy levels of oxalate in the body. The
prescription drug and molecular diagnostic device products will be for the
diagnosis and treatment of oxalate-related diseases. Our oxalate technology is
based on genes from the non-pathogenic anaerobic intestinal bacteria,
Oxalobacter formigenes. O. formigenes produces enzymes which degrade oxalate in
healthy people. Inadequate colonies of O. formigenes result in reduced ability
to degrade oxalate. Excess oxalate plays a role in a variety of disorders
including
o kidney stones,
o hyperoxaluria,
o cardiomyopathy,
o cardiac conductance disorders,
o cystic fibrosis,
o Crohn's disease,
o renal failure and toxic death, and
o vulvodynia.
There are approximately one million kidney stone incidents annually in
the United States. Annual expenditures on kidney stone incidents 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
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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.
Ixion is in the development stage. We have earned only limited revenues,
the majority of which have been research and development payments, and we
have an accumulated deficit of $4,019,388 from our inception through December
31, 1999.
Industry Description and Outlook
In 1999, the U.S. biotechnology industry was composed of approximately
1,300 companies, public and private. The public market for biotechnology
financing for small companies was very poor during 1998 and much of 1999, but
recovered to some degree in the latter half of 1999. 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. It is
inadequately treated with currently available drugs. In 1995, there were over 16
million diabetics in the United States. There were 21 million diabetics in
Europe and as many as 100 million worldwide. Type 1 diabetes 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 2 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 1 diabetics. Approximately 25 percent of the new
type 2 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 1 diabetes will
develop diabetic nephropathy leading to kidney dialysis and renal transplants.
Overall, diabetes is the seventh leading cause of death in the U.S.
Current therapies, including insulin shots or oral hypoglycemic
medication modulate blood glucose, but cannot consistently maintain the
blood glucose near 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. We believe 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
help control the complications of the disease. While islet transplantation is
the only known potential cure for type 1 diabetes, transplant therapy is an
early stage procedure and results for the adult islet transplants performed to
date have been disappointing, as is common for early stage procedures. Although
there can be no assurance, we believe that the success rate of transplant
therapy will improve over time.
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
1,000 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 1,000 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.
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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 homeostasis, both by
regulating intestinal absorption of dietary oxalate and also its secretion into
intestinal lumen from the blood. We believe that it may be clinically important
to screen and treat patients with oxalate-associated diseases for the presence
or absence of the bacterium. Indeed, recent research indicates an increased risk
of kidney stones in patient populations with significantly decreased intestinal
colonization by O. formigenes. This appears to be particularly true of patients
with cystic fibrosis, who are at materially increased risk of kidney stones as a
result of excess oxalate.
Inflammatory Bowel Disease. Inflammatory bowel disease 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 inflammatory bowel disease is unknown, with many theories,
none proven. Many persons with inflammatory bowel disease also have elevated
levels of urinary oxalate, suggesting that excess oxalate may be a complicating
factor in the disease, or may lead to increased risk of kidney stones. In 1987,
the latest data available, the number of new cases of inflammatory bowel disease
in the United States annually ranged from two to six per 100,000 of population.
There were about 100,000 hospitalizations annually, approximately 64% for
Crohn's.
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 few years 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.
Pet Food Market. There are approximately 60 million cats and 53 million
dogs in the U.S. In Europe, dogs out number cats. Companion animal health care
products totals approximately $2 billion globally, of which
biotechnology-derived products, including the feed supplement segment, accounted
for $680 million in sales.
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
We expect to develop products for both the less heavily-regulated
nutritional supplement market and the heavily-regulated drug, device, and
biologic markets. Our strategy is to accelerate the development of our
nutritional supplement, Ox-Control,(TM) to generate near-term revenue. At the
same time, we intend to continue development of our prescription drug, device,
and biologic products where the product development cycle is much
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longer and more expensive. We will continue to seek strategic partners to
participate in the development of both types of products. Other elements of our
strategy include the following:
Basic Research. Ixion has used and intends to continue to use
cooperative research and development agreements with the University of Florida
and other research institutions 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. It typically ranks in the top 10 in the
United States in gross royalties received from patent licenses, and the top 20
in the United States in the number of U.S. patents obtained.
Technology Evaluation and Development. We use our affiliation with the
University of Florida Biotechnology Program and the members of our Scientific
Advisory Board to seek out cutting-edge university based biotechnology. Our
scientific and business team will review early stage academic inventions,
identify discoveries which are commercially promising, obtain licenses from the
universities, and develop the discoveries to add value.
Our relationship with the scientists at the University of Florida and
other institutions is based upon personal relationships between our management
and members of our Scientific Advisory Board, on the one hand, and other members
of the University of Florida and other institutions' faculties on the other. The
relationship with the University of Florida is helped by our nearby location and
by the business consulting provided by our management to University faculty at
no cost, by arrangement with the Biotechnology Program. We have no formal
agreement providing general access to rights to university research, nor to
advance notice of disclosures by university researchers.
Ixion intends to continue to develop collaborative arrangements with
leading researchers at the University of Florida and at other research
institutions in our core areas to diversify and strengthen our intellectual
property estate and to establish our reputation and credibility in the
scientific and medical communities.
Collaborative Product Development and Marketing with Established
Companies. Ixion hopes to develop products in collaboration with other
companies. Collaborative agreements may call for our partners to provide
research funds as well as clinical and other support during product development,
although we may develop and test ideas independently before entering into a
collaborative agreement. We contemplate that our partners will provide an
established and trained marketing and sales force, as well as manufacturing
experience, clinical trial expertise, support for patent prosecution, and other
capabilities.
Independent Product Development. The quality of our scientific team
also permits independent product development. Independently developed products
will provide us with the flexibility either to market the product directly or
enter into agreements with pharmaceutical partners on terms more favorable to
us. While independent product development is riskier than collaborative
development, we may be able to retain a higher proportion of any eventual
product revenue stream.
Contract Clinical Trial and Manufacturing Services. Initially, we have
elected to retain contract vendors to support clinical studies and product
development. Moreover, we will not initially construct our own manufacturing
facilities. By contracting with a qualified manufacturing company, Ixion will be
able to obtain immediate access to the necessary regulatory skill base at low
entry costs. We thus expect to minimize the time to market, maintain control
over development candidates, and reduce our financial risk when product risk is
the greatest.
Product Development
Our first target product for diabetes will be cell lines of cultured
islet or stem cells for use in islet replacement therapy for diabetes. Our first
target products to promote healthy levels of oxalate will be Ox-Control,(TM) our
nutritional supplement product, and our pet food supplement product, followed by
the XEntrIX TM Oxalobacter formigenes Monitor and the IxC1-62/47 prescription
treatment for oxalate-related conditions. We also plan other products that will
detect and measure the presence of oxalate in urine or blood. Certain of these
products may also be suitable for use in research applications and, subject to
certain limitations, would not require FDA approval prior to use in that
context.
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Descriptions of Planned Diabetes Products. Ixion intends to develop
products to enhance research into the disease of diabetes, as well as
therapeutic approaches where our 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.
About 3,000 patients die each year while waiting for a pancreas graft.
Xenotransplants using porcine islets face additional difficulties, such as the
possibility of cross-species viral infection. To date, efforts to propagate
commercial quantities of human islets in vitro (in the test tube) from either
fetal or adult tissue has had minimal success. We believe that a source of
reproducible islet cells would significantly improve the speed and results of
research into transplanted islets for diabetes.
Ixion's islet technology permits the successful growth of in vitro
pancreas-derived, pluripotent (e.g., able to differentiate) islet-producing
cells from mice and humans. When mouse cells were implanted into clinically
prediabetic mice, the implanted mice were successfully weaned from insulin until
they were sacrificed for further studies. We have also been successful in
propagating human islet cells from children and adult donors as well, but have
not transplanted such islets at the date of this report.
Our initial planned islet replacement therapy products, both of which
are in the research stage, include
o an autologous cultured islet or stem cell service for transplantation;
and
o an implantation device consisting of both generic cultured islets and
an encapsulation material.
Autologous Cultured Islet. A Trained surgeon will supply Ixion with a
biopsy of pancreatic tissue taken from the diabetic patient. Using our
proprietary methods, we will grow new insulin producing islets for that
individual patient. The replacement islets will then be delivered to the surgeon
for implantation to reduce the patient's requirement for daily insulin
injections. This service avoids the insulin producing problems of immune
rejection because it uses the patient's own cells, hence no immune privileged
encapsulation will be required.
Generic Cultured Islets in an immuno-privileged capsule. Using our
proprietary methods, we will grow generic cell lines of insulin producing
islets. These islets will then be encapsulated in an immune-privileged material
to protect the islet from attack by a patient's immune system. The encapsulated
islets will be sold to surgeons for implantation to reduce a diabetic patient's
requirements for daily insulin injections.
The following table summarizes the current status of our islet research
and development program for diabetes products.
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Product Development-Diabetes Islet Technology
-------------------------- ------------------------------------- ------------
Status (1)
Product Type Planned Uses
- --------------------------- ------------------------------------- -------------
Autologous Cultured Islets Research
Service Transplant of a person's own cells to
reduce insulin dependency
- --------------------------- ------------------------------------- ------------
Generic Cultured Islets Research
Immno-privileged Implantation device consisting of
Capsule islets and an encapsulation
material for transplantation to
reduce insulin dependency
- -------------------------- -------------------------------------- --------------
Islet Growth Factors Research
Correct disease deficiencies
Promote greater efficiency in culturing
cells for transplantation
Elucidation of diabetes disease process
Monitor disease stages
- ------------------------ ----------------------------------------- -------------
Surface Antibodies Research
Analysis of health or disease of biopsy
specimens Identification of cells
Enrichment of specific cell types
Isolation and identification of cells
by stage of differentiation
- ------------------------- ---------------------------------------- ------------
(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 essential
characteristics, and its initial production. "Preclinical" denotes efficacy,
pharmacology, safety, or toxicology studies in animal models.
Descriptions of Planned Oxalate Products. We have four distinct products in
development based on our oxalate technology.
o Ox-Control(TM)- a nutritional supplement made from O. formigenes,
designed to promote healthy levels of oxalate. This product will
be sold directly to consumers.
o A pet food supplement or additive to control oxalate in companion
animals.
o The XEntrIx(TM) Oxalobacter Formigenes Monitor - a molecular diagnostic
test for the rapid and sensitive detection of human O. formigenes.
o IxC1-62/47 - an oral dosage form consisting of recombinant(genetically
engineered) oxalate-degrading enzymes normally found in O. formigenes.
This will be a prescription product.
A nutritional supplement is one of a broad group of products
including vitamins, minerals, and some enzymes. They may or may not be
used under a doctor's supervision, but they are purchased directly by the
consumer from retail outlets or by mail order. A probiotic would deliver
whole live O. formigenes to the colon where they would break down oxalate.
Our oxalate technology is based on cloned, sequenced, and expressed
genes encoding the oxalate degrading enzymes from the intestine dwelling
bacteria, Oxalobacter formigenes as well as the enzymes themselves. O.
formigenes is a gram negative anaerobe present in humans and other animals. In
the GI tract of a healthy human or mammal, O. formigenes breaks down oxalate
that is in food, thus preventing its absorption into the blood stream.
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Ox-Control,(TM) an Oxalate-Reducing Nutritional Supplement. Our initial
product is Ox-Control,(TM) an oral formulation of whole cells or enzymes derived
from O. formigenes, in an enteric coating for use in promoting healthy levels of
oxalate in the body. This product has been formulated to be taken in pill form
with meals to assist in the breakdown of dietary oxalate. Development is now
concentrated on optimization and scale-up of the manufacturing process to reduce
the cost of production. We expect this product will not require FDA approval
prior to marketing.
Companion Animal Food Supplement. An additional oxalate-based product
is an animal food formulated to maintain healthy levels of oxalate in companion
animals, particularly dogs and cats.
The XEntrIX TM Oxalobacter formigenes Monitor. We have used the O.
formigenes genes to construct a DNA-based diagnostic test (the XEntrIX TM
Oxalobacter formigenes Monitor) for the rapid sensitive detection of O.
formigenes in easily-collectable stool samples. Except for our XEntrIX TM
Oxalobacter formigenes Monitor, there is no method of rapidly and easily
detecting the presence or absence of O. formigenes in the body. The current
tests for O. formigenes are laborious, time consuming, and unreliable.
The XEntrIX TM Oxalobacter formigenes Monitor has been used in 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 >90% nephrocalcinosis. In an Ixion sponsored
clinical study conducted in collaboration with collaborators at
Northwestern University, the University Children's' Hospital, Cologne,
Germany, and University Children's Hospital, Halle, Germany, 40 (18
male and 22 female) cystic fibrosis patients (aged three to 35 years)
were examined for colonization with Oxalobacter formigenes. 33 of the
40 patients were non-colonized, and of these, 18 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 ongoing 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-PCR Oxalobacter formigenes Monitor. The Quantitative-PCR
Oxalobacter formigenes Monitor is now being used in additional
preclinical work to detect and quantitate O. formigenes in oxalate
stone formers to identify if the number of colony forming units as a
potential relevant risk factor.
In June of 1998, we agreed with the University of Florida Diagnostic
Referral Laboratories for them to offer a service to physicians using the
reagents of our XEntrIX TM Oxalobacter formigenes Monitor under the provisions
of the FDA's analyte specific reagent regulation. The Diagnostic Referral
Laboratories are responsible for marketing the new service, which costs $295 per
sample. No reimbursement is yet available for patients requesting this test.
Sales to date have been immaterial, in part because of the lack of available
products for addressing the condition once it is diagnosed. We are focusing
ongoing development of the XEntrIX TM Oxalobacter formigenes Monitor on
development of a kit version suitable for automation.
We intend to file an application under Section 510(k) of the FDA Act
for clearance to market the XEntrIX TM Oxalobacter formigenes Monitor. There is
no assurance that the XEntrIX TM Oxalobacter formigenes Monitor will qualify for
the 510(k) procedure, in which case we will have to file an application for
premarket approval with the FDA. In either case, the approval process may be
lengthy, but is likely to be longer if a premarket approval application is
required.
IxC1-62/47 Enzyme Therapy for Oxalate-Related Disease. In addition to
the XEntrIX TM Oxalobacter formigenes Monitor, 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")
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and formerly-CoA transferase ("FRC"). The enzymatic therapy is based upon the
re-establishment or enhancement of oxalate degrading mechanisms in the body.
IxC1-62/47 is targeted at oxalate-related disorders including kidney stones,
enteric hyperoxaluria, oxalosis, cardiomyopathy, cardio conductance disorders,
cystic fibrosis, Crohn's disease, and possibly vulvodynia. Very few satisfactory
treatments currently exist for these disorders.
Both the OXC- and FRC-producing 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 developed the process of
purifyingthe OXC and FRC enzymes for use in a variety of preclinical studies
including(1) additional physicochemical characterization, (2) formulation and
drug delivery, and (3) further animal studies. We are also purifying the native
form of the OXC and FRC enzymes from O. formigenes, to provide comparative data
to the recombinant versions. We have not determined whether the recombinant or
native enzymes will be used therapeutically. The current intention is to file an
investigative new drug application for the IxC1-62/47 enzymatic therapy for
oxalate-related disorders when resources permit.
Over 65% 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. We
believe that a robust colony of O. formigenes prevents recurrent calcium-oxalate
kidney stone formation in persons susceptible to excess oxalate absorption and
may ameliorate other disease states. We believe that we are the only company
world-wide which is examining the role of O. formigenes in human and animal
disease states.
Oxalate-Degrading Catheter: Ixion is developing a urinary catheter designed
to prevent oxalate crystal deposition while the cather is in use. Oxalate
crystals can be deposited on a catheter as a result of oxalate in the urine. The
deposited oxalate crystals provide an environment for bacterial growth, leading
to a urinary tract infection.
The following table summarizes the current status of our oxalate
product research and development program.
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Product Development-Oxalate Technology
- ------------------------- ---------------------------------------- ------------
Product Type Planned Uses Status (1)
- ------------------------- ---------------------------------------- ------------
Ox-Control(TM Nutritional Development
Supplement Promotion of healthy levels of oxalate
in the body
- ------------------------- ----------------------------------------- -----------
Companion Animal Food Development
Supplement Promotion of healthy levels of oxalate
in companion animals
- ------------------------- ---------------------------------------- ------------
XEntrIX TM Oxalobacter Preclinical
formigenes Monitor Detection of O. formigenes in stool
for oxalate-related and
other oxalate-related disorders
- ------------------------- --------------------------------------- ------------
IxC1-62/4 Enzyme Preclinical
Therapy Treatment of oxalate-related
disorders:
Kidney Stones
Crohn's Disease
Cystic Fibrosis
Hyperoxaluria
Vulvodynia
Other oxalate-related diseases
- ------------------------- ------------------------------------------ ----------
Oxalate Degrading Research
Catheter Prevention of urinary tract infection
- ------------------------- ------------------------------------------ ----------
Dialysis Cartridge Concept
Rapid removal of excess oxalate in blood
- ------------------------- ------------------------------------------ ----------
(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. "Development"
indicates product development of products not requiring regulatory
approval.
Licensed Technology
We have exclusively licensed from the University of Florida Research
Foundation, on a world-wide basis, commercial rights in two areas: in vitro
grown islet producing stem cells for curing diabetes, and materials and methods
for detection of oxalate and Oxalobacter formigenes.
Under the UF Research Foundation licenses, we have been issued three US
oxalate patents and two US islet patents. We have received notice of allowance
of claims in one US oxalate patent. Still pending under these licenses are three
US oxalate patent applications and one US islet patent application. We have also
filed internationally on each of these patent families. One oxalate patent and
one islet patent has been issued in Australia; other countries are pending.
The license agreements require the UF Research Foundation to file and
prosecute the patents and require us to reimburse the costs. They must also take
all steps to defend such patent rights, also at our expense. If the UF Research
Foundation fails to take any such action, we have the right to defend such
rights at our own expense.
Except for royalty rates and certain other immaterial differences, the
terms of our patent licenses with the UF Research foundation are substantially
identical. The UF Research Foundation licensed its rights under on an exclusive,
worldwide basis for the life of any patents granted thereunder. We have rights
under the UF Research Foundation 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 our license, we must use our best efforts to bring one or more
licensed products or
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processes to market through a thorough, vigorous, and diligent program for
exploitation of the patent rights. In addition, we must provide annual business
plans showing our plan for product development.
Under the UF Research Foundation licenses, we paid a license issue fee,
are obligated to pay royalties on our net sales or net sales of our
sublicensees, and must reimburse the UF Research Foundation for patent costs.
There are no minimum annual royalties. We are also obliged to obtain product
liability insurance prior to the sale for commercial purposes of licensed
products. There is no assurance that we 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 our
licensed technologies. We are aware of patent applications previously filed by
and patents already issued to others that could conflict with our patents or
patent applications, either by claiming the same methods or compounds or by
claiming methods or compounds that could dominate those licensed to us. In
addition, we can not assure you that we are aware of all patents or patent
applications that may materially affect our ability to make, use, or sell any
products. United States patent applications are confidential while pending in
the United States Patent and Trademark Office, and patent applications filed in
foreign countries are often first published months 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 us and
limit our ability to obtain meaningful patent protection. If patents are issued
to other companies that contain competitive or conflicting claims, we may be
required to obtain licenses to these patents or to develop or obtain alternative
technology. We can not assure you that we will be able to obtain any such
license on acceptable terms or at all. If such licenses are not obtained, we
could be delayed in or prevented from the development or commercialization of
our product candidates, which would have a material adverse effect on us.
Litigation, which could result in substantial cost to us, may also be
necessary to enforce any patents to which we have rights or to determine the
scope, validity, and enforceability of other parties' proprietary rights, which
may affect our product candidates and technology. United States patents carry a
presumption of validity and generally can be invalidated only through clear and
convincing evidence. Our licensors may also have to participate in interference
proceedings declared by the Patent Office to determine the priority of an
invention, which could result in substantial cost to us. There can be no
assurance that our 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 us from the UF
Research Foundation, they are primarily responsible for any litigation,
interference, opposition, or other action pertaining to patents or patent
applications related to the licensed technology, and we are required to
reimburse them for the costs. As a result, we generally do not have the ability
to institute or determine the conduct of any such patent proceedings unless they
do not elect to institute or elect to abandon such proceedings. In cases where
they elect to institute and prosecute patent proceedings, our rights will be
dependent in part upon the manner in which they conduct the proceedings. The UF
Research Foundation could elect not to vigorously pursue or defend or to settle
such proceedings on terms that are not favorable to us. An adverse outcome in
any patent litigation or interference proceeding could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require us to cease using such technology, any of which could have a
material adverse effect on us.
We can not assure you that any existing patent application, or any
future patent application will issue or that any patents, if issued, will
provide us with adequate patent protection with respect to the covered products,
their uses, technology, or processes. In addition, under our licenses, we are
required to meet specified diligence requirements to retain our rights.
In January 1997, we 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 species 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, we paid
a license issue fee of 1,000 shares of our common stock and are obligated to pay
royalties of 2% on net sales by Ixion or our 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 (expiring in 2010).
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In June 1997, we entered into a patent license agreement with the
Milton J. Allison Revocable Trust, obtaining exclusive, world-wide rights to the
inventions of Dr. Milton Allison, a member of our Scientific Advisory Board,
relating to the administration of cells of O. formigenes or natural enzymes from
O. formigenes (or other microorganisms) to treat oxalate-related conditions.
Except for royalty rates and patent issue fees, the terms of this license
agreement are substantially similar to the terms of the Fischer-Jensen patent
license discussed above.
Because the inventions covered by our licenses were made with federal
assistance (which is typical of university-based discoveries), they are subject
to the rights of the federal government under 35 USC Title 18, "Patent Rights in
Inventions Made with Federal Assistance," including "march in" rights under
which the government has the right to require us to grant an exclusive license
under any of such inventions to a third party if the government determines that
(1) adequate steps have not been taken to commercialize such inventions, (2)
such action is necessary to meet public health or safety needs, or (3) such
action is necessary to meet requirement for public use under federal
regulations. The government's 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 our 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 by him in the area in which he is employed belongs to
the University (subject to the rights of the federal government described above,
and to Ixion's rights under the consulting agreement it has with him).
It is our policy to require our 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 us. These agreements provide that all confidential information developed or
made known to the individual during the course of his or her relationship with
us 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 us
shall be assigned to us as our exclusive property (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 our trade secrets or other proprietary information in the
event of an unauthorized disclosure or will be effective to assign inventions.
Certain of our research has been funded in part by research grants from
the NIH and other government agencies. In connection with any such funding, the
U.S. Government will have the rights described above.
In order to produce or use the XEntrIX TM Oxalobacter formigenes Monitor in
its current formulation, it will be necessary to license certain rights from
Roche Diagnostics, Inc., the holder of patents on the 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.
Ixion does not anticipate that the terms of such license will have a materially
adverse effect on us.
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. Our 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 ours. Academic
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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.
We expect our products to address a broad range of markets. Our
competition will be determined in part by the potential indications for which
our products are developed and ultimately approved by regulatory authorities. 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 our 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. Our
competitive position will also depend on our 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.
Government Regulation
In the United States, the FDA regulates distribution, manufacture,
labeling, and promotion of nutritional supplements, 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.
Dietary Supplements. We believe that, in the United States, Ox-Control(TM)
will be regulated by the FDA as a dietary supplement. The FDA regulates many
aspects of the safety, labeling, and promotion of dietary supplements, but most
dietary supplements do not require FDA pre-approval before they can be
commercially marketed. The category of dietary supplements is defined by
statute, and generally includes products that, inter alia, contain a dietary
ingredient, are intended for ingestion, and are labeled as dietary supplements.
If a dietary supplement ingredient has not previously been used in food, the
manufacturer or distributor must provide evidence of safety to FDA at least 75
days before the product is commercially distributed. In addition, there are
significant restrictions on the kinds of claims that may be made for dietary
supplements. For example, if a dietary supplement is claimed to treat or prevent
a disease, FDA will consider the product a drug and generally require FDA
approval prior to commercial marketing. also, if a dietary supplement is claimed
to affect the structure or function of the body, the claim must be accompanied
by a disclosure that the claim has not been evaluated by the FDA and that the
product is not intended to diagnose, treat, cure, or prevent any disease.
Failure to comply with applicable requirements can, among other consequences,
result in compliance letters, seizures, injunctions, and criminal prosecution.
To date, FDA's enforcement efforts have been directed primarily toward
preventing marketers of dietary supplements from making drug claims without
appropriate approvals.
Because O. formigenes enzymes, and O. formigenes itself, have not
previously been used in food, we expect to file a safety notice with the FDA.
Any FDA concerns about safety could slow or preclude the commercial launch of
the product. Also, because the dietary supplement law is relatively new and
numerous questions about its requirements remain, we cannot be sure that the FDA
will not object to marketing the nutritional product as a dietary supplement or
to the claims made for it.
In addition to FDA regulation, our competitors, the Federal Trade
Commission, or other governmental and private agencies may challenge our product
or product claims, or the adequacy of the data that we use to substantiate our
claims. Failure to adequately defend or modify a challenged claim could result
in a court's or agency's issuing an order requiring us to stop making the claim.
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 our planned products, such as islet
replacement therapy for diabetes, will be regulated as drugs and biologics. The
Food, Drug, and Cosmetic Act and the Public Health Service Act provide that
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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:
o preclinical laboratory and animal testing,
o submission to the FDA of an investigational new drug application
which must be effective prior to the initiation of human clinical
studies,
o adequate and well-controlled clinical trials to establish safety and
efficacy for its intended use,
o submission to the FDA of an new drug application or biologics license
application, and
o review and approval of the new drug application or biologics license
application 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 investigational new drug application. If a
company is not notified by the FDA within 30 days of submission, the company may
initiate Phase I clinical trials. Clinical trials are typically conducted in
three sequential phases, although the phases may overlap.
o 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.
o 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.
o 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 a 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 a new drug application (in the
case of a drug) or biologic license application (in the case of a biologic). The
FDA may request additional information, including additional animal studies or
clinical trials 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, a new drug application or product license application may place
substantial restrictions on how the product is marketed. After FDA approval of
the new drug application or biologic license application 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 our planned products (such as the in vitro
diagnostic products including the XEntrIX TM Oxalobacter formigenes Monitor),
will be regulated as medical devices. The FDA regulates the clinical testing,
manufacture, labeling, distribution, and promotion of medical devices. 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 good manufacturing
practices), 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 premarket approval
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).
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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) 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 application before marketing can begin.
Premarket approval applications must demonstrate, among other matters, that the
medical device is safe and effective. A premarket approval 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 premarket approval 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 premarket approval, 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 requirements, which usually involve FDA review
of the investigation before it may begin. Clinical investigations of many in
vitro diagnostic tests are exempt from the investigational device exemption
requirements, provided the testing meets certain exemption criteria, including
labeling as an "investigational use only" product. In addition, in vitro devices
may be distributed for "research use only," provided they are intended for
laboratory research and labeled for research use. The FDA's current policy is to
encourage manufacturers of in vitro devices for "investigational use only" or
"research use only" to establish a certification program under which these in
vitro devices 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 "investigational use only" or
"research use only" 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 premarket application approval may
place substantial restrictions on how a device is marketed. Even where a device
is exempted from 510(k) clearance or premarket application approval, the 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 premarket application approval. These reagents, however, may be marketed only
to clinical laboratories certified under the Clinical Laboratories Improvements
Act to conduct tests of high complexity and are subject to a number of labeling
requirements.
Ixion's Products. We have agreed, as discussed above, with the University
of Florida Diagnostic Referral Laboratories for them to offer a service to
urologists and other physicians based on the reagents of our XEntrIX TM
Oxalobacter formigenes Monitor. We believe this agreement is permitted under the
provisions of the FDA's analyte specific reagent regulation; however, we can not
assure you that our reliance on that regulation will be accepted by the FDA.
The XEntrIX TM Oxalobacter formigenes Monitor, when manufactured by or for
us, will be distributed initially for research use and will not require FDA
review prior to distribution for those uses. To market this product for
diagnostic use, we intend to request authorization under the 510(k) procedure
for the XEntrIX TM Oxalobacter formigenes Monitor. Premarket approval
applications may, however, be required.
We believe that our islet products and IxC1-62/47, the enzyme therapy
for treatment of oxalate-related disorders, will require either a new drug
application or a biologic license application before they may be commercially
distributed. There can be no assurance that the FDA will accept our views on the
regulatory status of our 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
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delay marketing authorization. The law or government regulations
may change in ways that could prevent or delay marketing authorization for our
products. Delays in receipt of, failure to receive, or loss of previously
received approvals could have a material adverse effect on our 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. We intend to rely on our 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 us to enter into supply contracts with the
government, and criminal prosecution.
Non-U.S. Marketing. For marketing outside the United States, we are 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. We intends to rely on our strategic partners both in the United
States and abroad for assistance with these matters.
University Conflicts of Interest. Because Dr. Peck, our Chief Scientist,
Dr. Allison, Dr. Hatch, Dr. Khan, Dr. Schatz, and Dr. Schuster, and members of
our Scientific Advisory Board, are employees of public universities, they, and
consequently we, are subject to statutes and guidelines relating to conflicts of
interest. In order for Ixion to conduct business with the university employers
of these members of our Scientific Advisory Board (including licensing
University of Florida technology or entering into research support agreements or
subcontracts), we must obtain and maintain an exemption for Dr. Peck from the
application of the Florida conflict of interest statutes, and obtain approvals
for outside activities for the others.
Exemptions for Dr. Peck are issued pursuant to a monitoring plan which
requires us, among other things, to promptly disclose every material transaction
between us 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 by Dr. Peck at the beginning of each academic year (or upon material
alterations in the terms of the relations between us and him). The approval
process can take 12 or more months. While we have no reason to believe that Dr.
Peck's requests for renewal will not be approved, there is no assurance that the
exemptions will be renewed, or, if renewed, that it will be renewed on
reasonable terms. Furthermore, it is not clear what the effect of a non-renewal
will be should the University decline to renew the exemptions on a timely basis
or at all.
Manufacturing and Marketing
We have 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 our products in other
countries outside of the United States. While using third parties for
distribution or marketing permits us to avoid the costs of establishing a
distribution or marketing network in a particular area, this strategy also makes
us 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. The markets for our various product candidates are
quite distinct.
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o The Ox-Control (TM) nutritional supplement will be sold
directly to end users through dispensing physicians,
vitamin and health food stores, and by mail order or
internet direct retail sales.
o Food formulations for companion animals may be sold as
premium pet foods by veterinarians or specialty pet food
shops, or in grocery stores or other mass market outlets.
o Prescription drug and device products will be targeted toward
prescribing physicians.
We believe there will be demand for the XEntrIX TM 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.
For the use of the XEntrIX TM Oxalobacter formigenes Monitor, the blood
oxalate assay, and our IxC1-62/47 enzyme therapy in the management of kidney
stones, we plan to target the country's approximately 7,300 in-office
urologists. For the use of the XEntrIX TM Oxalobacter formigenes Monitor and
IxC1-62/47 enzyme therapy for managing kidney stone risk in cystic fibrosis
patients, we plan to target the cystic fibrosis treatment centers in the United
States. For the use of the XEntrIX TM Oxalobacter formigenes Monitor and
IxC1-62/47 enzyme therapy in the diagnosis and treatment of vulvodynia, we
intend to approach the market through the 35,000 gynecologists practicing in the
United States.
Marketing Strategy. The strategy for marketing our islet replacement
therapy will depend on collaborations with third parties with greater marketing
resources than we.
The marketing strategy for the XEntrIX TM Oxalobacter formigenes
Monitor depends upon educating urologists and nephrologists of its clinical
usefulness. 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 XEntrIX TM 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 XEntrIX TM 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. XEntrIX TM 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, we intend to
invest in both physician education programs, and, assuming funds are available,
consumer awareness campaigns. We 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, we propose to inform urologists about our
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 our vulvodynia products and the cystic fibrosis market for the management of
kidney stone risk.
In each case, we intend to participate in urology, nephrology,
gynecology, and other industry trade meetings and to exploit on-line medical
databases and our own web site. Finally, as stated above, we intend to use
third-party sales forces to amplify our efforts.
Contract Suppliers and Manufacturers. It is our present intention to
enter into agreements with contract testing and manufacturing entities to test
and manufacture commercial quantities of our 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" requirements
applicable to such a facility.
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Scientific Advisory Board
None of the members of the Scientific Advisory Board is an employee.
Scientific advisors spend only a small portion of their time on our affairs and
have commitments to other institutions that may conflict or compete with their
obligations to us. Scientific advisors collaborate with us on research grant
applications, review and evaluate our research programs, advise us about
technical matters, consult on product planning and feasibility studies, assist
in establishing research priorities, provide guidance on clinical evaluation
programs, alert us to potential collaborators, advise us on new developments,
and recommend personnel.
The Scientific Advisory Board meets periodically as a group. In
addition, some members may meet in smaller groups or individually with our
scientists. Ixion has confidentiality agreements with each scientific advisor
providing that all confidential information shall be our exclusive property.
Scientific advisors are not paid in cash, but are reimbursed expenses, and,
pursuant to the 1994 Board Retainer Plan, receive 5,000 restricted shares of
Ixion's common stock upon joining, and 1,000 restricted shares annually
thereafter. They also receive stock options for 2,500 shares annually after
their initial year.
The current members of the Scientific Advisory Board are the following:
Milton J. Allison, Ph.D. Dr. Allison has long been a pioneer in oxalate
research, having discovered and named Oxalobacter formigenes. He is presently
Professor of Microbiology, Immunology, and Preventive Medicine, Iowa State
University and Microbiologist Emeritus of the National Animal Disease Center,
USDA, Ames, Iowa. He earned his Ph.D. from the University of Maryland.
Marguerite Hatch, Ph.D. Dr. Hatch is a Professor in the College of
Medicine, Nephrology Division, and Director of the Kidney Stone Center at the
University of California, Irvine College of Medicine since 1990.Previously she
was Director of the New York Kidney Stone Center, SUNY Health Science Center.
She earned her B.Sc. with Honors from the University College, Dublin, Ireland
and her Ph.D. in 1978 from Trinity College, Dublin, Ireland.
Saeedur R. Khan, Ph.D. Dr. Khan is Associate Professor of Pathology at
the University of Florida College of Medicine and a leader in the field of
oxalate research and molecular/microscopy. His current and previous committee
memberships include the NIH Ad hoc Reviewer on Urinary Stone Grants; member,
Center for the Study of Lithiasis and Pathological Calcification; and member of
the Shands Stone Center Committee. He earned his undergraduate degree from Agra
University in Agra, India, his masters of science degree from the Peshawar
University, Peshawar, Pakistan, and his Ph.D. from the University of Florida.
Desmond Schatz, M.D. Dr. Schatz is the Medical Director of the Diabetes
Center and Associate Professor of Pediatric Endocrinology at the University of
Florida Medical School. He is a Diplomate of the American Board of Pediatric
Endocrinology and a member of the American Diabetes Association, the
International Diabetes Federation, and the Immunology of Diabetes Society. He
received his undergraduate degree from St. David's College in Johannesburg,
South Africa, and his medical degree from the University of the Witwatersrand
Medical School in Johannesburg.
Sheldon M. Schuster, Ph.D. Dr. Schuster is Biotechnology Program Director
for the University of Florida's biotechnology program. He is a member of the
American Association for the Advancement of Science and the American Society of
Biological Chemistry and Molecular Biology. He was a co-founder of BioNebraska,
Inc., and is a co-founder and chairman of the scientific advisory board of
AquaGene, Inc. He received his B.S. in biochemistry from the University of
California, Davis and his Ph.D. in biochemistry and pharmacology from the
University of Arizona.
Hans Wigzell, M.D., D.Sc. Dr. Wigzell is presently the Rector of
Stockholm's famed Karolinska Institute. He received his medical degree and
doctorate of science. from Karolinska. From 1982 onwards, he has been Chairman
of the Department of Immunology at Karolinska. Among his many honors was his
service as Chairman of the Nobel Committee of Karolinska from 1990 to 1992.
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Special Note Regarding Forward-Looking Statements
This annual report on Form 10-KSB of Ixion Biotechnology, Inc. for the year
ended December 31, 1999 contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 194, as amended, which are intended to be
covered by the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements under Item 1, Industry Description and
Outlook, Business Strategy, Product Development, Manufacturing and Marketing;
Item 2, Description of Property, Item 5, Market for Common Equity and Related
Stockholder Matters, and Item 6, Management's Discussion and Analysis or Plan of
operations, contain forward-looking statements. Where, in any forward-looking
statement, Ixion expresses an expectation or belief as to future results or
events, such expectation or belief is expressed in good faith and believed to
have reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
Statements in this report regarding the dates on which we anticipate
commencing clinical trials or filing for regulatory approval, constitute
forward-looking statements under the federal securities laws. Such statements
are subject to risks and uncertainties that could cause the actual timing of
such clinical trials or filings to differ materially from those we project. With
respect to such dates, we have made assumptions regarding, among other things,
* the successful and timely completion of preclinical tests,
* the approval of investigational new drug applications for each of our
drug candidates by the FDA,
* the availability of a simplified application way to seek market
clearance from the FDA for our molecular diagnostic test,
* 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.
Our ability to commence clinical trials or file for regulatory approval on
the dates anticipated is subject to risks. You should not rely on the dates on
which we anticipate filing regulatory approval or commencing clinical trials.
Statements regarding our research and development plans also constitute
forward-looking statements. 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 our
management team, which may change in the future due to a large number of
potential events, including unanticipated future developments.
The following factors are factors that could cause actual results or events
to differ materially from those anticipated, and include, but are not limited
to: general economic, financial and business conditions; labor difficulties;
competition for customers in the biotechnology and pharmaceutical industries;
the costs of research and development of chemical compounds and products; and
changes in and compliance with governmental regulations.
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Item 2. Description of Property.
In October 1998, we leased approximately 3,600 rentable square feet of
equipped laboratory space and approximately 1,413 rentable square feet of office
space at 13709 Progress Blvd., Alachua, Florida. Our lease has a three-year
term, expiring in September 2001, with two one-year renewal options. We are
developing a small scale facility in our lab suite to produce preclinical
quantities of our XEntrIX TM Oxalobacter formigenes Monitor as well as
IxC1-62/47. Commercial scale production will be subcontracted to contract
manufacturers. Annual expenses for 1999, including repayment of funds provided
by the lessor for tenant improvements and an emergency generator, were
approximately $104,000. We expect that annual lease expenses will continue to be
approximately the same for 2000.
For a fee of $1,000 for 2000, we have a graduate membership agreement
with the Biotechnology Development Institute under which we have access to
specialized facilities such as animal rooms, small-scale fermentation
capabilities, and glass washing and autoclaving facilities. As a graduate
member, we may also use the specialized equipment located in the centralized
instrument lab in the Biotechnology Development Institute at no extra cost, and
we may use the services of the University's Core Laboratories including the
Recombinant Protein Expression Core, the Flow Cytometry Core, the Protein
Chemistry Core, and the Electron Microscopy Core at a special graduate
membership rate.
Item 3. Legal Proceedings.
We are not a party to any legal proceedings and are not aware of any
threatened litigation or regulatory action that could have a material adverse
effect on our 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.
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 our issued and outstanding restricted securities have been properly
legended and we have issued "stop transfer" instructions to our 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
Act or have been transferred pursuant to an appropriate exemption from the
registration provisions of the Act.
Restricted shares of common stock have been issued to members of the
board of directors, members of the Scientific Advisory Board, and employees
and consultants under our Board Retainer Plan as follows:
On February 11, 1997, 10,000 shares to our Director of Research,
Oxalate Division, for services valued at $100,000 (a portion of which
is unearned compensation) or $10.00 per share.
On June 27, 1997, 7,000 shares (1,000 shares to each of two directors
and 1,000 shares to each of five members of the Scientific Advisory
Board, for services) valued at $70,000 (a portion of which is unearned
compensation) or $10.00 per share.
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On July 1, 1997, 3,000 shares to our Associate Director of Research,
Diabetes Division, for services (a portion of which is unearned
compensation) valued at $30,000 or $10.00 per share.
On July 1, 1998, 23,450 shares (1,000 shares to each of two directors,
5,000 shares to a newly-elected director, 1,000 shares to each of five
members of the Scientific Advisory Board, 5,000 shares to a
newly-appointed member of the Scientific Advisory Board, and 6,450
shares to employees for services, in aggregate, valued at $234,500 (a
portion of which is unearned compensation) or $10.00 per share.
On July 12, 1999, 22,400 shares (1,000 shares to each of three
directors, 5,000 shares to each of two newly-elected directors, 1,000
shares to each of six members of the Scientific Advisory Board, and
3,400 shares to employees for services, in aggregate, valued at $89,600
(a portion of which is unearned compensation) or $4.00 per share.
On January 10, 2000 and again on March 3, 2000, an aggregate of
670 shares to our Associate Director of Research, Diabetes Division,
for services, in the aggregate, valued at $2,680 (a portion of which
is unearned compensation) or $4.00 per share.
We 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.
On February 11, 1997, we 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 us 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.
We 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.
On April 16, 1999, we entered into an agreement in principle with
Q-Med, AB, a biotechnology company with headquarters and operations in Uppsala,
Sweden. This agreement was amended on September 9, 1999. Pursuant to the
agreement in principle as amended, we issued a promissory note in the amount of
$300,000, convertible into shares of common stock at a price of $2.00 per share.
The promissory note was converted into 150,000 shares of restricted common stock
on July 7, 1999. Also, pursuant to the agreement in principle as amended, we
have issued additional shares of restricted common stock as follows:
September 7, 1999 37,500 shares at $2.00 per share
September 10, 1999 37,500 shares at $2.00 per share
October 18, 1999 37,500 shares at $2.00 per share
November 18, 1999 37,500 shares at $2.00 per share
December 10, 1999 37,500 shares at $2.00 per share
January 12, 2000 37,500 shares at $2.00 per share
February 10, 2000 37,500 shares at $2.00 per share
March 14, 2000 37,500 shares at $2.00 per share
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We issued the above securities without registration in reliance upon the
exemption provided by Section 4(2) of the Act as a transaction to a single
sophisticated corporate investor which did not involve a public offering,
general solicitation, or general advertisement and in reliance on the exemption
provided by the provisions of Regulation S.
In December, 1997, we commenced the public offering of 400,000 units,
for an aggregate of $4,000,000. Each unit consisted of one share of common stock
and 0.25 charitable benefit warrant. Each whole charitable benefit warrant
entitled someone to purchase one share of common stock at a price of $20.00 per
share. On December 10, 1998,we extended the offering through December 10, 1999,
and thereafter through March 31, 2000.
In early 1999, we temporarily suspended the offering, converted the
securities offered from units to shares, retroactively reduced the offering
price from $10.00 per unit to $4.00 per share, and withdrew 250,000 shares and
all unsold charitable benefit warrants from registration. We also adjusted the
exercise price for outstanding charitable benefit warrants from $20 per share to
$8 per share and increased the number of shares purchasable upon exercise of
those warrants from 8,605 shares to 21,513 shares. As a result, a total of
51,630 shares were issued to purchasers in the public offering for no additional
consideration. There is no minimum number of shares to be sold in the Offering,
and all funds received have gone immediately to the Company.
The offering is not scheduled to terminate until the earliest of: the sale
of all shares, March 31, 2000. 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 23, 2000, we had sold a total of 118,400 shares and 21, 513
charitable benefits warrants at an aggregate price of $473,600, of which shares
and warrants for an aggregate of $344,200 were sold through December 31, 1999.
From the effective date of the offering to December 31, 1999, we have paid $200
in expenses and $1,854 in commissions to Unified Management Company as broker,
and there have been no finders' fees. Other offering related expenses through
December 31, 1999, amounted to $124,680 all of which have been offset against
proceeds. No payments were made to our directors or officers, or to their
associates in connection with the offering.
Net offering proceeds as of December 31, 1999 amounted to $219,250. The
net proceeds were used entirely to fund our operations during 1998 and 1999 as
reflected in the financial statements included elsewhere in this report. The use
of proceeds still to be received from the offering is not expected to vary
materially from the use of proceeds described in the amended registration
statement.
There is no public trading market for our securities.
As of March 23, 2000, there were approximately 130 shareholders of
record of our common stock.
We have never declared or paid any cash dividends on our common stock
and do not intend to pay any cash dividends on our 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. Our 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
Ixion is a development stage, biotechnology company. We are in the
development stage because we are devoting substantially all of our efforts to
establishing our business, and our planned principal operations have not
commenced.
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Since we were founded in March of 1993, we have principally been doing
research and development, securing patent protection, and raising capital. We
have not received any revenues from the sale of products. In June 1998, we
reached an agreement with the University of Florida Diagnostic Referral
Laboratories for them to provide a service to physicians using our molecular
diagnostic test, the XEntrIx TM Oxalobacter formigenes Monitor. We have received
no revenue to date under this agreement. We do not expect any of our drug or
device product candidates (which require regulatory approval) to be commercially
available for at least several years, but our nutritional supplement product is
scheduled for 2000. From inception through December 31, 1999, we incurred
cumulative losses of $4,019,388. These losses were due primarily to expenditures
on general and administrative activities, research and development, patent
preparation and prosecution, and interest charges.
We expect to continue to incur substantial research and development
costs resulting from
o ongoing research and development programs,
o manufacturing of products for use in clinical trials and preclinical
and clinical testing of our products.
We also expect that operating, general and administrative costs,
including
o amortization of patents,
o costs of additional administrative personnel.
o legal and regulatory costs necessary to support preclinical
development and clinical trials, and
o costs associated with the creation of a marketing and sales
organization, if warranted,
will increase in the future, assuming we can finance the increased requirements.
Accordingly, we expect to incur operating losses for the foreseeable future.
Our operating expenses will depend on several factors, including the
level of research and development expenses and our success in raising capital.
Research and development expenses will depend on the progress and results of our
product development efforts, which we cannot predict. We may sometimes 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, we believe that period-to-period comparisons in the future are
not necessarily meaningful.
Results of Operations
Years Ended December 31, 1999 and 1998
Total revenues increased by 2,657% from $3,722 for the year ended
December 31 1998 to $102,636 for the year ended December 31, 1999 mainly as a
result of the following:
o Two new NIH research contracts; one awarded under the Small
Business Technology Transfer Research (STTR) Program, and
a second, awarded under the Request for Assistance (RFA)
program.
o Two research support agreements, with corporate collaborators.
o An increase in interest income generated from the investment of
increased cash flows.
We expect revenue to continue to increase in 2000 because of
o Two NIH grants awarded in 1999 which will provide approximately $85,000
of income in 2000,
o The extension of another NIH grant for an additional $100,000
beginning on September 1, 2000,
o Another NIH grant awarded on March 30, 2000 for $100,000
o Further activity under the research support agreements
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o Increased interest income from investments of excess cash generated
from increased cash flows.
Operating, general, and administrative expenses increased 21% from
$370,397 for the year ended December 31, 1998 to $447,400 for the year ended
December 31, 1999. These increased expenses reflect:
o increased personnel and related payroll taxes
o increased supplies and computer-related expenses
o increased utilities usage
o increase in travel related to capital raising
o support of related research
o 1998 bonus declared in 1999.
We expect our operating, general and administrative expenses to
continue to increase in 2000 as a result of increased research activities
resulting in a need for increased administrative and marketing personnel.
Research and development expenditures consist primarily of:
o payroll-related expenses of research and development personnel
o laboratory and animal supplies
o laboratory rent and associated utilities
o depreciation on laboratory equipment
o development activities
o payments for sponsored research
o scientific advisors
o regulatory consultants fees
o amortization of capitalized patent costs.
Research and development expenses increased 47% from $424,606 for the
year ended December 31, 1998 to $625,329 for the year ended December 31, 1999.
These increased expenses reflect
o increased laboratory personnel
o increased laboratory rent and associated utilities
o R&D-related travel expenses
o interest charges on the purchase of lab equipment and on deferred
fees and salaries
o increased consultant's fees
o 1998 bonus declared in 1999
o increased laboratory-related supplies and expenses
offset somewhat by a reduction in scientific advisor's fees, regulatory and
preclinical expenses. Our research and development expenses will continue to
increase in 2000 due to an increase in the scale of operations as a result of
the receipt of the research grants referred to above.
Interest expense is comprised only of non-R&D-related interest.R&D-related
interest is accounted for as an expense under research and development. Interest
expense increased 27% from $122,958 for the year ended for the year ended
December 31, 1998 to $155,697 for the year ended December 31, 1999 due primarily
to interest on bridge loans from officers, and the compounding of interest on
deferred administrative fees and salaries, including deferred interest, payable
to related parties.
Liquidity and Capital Resources
In December, 1997, we commenced the public offering of 400,000 units of
newly issued securities, for an aggregate of $4,000,000. Each unit consisted of
one share of common stock, $0.01 par value, and 0.25 of charitable
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benefit warrants. Each whole charitable benefit warrant entitled the holder to
purchase one share of common stock at a price of $20.00 per share. Ixion is
directly making the offering (except in Florida where sales must be made through
a broker) in selected states, primarily over the Internet. There is no minimum
number of shares to be sold in the offering, and all funds received have gone
and will go immediately to us. On December 10, 1998, we extended the offering
through December 10, 1999 and thereafter through March 31, 2000.
In early 1999, the offering was temporarily suspended, and the board of
directors approved changes in the offering including a withdrawal from
registration of all unsold charitable benefit warrants, a reduction in the
number of shares offered from 400,000 to 150,000, a retroactive reduction in the
offering price to $4.00 per share of common stock, a concomitant adjustment in
the exercise price for outstanding charitable benefit warrants (from $20/share
to $8/share) and an increase in the number of shares purchasable upon exercise
of those warrants from 8,605 shares to 21,513 shares. This action by the board
resulted in the additional issuance of 51,630 shares to purchasers in the public
offering for no additional consideration, and a reduction in the maximum
potential aggregate offering amount from $4,000,000 to $600,000. As a result, in
September, 1999,a total of 51,630 additional shares were issued to purchasers in
the public offering for no additional consideration and are included in the
shares outstanding on December 31, 1999. Through March 23, 2000 a total of
$473,600 had been raised in the offering for 118,400 shares. The offering will
terminate on March 31, 2000.
In February, 1999, we received notice that the NIH had awarded us a
$100,000 Phase I grant under the Small Business Technology Transfer Program for
research in our oxalate technology. The effective date of the grant was June 15,
1999. We began drawing on these funds in July. We subcontracted a large portion
of the grant to the University of California, Irvine, but there is $10,000 still
remaining available during the first six months of 2000 to support oxalate
research at Ixion. In September we also received notice of the award of a
$200,000 grant (covering a 23-month period) from the NIH to support our diabetes
research. These funds became available starting September 30, 1999. We have
subcontracted $25,000 under this grant, but have approximately $175,000
available to support diabetes research through August 31, 2001. In February,
2000 we received notice that we had been awarded another $100,000 NIH Phase I
grant under the SBIR program for research in our oxalate technology. We will
subcontract approximately $30,000 to Wake Forest University, but the remaining
$70,000 will be available to support oxalate research at Ixion through February
28, 2001. In March 2000 we received notice of an additional NIH SBIR award for
oxalate research. We will subcontract $45,000 to the University of Florida,
leaving approximately $55,000 to support Ixion oxalate research through
September 2000. We have other grant applications pending.
During 1998 and the first quarter of 1999, our development activities were
funded primarily by the proceeds from the offering and bridge loans from the
Chairman and Chief Executive Officer and the President. Operations during the
last three quarters of 1999 were funded primarily from $675,000 advanced by
Q-Med in connection with the Q-Med transaction described below. The bridge loans
total $415,000 at December 31, 1999, not including accrued but unpaid interest,
and are due on demand. Interest on the bridge loans from officers is currently
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%. We have no agreement
with the officers to advance further funds, however, the officers have continued
to fund operating requirements voluntarily, in the past, to meet working capital
needs. Although additional bridge loans may be necessary in 2000 because of the
Q-Med transaction, and awarded and pending NIH grants, we can not assure you
that, should such loans be necessary in the future, the officers will continue
to voluntarily fund them. We do not have any bank financing arrangements. Our
long-term indebtedness consists primarily of deferred fees and salaries payable
to related individuals and our unsecured convertible notes, which mature in
2001.
At December 31, 1999, we had $22,361 in cash and cash equivalents.
Until required for operations, our policy is to invest any excess 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.
In connection with a sponsored research agreement with Genetics
Institute, Inc. which was concluded during 1997, some patent-related expenses
were reimbursed by Genetics Institute. We may be contractually obligated to
repay these reimbursed expenses in installments over a 36 month period upon a
notice to or by Genetics Institute to the effect that their option to negotiate
for a license to our technology, contained in the sponsored
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research agreement has expired. We have not given nor received such notice, and,
accordingly, reimbursement has not commenced. We have accrued $42,317 as a
long-term liability pending final notice under the agreement.
Annual expenses during 1999 for our current three-year lease (with two
one-year renewal options), including repayment of funds provided by lessor for
tenant improvements and an emergency generator, were approximately $104,000. We
expect that annual lease expenses will continue to be approximately the same for
2000. We will continue to have a need to purchase additional laboratory
equipment. We estimate that we will need to purchase at least $100,000 of
capital laboratory equipment in the coming year.
We have incurred negative cash flows from operations since our inception.
We have spent and expect to continue to spend, substantial funds to complete our
planned product development efforts, commence clinical trials, and diversify our
technology. Our future capital requirements and the adequacy of available funds
will depend on numerous factors, including
* the completion of the Q-Med transaction described below,
* the successful commercialization of Ox-Control(TM) (our
nutritional supplement) the XEntrIx (TM) Oxalobacter
formigenes Monitor (our diagnostic test), and IxC1-62/47
(our lead therapeutic compound),
* the successful commercialization of our islet replacement therapy
products,
* progress in our product development efforts,
* the magnitude and scope of development 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 our products
The Q-Med Transaction
On April 16, 1999, we reached an agreement in principle with Q-Med AB,
a biotechnology company based in Uppsala, Sweden, which was amended on September
7, 1999. Under the amended agreement, we agreed to the following:
o we issued an option to Q-Med to acquire shares of newly-issued
common stock under the following terms:
o exercise is at the sole discretion of Q-Med;
o the number of shares to be acquired shall be 2,700,000 or
a number of shares such that, following the exercise of the
option, Q-Med shall own at least 50% of our outstanding shares
(on a fully diluted basis);
o Q-Med must purchase all or none of the remaining option shares;
o the option expires not later than July 1, 2000;
o the cash purchase price for the option shares is $2.00/share; and
o the option price will be paid over a two-year period.
o Q-Med shall purchase 37,500 shares per month (at the $2.00
per share price) through the expiration of the option or
the agreement. Q-Med will retain these shares without
regard to whether they exercise their option.
o As additional consideration for the option shares, the
Company receives a royalty-free license to Q-Med's
non-animal, stabilized hyaluronic acid technology for use
as an encapsulation material for our transplantable
islets; and
o If the option is exercised, the redemption of up to
$787,000 of our convertible unsecured notes which note
holders elect not to convert in August 2001; and
o The agreement is cancelable by Q-Med on not less than 90 days'
notice.
If Q-Med were to exercise its option for all 2,700,000 shares, it would
own over 50% of our company.
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Q-Med, a growing, profitable Swedish company, whose shares are listed
on the Stockholm stock exchange, develops, manufactures, and sells natural,
specialized medical implants. Q-Med AB has no relationship to or affiliation
with Q-Med, Inc., a Delaware corporation whose shares are listed on the Nasdaq
small cap market. All of Q-Med's products are constructed using a
proprietary form of non-animal, stabilized hyaluronic acid. Hyaluronic acid is a
natural polysaccharide, first isolated in 1934. Its main function in the body is
to lubricate moveable parts like joints and muscles and to transport substances
to and within cells. The majority of Q-Med's revenues are accounted for by
Restylane(R) for the filling out of lips, facial wrinkles, and facial folds.
Through December 31, 1999, we have received $675,000 in investments
from Q-Med, A.B. and issued a total of 337,500 shares of common stock in
accordance with the amended agreement in principle, described above.
Additionally, in 2000 through March 23, we have received an additional $225,000
in investments and issued an additional 112,500 shares to Q-Med.
We cannot assure you that Q-Med will not terminate the agreement, that
it will exercise its option on or before July 1, 2000, or that it will otherwise
complete the contingent elements of the transaction on satisfactory terms, or at
all. In the event our plans change or our assumptions change or prove to be
inaccurate or we fail to complete the Q-Med transaction, we will require
additional financing. We will be required to obtain additional funds in any
event through equity or debt financing, strategic alliances with corporate
partners and others, mergers or the sale of substantially all our assets, or
through other sources in order to bring our drug and device products through
regulatory approval to commercialization. We do not have any material committed
sources of additional financing. We cannot assure you that additional funding,
consolidation, or alliance, if necessary, will be available on acceptable terms,
if at all. If adequate funds are not available, we may be required to further
delay, scale-back, or eliminate certain aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates, products, or potential markets. If adequate funds are not available,
our business, financial condition, and results of operations will be materially
and adversely affected.
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, 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.
28
<PAGE>
Exhibits marked by asterisk(s) are included with this Report; other exhibits
have been incorporated by reference to other documents filed by us with the SEC.
Exhibit Description
Number
1.1 Agreement with Unified Management Corporation, dated March 18, 1998 (5)
3.1 Certificate of Incorporation of Registrant (1)
3.2 Certificate of Amendment to Certificate of Incorporation of Registrant
(1)
3.3 Certificate of Amendment to Certificate of Incorporation of Registrant
(1)
3.4 Bylaws of Registrant, as amended and restated (5)
3.5 Certificate of Amendment of Certificate of Incorporation, dated June
11, 1999 (8)
3.6 Certificate of Incorporation, as amended and restated (8)
4.1 Form of Registrant's Common Stock Certificate (2)
4.2 Form of Registrant's Charitable Benefit Warrant Certificate (5)
4.3 Charitable Benefit Warrant Agreement, dated as of December 10, 1997(5)
4.4 Warrant Agreement with Jeffrey W. Seel, dated November 7, 1995 (1)
4.5 Warrant Agreement with the University of Florida Research Foundation,
Inc., dated November 7, 1995 (1)
4.6 Warrant Agreement with the University of Florida Research Foundation,
Inc., dated August 1, 1996 (1)
4.7 Warrant Agreement with the University of Florida Research Foundation,
Inc., dated October 1, 1996 (1)
4.8 Warrant Agreement with the University of Florida Research Foundation,
Inc., dated November 7, 1996 (1)
4.9 Warrant Agreement with Brandywine Consultants, Inc., dated June 23,
1997 (2)
4.10 Warrant Agreement with Brandywine Consultants, Inc., dated October 24,
1997 (2)
4.11 Amendment to Charitable Benefit Warrant Agreement dated September 30,
1999 (9)
*4.12 1994 Stock Option Plan, as amended
10.1 Chattel Mortgage Agreement with Carl Therapeutic, Inc., dated as of
January 1, 1996 (1)
10.2 Consulting Agreement with Brandywine Consultants, Inc., dated December
12, 1996 (1)
10.3 Consulting Agreement with Ammon B. Peck, dated February 21, 1997 (1)
10.4 Consulting Agreement with David C. Peck, dated July 1, 1996 (1)
10.5 Convertible Promissory Note with Weaver H. Gaines, dated March 31,
1993 (1)
10.6 Convertible Promissory Note with David C. Peck, dated October 15,
1993 (1)
10.7 Demand Promissory Note, Bridge Loan with Weaver H. Gaines, dated April
15, 1996 (1)
10.8 Demand Promissory Note, Bridge Loan with David C. Peck, dated April 15,
1996 (1)
10.9 Deferred Compensation Plan Agreement with Weaver H. Gaines, dated
January 1, 1994 (1)
10.10 Deferred Compensation Plan Agreement with Ammon B. Peck, dated June 1,
1994 (1)
10.11 Deferred Compensation Plan Agreement with David C. Peck, dated April
1, 1994(1)
10.12 Agreement to Purchase Shares, dated as of October 10, 1994 (1)
10.13 Note Purchase Agreement, dated as of September 13, 1996 (1)
10.14 Incubator License Agreement with the University of Florida Research
Foundation, Inc., dated June 26, 1995 (1)
10.15 Amendment No. 1, dated July 31, 1996 to Incubator License Agreement
with the University of Florida Research Foundation, Inc. (1)
10.16 Amendment No. 2, dated October 1, 1996 to Incubator License Agreement
with the University of Florida Research Foundation, Inc. (1)
10.17 Amendment No. 3, dated November 7, 1996 to Incubator License Agreement
with the University of Florida Research Foundation, Inc. (1)
10.18 Amendment No. 4, dated January 21, 1997 to Incubator License Agreement
with the University of Florida Research Foundation, Inc. (1)
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 (1)
10.20 Patent License Agreement with Research Component with the University of
Florida Research Foundation, Inc. relating to Oxalobacter formigenes,
dated January 11, 1995 (4) (a)
29
<PAGE>
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 (4)
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 (4) (a)
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 (4) (a)
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 (4)(a)
10.25 Patent License Agreement with Milton J. Allison, dated June 23, 1997.
(4) (a)
10.26 Sponsored Research Agreement with Genetics Institute, Inc., dated
June 5, 1996 (4) (a)
10.27 Employment Agreement with Weaver H. Gaines, dated August 31, 1994 (1)
10.28 Employment Agreement with David C. Peck, dated August 31, 1994 (1)
10.29 1994 Stock Option Plan, as amended (1)
10.30 1994 Board Retainer Plan, as amended (7)
10.31 Consulting Agreement with Ammon Peck, dated October 6, 1994 (1)
10.32 Amendment No. 5 to Incubator License Agreement, dated July 19, 1997 (1)
10.33 Office Lease agreement with Echelon International Corporation dated as
of September 18, 1998 (6)
10.34 Amendment No. 3 to Patent License Agreement with Research Component
with the University of Florida Research Foundation, Inc. relating to
Oxalobacter formigenes, dated December 17, 1998 (6) (a)
10.35 BDI Graduate Membership Agreement with the Biotechnology Development
Institute dated November 5, 1998. (6)
10.36 Consulting Agreement with Amersham Pharmacia Biotech, Inc., dated
January 3, 1999 (6)
10.37 Interinstitutional Agreement with The University of Florida Research
Foundation, dated February 4, 1999 (7) (a)
10.38 Finders' Agreement with East Coast Angels, LLC, dated March 15,
1999. (7)
10.39 Agreement in Principle dated April 16, 1999, with Q-Med AB (8)
10.40 1994 Board Retainer Plan, as amended. (8)
10.41 Consulting Agreement with Thomas P. Stagnaro, dated September 21, 1998
(9)
10.42 Amended and Restated Agreement in Principle dated September 7, 1999
with Q-Med, AB (9)
*10.43 Service Contract and Confidentiality Agreement with BioQuest
Corporation, dated November 30, 1999.
*11.1 Statement regarding computation of earnings per share (included as
Note 1 in financial statements)
23.1 Consent of Independent Accountants
24 Power of Attorney (included with the signature page to the registration
statement (6)
*27 Financial Data Schedule
(a) Confidential information has been omitted from these document and filed
separately with the Commission pursuant to a request for Confidential
Treatment.
* Filed herewith.
(1) Incorporated by reference to Form SB-2, File No. 333-334765, dated
August 29, 1997.
(2) Incorporated by reference to Amendment 1 to Form SB-2, File
No. 333-334765, dated November 7, 1997.
(3) Incorporated by reference to Amendment 2 to Form SB-2, File
No. 333-334765, dated December 2, 1997.
(4) Incorporated by reference to Amendment 3 to Form SB-2, File
No. 333-334765, dated December 9, 1997.
(5) Incorporated by reference to Post Effective Amendment No. 1 to
Form SB-2, File No. 333-34765, dated
January 23, 1998.
(6) Incorporated by reference to Post Effective Amendment No. 2 to Form
SB-2, File No. 333-33475, dated February 17, 1999.
(7) Incorporated by reference to Form 10-KSB for the year ended December
31, 1999, dated March 31, 1999.
(8) Incorporated by reference to Form 10-QSB for the quarter ended June 30,
1999, dated August 15, 1999.
30
<PAGE>
(9) Incorporated by reference to Form 10-QSB for the quarter ended September
30, 1999, dated November 15, 1999.
Item 13(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
31
<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 17, 2000.
SIGNATURE TITLE
/S/ Weaver H. Gaines Chairman of the Board, Chief Executive
- ---------------------- Officer, and Director
Weaver H. Gaines
/S/ David C. Peck President, Chief Financial Officer and
- ---------------------- Director
David C. Peck
/S/ Kimberly A. Ramsey Vice President and Controller
- ----------------------
Kimberly A. Ramsey
/S/David M. Margulies Director
- ----------------------
David M. Margulies
/S/ Vincent P. Mihalik Director
- ----------------------
Vincent P. Mihalik
/S/ Karl E. Arfors Director
- ----------------------
Karl-E. Arfors
/S/ Bengt Agerup Director
- ----------------------
Bengt Agerup
/S/ Thomas P. Stagnaro Director
- -----------------------
Thomas P. Stagnaro
<PAGE>
Ixion Biotechnology, Inc.
Contents
- -------------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F-1
Financial Statements:
Balance Sheet F-2
Statements of Operations F-3
Statements of Capital Deficiency F-4
Statements of Cash Flows F-6
Notes to Financial Statements F-8
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Ixion Biotechnology, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of capital deficiency and of cash flows present fairly, in all
material respects, the financial position of Ixion Biotechnology, Inc. (A
Development Stage Company) at December 31, 1999 and the results of its
operations and its cash flows for the years ended December 31, 1999 and 1998 and
for the period March 25, 1993 (date of inception) through December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
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.
March 6, 2000
/s/ Price Waterhouse Coopers
Price Waterhouse Coopers
Orlando, Florida
F-1
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Balance Sheet
December 31, 1999
- ---------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 22,361
Accounts receivable 28,920
Prepaid expenses 3,435
Other current assets 500
-----------
Total current assets 55,216
-----------
Property and Equipment, net 111,952
-----------
Other Assets:
Patents and patents pending less accumulated
amortization of $5,385 376,970
Other, less accumulated amortization of $7,835 8,681
-----------
Total other assets 385,651
-----------
Total assets $ 552,819
===========
Liabilities and Capital Deficiency
Current Liabilities:
Accounts payable $ 43,214
Bridge loans payable to officers 415,000
Current portion of 8,817
Accrued expenses 150,049
Deferred rent - current 1,612
Interest payable 39,443
--------
Total current liabilities 658,135
--------
Long-Term Liabilities:
Notes payable 698,607
Liability under research agreement 42,317
Deferred rent, including accrued interest 22,131
Deferred fees and salaries, including accrued interest 944,041
---------
Total long-term liabilities 1,707,096
---------
Total liabilities 2,365,231
---------
Commitments (Notes 1 and 11)
Capital Deficiency:
Common stock, $.01 par value; authorized 4,000,000,
issued and outstanding 2,926,044 shares 29,260
Additional paid-in capital 2,419,818
Deficit accumulated during the development stage (4,019,388)
Less unearned compensation (242,102)
-----------
Total capital deficiency 1,812,412)
-----------
Total liabilities and capital deficiency $ 552,819
===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Operations
For the Period
March 25,
1993 (Date
of Inception)
Year Ended through
December 31, December 31,
1999 1998 1999
Revenues:
Income under research $ 27,833 $ - $ 302,834
agreementIncome from 71,653 - 163,303
SBIR grant
Interest income 2,121 465 25,553
Other income 1,029 3,257 18,834
----------- ------- ---------
Total revenues 102,636 3,722 510,524
----------- -------- ---------
Expenses:
Operating, general and
administrative 447,400 370,397 1,915,907
Research and development 625,329 424,606 2,136,066
Interest 155,697 122,958 477,939
----------- -------- ---------
Total expenses 1,228,426 917,961 4,529,912
----------- ------- ---------
Net Loss $(1,125,790) $(914,239) $(4,019,388)
============ ========== ===========
Net Loss per Share (Basic) $ (0.42) $ (0.37)
============ ==========
Weighted Average Common Shares 2,657,439 2,489,677
============ ==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Capital Deficiency
For the Period March 25, 1993 (Date of Inception) through December 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Unearned
Common Stock Paid-In Development Notes Compen-
Shares Amount Capital Stage Receivable sation Total
<S> <C> <C> <C> <C> <C> <C> <C>
Initial sale of common stock,
$.01 per share 100,000 $1,000 $ - $ - $ - $ - $ 1,000
Sale of common stock,
$.01 per share 50,000 500 - - - - 500
Net loss for the period
March 25, 1993 (date
of inception) through December
31, 1993 - - - (54,268) - - (54,268)
------ ------- ------- -------- ------- ----- ---------
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 650,000 6,500 6,500 - - - 13,000
property, $0.02 per share
Conversion of deferred consulting 10,000 100 900 - - - 1,000
fees,$0.10 per share
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 34,000 340 101,660 - - (62,706) 39,294
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 21,544 215 15,943 - - - 16,158
parties, $0.75 per 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 in exchange
for certain intellectual
property, $10.00 per share 1,000 10 9,990 - - - 10,000
Issuance of stock under
Board Retainer Plan, $10.00
per share 20,000 200 199,800 - - (154,382) 45,618
Payment received from
shareholder for note received
for common stock and warrants - - - - 6,000 - 6,000
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 2,465,544 24,655 1,239,003 (1,979,359) - (202,688) (918,389)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Capital Deficiency - Continued
For the Period March 25, 1993 (Date of Inception) through December 31, 1999
<TABLE>
<CAPTION> Deficit
Accumulated
Additional During the Unearned
Common Stock Paid-In Development Notes Compen-
Shares Amount Capital Stage Receivable sation Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,465,544 24,655 1,239,003 (1,979,359) - (202,688) (918,389)
Issuance of stock under
Board Retainer Plan,
$10.00 per share 23,450 235 234,265 - - (171,050) 63,450
Forfeiture of issued
stock under Board Retainer
Plan, $3.00 per share (8,400) (84) (25,116) - - 25,200 -
Amortization of unearned
compensation over service period - - - - - 63,940 63,940
Sale of stock, $10.00 per share 33,320 333 332,867 - - - 333,200
Offering costs - - (116,561) - - - (116,561)
Net loss - - - (914,239) - - (914,239)
---------- ------ ---------- ----------- ------ --------- -----------
Balance, December 31, 1998 2,513,914 25,139 1,664,458 (2,893,598) - (284,598) (1,488,599)
Issuance of stock, $10.00 per 100 1 999 - - - 1,000
share
Issuance of stock under
Board Retainer Plan, $4.00 22,400 224 89,376 - - (72,067) 17,533
per share
Conversion of notes payable,
$2.00 per share 150,000 1,500 298,500 - - - 300,000
Sale of stock, $2.00 per share 187,500 1,875 373,125 - - - 375,000
Offering costs - - (8,119) - - - (8,119)
Additional shares issued to IPO
investors for no additional
consideration 51,630 516 (516) - - - -
Amortization of unearned
compensation over service period - - - - - 114,563 114,563
Stock issued for services 500 5 1,995 - - - 2,000
Net loss - - - (1,125,790) - - (1,125,790)
---------- ------- ---------- ----------- ------ ----------- ------------
Balance, December 31, 1999 2,926,044 $29,260 $2,419,818 $(4,019,388) $ - $(242,102) $(1,812,412)
========= ======= ========== ============ ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<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,
1999 1998 1999
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,125,790) $(914,239) $(4,019,388)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 30,311 13,455 68,166
Amortization 5,870 3,156 12,870
Write-off of abandoned patents 13,045 - 13,045
Stock warrants issued under license agreement - - 20,465
Amortization of debt discount 57,168 57,168 190,560
Stock and equity instruments issued for
consulting services 2,000 - 32,000
Stock compensation 132,098 127,390 516,301
Decrease (increase) in prepaid expenses and
other current assets (3,268) 326 (4,669)
Decrease (increase) in accounts receivable (26,095) (146) (28,011)
Increase in liability under research agreement - - 42,317
Increase (decrease) in accounts payable and
accrued expenses 111,387 172 206,752
Increase in deferred fees and salaries 224,764 242,862 917,490
Increase in deferred rent 1,647 15,609 23,742
Increase in interest payable 26,622 - 59,820
----------- --------- -----------
Net cash used in operating activities (550,241) (454,247) (1,948,540)
------------ ---------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (81,177) (12,397) (125,471)
Organization costs - - (436)
Payments for patents and patents pending (103,751) (74,345) (387,866)
------------ ---------- ----------
Net cash used in investing activities (184,928) (86,742) (513,773)
------------ ---------- ----------
Cash Flows from Financing Activities:
Loans from officers 90,000 250,000 445,307
Proceeds from issuance of convertible notes payable 300,000 - 1,087,270
Proceeds from sale of common stock 376,000 333,200 1,131,900
Payment of loan costs and other assets 1,114 (1,114) (11,080)
Payment of offering costs (13,119) 53,932) (129,680)
Principal reductions in note payable (15,098) (12,975) (39,043)
------------ ---------- ------------
Net cash provided by financing activities 738,897 515,179 2,484,674
----------- --------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,728 (25,810) 22,361
Cash and Cash Equivalents at Beginning of Period 18,633 44,443 -
----------- --------- -----------
Cash and Cash Equivalents at End of Period $ 22,361 $ 18,633 $ 22,361
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<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,
1999 1998 1999
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 55,656 $ 27,590 $ 111,402
========= ========== ==========
Supplemental Disclosure of Noncash Investing
and Financing Activities:
Common stock issued for subordinated
notes payable $ - $ - $ 34,158
========== ========== ========
Conversion of notes payable in exchange for
150,000 shares of common stock $ 300,000 $ - $ 300,000
========== ========== ========
Common stock and equity instruments
issued for services or technology $ 2,000 $ - $ 51,457
========= ========== =========
Common stock issued for note receivable $ - $ - $ (6,000)
========== ========== ==========
Common stock issued for purchase of patent $ - $ - $ 10,000
========== ========== ==========
Equipment purchased under an installment
note arrangement or lease agreement $ - $ 26,450 $ 53,442
========== ========== ==========
Common stock issued under Board
Retainer Plans $ 89,600 $ 170,000 $ 547,100
========== ======== ========
Other common stock issued as compensation $ - $ 65,000 $ 237,000
========= ========= =========
Offering costs included in accounts payable $ - $ - $ 16,345
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
1. Organization and Business:
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. Obtaining regulatory authorization
involves, among other things, lengthy and detailed laboratory and clinical
testing, manufacturing validation, and other complex procedures. The
approval process is costly, time-consuming, and subject to unexpected
delays.
The Company's financial statements for the year ended December 31, 1999
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
$1,125,790 for the year ended December 31, 1999, and as of December 31,
1999, had a total capital deficiency of $4,019,388. The Company had deficit
cash from operations of $550,241 and $454,247 for 1999 and 1998,
respectively.
F-8
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
1. Organization and Business - Continued:
Public Offering
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.
As a result of the transaction with Q-Med, A.B. (described below), the
offering was temporarily suspended and the board of directors approved
changes in the offering including a withdrawal from registration of all
unsold Charitable Benefit Warrants, a reduction in the number of shares
offered from 400,000 to 150,000, a retroactive reduction in the offering
price to $4.00 per share of common stock, a concomitant adjustment in the
exercise price for outstanding Charitable Benefit Warrants (from $20/share
to $8/share), and an increase in the number of shares purchasable upon
exercise of those warrants from 8,605 shares to 21,513 shares. This action
by the Board of Directors resulted in an additional issuance of 51,630
shares to purchasers in the public offering for no additional
consideration, and a reduction in the maximum potential aggregate offering
from $4,000,000 to $600,000.
The Company has received proceeds from this offering of $344,200 through
December 31, 1999. The offering was extended from its original termination
date and will be continued until all securities have been sold or until
March 31, 2000. Offering costs of $124,680 have been offset against the
proceeds of the offering through December 31, 1999.
If the proceeds from the offering and other sources 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 either completing the Q-Med
transaction or obtaining additional financing through other sources.
F-9
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
1. Organization and Business - Continued:
Q-Med Agreement
On April 16, 1999, the Company reached an agreement in principle with
Q-Med, A.B., a biotechnology company based in Uppsala, Sweden, which
was amended on September 7, 1999. Under the amended agreement, the
Company agreed to the following:
* The Company issued an option to Q-Med to acquire shares of newly-
issued common stock under the following terms:
* Exercise is at the sole discretion of Q-Med;
* The number of shares to be acquired shall be 2,700,000 or
a number of shares such that, following the exercise of the
option, Q-Med shall own at least 50% of the Company's
outstanding shares (on a fully diluted basis);
* The option expires not later than July 1, 2000;
* The cash purchase price for the option shares is $2.00 per
share; and
* The option price will be paid over a two-year period.
* Q-Med shall purchase 37,500 shares per month (at the $2.00 per
share price) through the expiration of the option or the
agreement. Q-Med will retain these shares without regard to
whether they exercise their option for any remaining shares
(Q-Med has purchased a total of 337,500 shares for $675,000
through December under this agreement);
* As additional consideration for the option shares, the
Company receives a royalty-free license to Q-Med's non-animal,
stabilized hyaluronic acid technology;
* If the option is exercised, Q-Med agrees to redeem up to $787,000
of the convertible unsecured notes which note holders may elect
not to convert in August 2001;
* The agreement is cancelable by Q-Med on not less than 90 days'
notice.
2. Significant Accounting Policies:
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-10
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
2. 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. A valuation allowance is provided against the future benefit
of deferred tax assets if it is determined that it is more likely than
not that the future tax benefits associated with the deferred tax
asset will not 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 (3-5 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, 1999, the Company has been
issued 5 U.S. patents 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 trends and
prospects as well as the effects of obsolescence, demand, competition
and other economic factors. In 1999, $13,045 of patent pending costs
were written off as abandoned.
Revenue Recognition
Revenue from ongoing research and co-development payments is
recognized ratably over the term of the agreement, and the Company
believes such payments will approximate the research and development
expense being incurred associated with the agreement. The Company does
not have an obligation to refund, nor does there exist the presumption
of an obligation to refund, ongoing research and co-development
payments. Revenue under cost reimbursement contracts is recognized as
the related costs are incurred.
In December 1999, the SEC staff issued a Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements" (SAB
101). Among other things, SAB 101 discusses the SEC staff's view on
accounting for non-refundable up-front fees received in connection
with collaboration agreements. SAB 101 is effective for fiscal years
beginning December 15, 1999. The Company is evaluating SAB 101
F-11
<PAGE>
and the effect it may have on the financial statements. At this time,
the Company believes that SAB 101 will not have a material impact on
it's financial position or results of operations.
Research and Development
Research and development costs are charged to expense as incurred.
F-12
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
2. Significant Accounting Policies - Continued:
Other Assets
Other assets consists of loan costs associated with the issuance of
convertible notes. Loan costs are being amortized on a straight-line
basis, which approximates the effective interest method, over the
term of the notes.
Deferred Rent
Deferred rent represents a portion of the rent payable under the
Company's former 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. Also included in
deferred rent is a portion of rent of the current 36-month lease,
amortized over the length of the lease to straight-line the effect of
the graduated payments.
Stock Based Compensation
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.
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 potentially
dilutive securities in the computation is antidilutive. Common stock
equivalent shares consist of stock options, warrants and convertible
notes payable. For the year ended December 31, 1999, options to
purchase 1,559,366 shares of common stock (including estimate of
shares under Q-Med agreement), warrants to purchase 23,630 shares of
common stock, and notes payable convertible into 323,557 shares of
common stock were excluded from the calculation of earnings per share
since their inclusion would be 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.
Reclassification
Certain items in the 1998 financial statements have been reclassified
to conform to 1999 presentation. These reclassifications had no effect
on partners' capital or net income.
F-13
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
3. Property and Equipment:
Property and equipment consists of the following as of December 31, 1999:
Computer and lab equipment $ 153,356
Computer software 515
Office furniture and equipment 1,667
Library 804
Leasehold improvements 17,802
--------
174,144
Less accumulated depreciation (62,192)
--------
$ 111,952
=========
4. Notes Payable:
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. 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
straight-line method, which approximates the effective interest method,
over the term of the Variable Notes and to the date of the deepest
discount. As of December 31, 1999, there were $215,600 of 10% Notes and
$571,670 of the Variable Notes outstanding ($476,395 net of unamortized
debt discount of $95,275 at December 31, 1999). Accrued interest on the 10%
Notes totalled $1,796 as of December 31, 1999.
The Company entered into short-term loan agreements with officers of the
Company for working capital purposes. Amount outstanding was $415,000 at
December 31, 1999. The loans accrue interest at 8% and are due on demand
(Note 10).
F-14
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
4. Notes Payable - Continued:
In October 1998, upon the expiration of its lease at the Biotechnology
Development Institute, the Company entered into a new lease agreement at a
new facility (see Note 11). As part of this new agreement, the Company
acquired $26,450 of leasehold improvements and lab equipment from the
lessor. Amounts due for these capital additions are to be repaid over 36
months, the term of the lease, with interest at 10%. The balance due under
this agreement was $15,429 at December 31, 1999.
Future principal maturities of notes payable for each of the five years
subsequent to December 31, 1999 are as follows:
Year Ending
2000 $ 423,817
2001 793,882
----------
1,217,699
Less: Unamortized debt discount (95,275)
-----------
Total $ 1,122,424
===========
5. 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, 1999:
Deferred compensation $ 372,900
Net operating loss carryforward 1,214,800
Deferred tax asset 1,587,700
valuation allowance (1,587,700)
-----------
Net deferred tax asset $ -
===========
Any tax benefits for the years ended December 31, 1999 and 1998 and the
period March 25, 1993 (date of inception) through December 31, 1999
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.
F-15
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
6. Research and Development:
During the period ended December 31, 1999, the Company entered into two
separate research agreements with terms that extend into the subsequent
year and include options to extend the research periods, exercisable at the
sponsor's discretion. Revenues earned in the current year under these
research agreements were $27,833.
7. Common Stock Warrants:
During 1997, the Company issued warrants to purchase 6,000 shares of common
stock to a consulting firm as part of a consulting agreement. The warrants
are accounted for under the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation. 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.
There were no common stock warrants issued during 1998 and 1999.
Common stock warrants outstanding at December 31, 1999 are as follows:
Number Exercise Price Expiration Date
17,630 $2.00 August 31,2000
6,000 $5.00 February, 2002 - October, 2002
As discussed in Note 1, as part of the public offering commenced in
December 1997, the Company has sold units which consist 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 common stock at a price of $20 per share. Four units were required to
acquire one whole Charitable Benefit Warrant. As a result of the
transaction with Q-Med, A.B., the offering was temporarily suspended and
the Board of Directors approved changes in the offering including a
withdrawal from registration of all unsold Charitable Benefit Warrants, an
adjustment in the exercise price for outstanding Charitable Benefit
Warrants (from $20/share to $8/share), and an increase in the number of
shares purchasable upon exercise of those warrants from 8,605 shares to
21,513. Approved qualified charitable organizations may exercise Charitable
Benefit Warrants at any time until the expiration date (December 9, 2007,
unless extended); holders other than approved qualified charitable
organizations may not exercise except between December 9, 2006 and
December-9, 2007. The Charitable Benefit Warrants, will be detached from
the common stock immediately on purchase. At December 31, 1999, there were
21,513 Charitable Benefit Warrants outstanding.
F-16
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
8. Stock Option Plan:
In August 1994, the Board of Directors adopted the 1994 Stock Option Plan,
under which 325,000 shares of common stock are 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.
Effective December 22, 1999, the Board of Directors amended the Plan to
increase the total number of shares available for options from 325,000 to
500,000. Options granted to members of the Scientific Advisory Board
generally vest at the rate of 25% at the end of each three-month period
following the grant. All other options generally vest at the rate of 20%
per year and are exercisable 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
Granted 62,500 $10.00
Exercised -
Forfeited (5,500) $3.00-$10.00
-------
Outstanding at December 31, 1998 100,900
Granted 73,000 $4.00
Exercised -
Forfeited (400) $10.00
-------
Outstanding at December 31, 1999 173,500
========
F-17
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
8. Stock Option Plan - Continued:
The status of options outstanding at December 31, 1999 is as follows:
Weighted Weighted
Exercise Average Average Number
Price Shares Remaining Life Exercise Price Exercisable
$ 0.02 2,000 4.5 years $ 0.02 2,000
$ 0.75 3,500 5.5 years $ 0.75 3,150
$ 3.00 8,000 6.5 years $ 3.00 5,600
$ 6.00 3,000 7.33 years $ 6.00 1,600
$ 7.50 2,000 7.4 years $ 7.50 1,040
$ 10.00 19,900 7.5 years $ 10.00 16,200
$ 10.00 62,100 8.5 years $ 10.00 27,380
$ 4.00 73,000 9.5 years $ 4.00 7,500
------- -------
173,500 64,470
========= =========
Given the limited time period that the Company's stock has been publicly
registered, 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:
1999 1998
Low High Low High
Discount Rate 5.83% 6.11% 5.46% 5.52%
Volatility 30% 60% 30% 60%
Option Life (Years) 5 9 5 9
F-18
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
8. Stock Option Plan - Continued:
The weighted average fair value of options granted to other than
non-employee consultants during fiscal year 1999 and 1998 was in the range
of $1.50 to $2.90 and $3.67 to $7.16 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 1999 and 1998 would
have been as follows:
Low High
1999 Net Loss $1,201,439 $1,272,414
1999 Loss Per Share (.045) (0.48)
1998 Net Loss $ 956,001 $ 994,943
1998 Loss Per Share (0.38) (0.40)
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 to non-employee consultants 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 $4.00.
9. 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. In
March 1999 under an amendment to the Board Retainer Plan, up to 250,000
shares may be issued and outstanding pursuant to the Plan.
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 charged against capital deficiency and amortized over the service
period to compensation expense. Shares which vest upon delivery are
recorded as compensation expense upon issuance.
F-19
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
9. Board Retainer Plan Continued:
At December 31, 1999, a total of 121,450 shares had been granted under the
Board Retainer Plan. Compensation expense recognized in connection with
such awards under the Board Retainer Plan for the years ending December 31,
1999 and 1998 was $132,098 and $127,390, respectively. Total unearned
compensation related to Board Retainer Plan awards was $242,102 at December
31, 1999 and will be recognized as expense over future periods of service.
10. 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 April 1996, the Chairman/Chief Executive Officer and President each
entered into a revolving agreement to extend the Company up to $25,000 in
the form of bridge loans. Under these agreements, the Company borrowed a
total of approximately $32,000, all of which was repaid in June 1996. In
addition, in June 1996, these officers agreed to increase their loan
commitments to operations. Interest on bridge loans 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%. At December 31, 1999, there are total
loans of $415,000 outstanding to these officers of the Company (Note 4).
These officers have no commitment to lend additional funds in the future.
F-20
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
10. Related-Party Transactions - Continued:
In addition, the Company has agreed to defer the payment of the 1993, 1994
and part of the 1995 through 1999 salaries of the Chairman/Chief Executive
Officer, the President and the Senior Vice President/Chief Scientist
pursuant to agreements between the Company and such executives. Payments
are to be made only upon termination of employment (which may be by death,
disability, 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, and is reset annually at the rate on 30-year treasury
bonds in effect on January 1 of any given year plus 1%. The rate during
1999 was 6.29%. 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, 2002.
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.
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, 1998, the printer has been paid a
total of $11,533.
11. 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, 1999, GI has not exercised their right for
an exclusive license to this technology and costs of $42,317 are recorded
as a liability.
F-21
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
12. Risks and Uncertainties:
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.
13. Commitments:
Lease
In October 1998, the Company entered into a lease for approximately 5,000
square feet of laboratory and office space. Rents consist of a base rent
plus an amount designated for the Company's share of operating costs in
excess of a certain base level. The lease has a three-year term expiring in
September, 2001, with two one-year renewal options. Total rent expense
under this lease was approximately $87,500 and $16,900 during 1999 and
1998, respectively. Future minimum rental payments under this lease,
including an estimate of excess operating costs, at December 31, 1999 are
as follows:
Year Ending
2000 $ 89,000
2001 74,000
Other
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.
The Company has licensed the exclusive rights to technology in two areas
from the University of Florida Research Foundation. The Company is
obligated to pay royalties on net sales of the Company or their
sublicensees on products in these areas. As there have been no product
sales to date, there have been no amounts owed under these license
agreements.
F-22
<PAGE>
Ixion Biotechnology, Inc.
(A Development Stage Company)
Notes to Financial Statements - Continued
Years Ended December 31, 1999 and 1998 and the Period March 25, 1993
(Date of Inception) through December 31, 1999
14. Subsequent Events:
From January 1, 2000 through March 6, 2000, the Company has received
proceeds of $48,400 for 12,100 shares of Common Stock in their initial
public offering which will terminate March 31, 2000.
From January 1, 2000 through March 6, 2000, the Company received an
additional $150,000 from Q-Med in exchange for 75,000 shares of common
stock.
From January 1, 2000 through March 6, 2000, the Company received an
additional $41,410 from research grants and sponsored research agreements.
On January 1, 2000, additional options for 6,000 shares were granted to
members of the audit and benefits committee, and options for 2,000 shares
were issued to the Company's regulatory consultants.
F-23
Ixion Biotechnology, Inc.
1994 Stock Option Plan,
as amended December xx, 1999
1. Purpose of Plan. The purpose of the Ixion Biotechnology, Inc. 1994 Stock
Option Plan (the "Plan") is to provide a means by which Ixion Biotechnology,
Inc. (the "Company") may attract and retain directors, executive officers, other
key employees who have been or who will be given responsibility for the
management or administration of the Company's business and the growth of the
Company, Consultants, and Members of the Scientific Advisory Board, by providing
those personnel with an opportunity to participate in the growth, development
and financial success of the Company which their efforts, initiative, and skill
have helped produce.
2. Definitions. Wherever the following capitalized terms are used in the Plan,
they shall have the following respective meaning:
2.1 "Board of Directors" means the board of directors of the Company.
2.2 "Change in Control" shall be deemed to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, a corporation owned
directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of the Common Stock, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding securities which vote
generally in the election of Directors (referred to herein as "Voting
Securities"); or
(b) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors and any
new Directors whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the Directors then still in office who either were Directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
or
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other entity, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of surviving
entity) more then 50% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or
<PAGE>
a series of transactions) all or substantially all of the Company's assets.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Committee" means the Audit and Benefits Committee of the
Company.
2.5 "Common Stock" means the Common Stock of the Company, par value $0.01 per
share. 2.6 "Company" means Ixion Biotechnology, Inc., a Delaware corporation. In
addition, "Company" shall mean any corporation assuming or issuing new employee
stock options in substitution for Incentive Stock Options outstanding under the
Plan, in a transaction to which Section 424(a) of the Code applies.
2.7 "Consultant" means any person designated a consultant by the Board
of Directors providing services in connection with the Company's business or
research.
2.8 "Director" means a member of the Board of Directors.
2.9 "Disability" or "disabled" means, with respect to an Employee, a
physical or mental condition resulting from any medically determinable physical
or mental impairment that renders such Employee incapable of engaging in any
substantial gainful employment and that can be expected to result in death or
that has lasted or can be expected to last for a continuous period of not less
than six consecutive months.
2.10 "Disinterested Person" means a person who, pursuant to Rule 16b-3
has not been granted stock, stock options, or stock appreciation rights of the
Company, under the Plan or any other plan during the period beginning one year
prior to his appointment to the Committee, and during his period of service on
the Committee (except grants made pursuant to Section 4.3 or 4.4).
2.11 "Employee" means any employee (as defined in accordance with the
regulations and revenue rulings then applicable under Section 3401(c) of the
Code) of the Company, or of its subsidiaries or affiliated entities, or of
members of its Affiliated Group, whether such employee is so employed at the
time this Plan is adopted or becomes so employed subsequent to the adoption of
this Plan.
2.12 "Exchange Act" means the Securities Exchange Action of 1934, as
amended.
2.13 "Fair Market Value" means the per share value of the Common Stock
as of a given date, determined as follows:
(a) If the Common Stock is listed or admitted for trading on
any national securities exchange, the Fair Market Value of the Common Stock is
the closing quotation for such
<PAGE>
stock on the day preceding such date, or, if shares were not traded on the day
preceding such date, then on the next preceding trading day during which a sale
occurred.
(b) If the Common Stock is not traded on any national
securities exchange, but is quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System (Nasdaq System) or any similar system
of automated dissemination of quotations of prices in common use, the Fair
Market Value of the Common Stock is the last sales price (if the stock is then
listed as a national market issue under the Nasdaq System) or the mean between
the closing representative bid and asked prices (in all other cases) for the
stock on the day preceding such date as reported by Nasdaq System (or such
similar quotation system).
(c) If neither clause (a) nor clause (b) of this Section 2.13
is applicable, the Fair Market Value of the Common Stock is the fair market
value per share as of such valuation date, as determined by the Board of
Directors in good faith and in accordance with uniform principles consistently
applied. Such Fair Market Value shall be determined on a regular basis, not less
than annually.
2.14 "Incentive Stock Option" means an Option which qualifies under
Section 422 of the Code and which is designated as an Incentive Stock Option by
the Committee.
2.15 "Member of the Scientific Advisory Board" means a member of
the Company's Scientific Advisory Board.
2.16 "Nonqualified Option" means an Option which is not an Incentive
Stock Option and which is designated as a Nonqualified Option by the Committee.
2.17 "Officer" means an officer of the Company, as defined in Rule
16a-1(f) under the Exchange Act, as such rule may be amended from time to time.
2.18 "Option" means the Incentive Stock Options and Nonqualified
Options granted under this Plan.
2.19 "Optionee" means an Employee or an Outside Director to whom
an Option is granted under this Plan.
2.20 "Outside Director" means a Director who is Independent (if the
Common Stock is listed or admitted for trading on any national securities
exchange, then "Independent" as such term is defined in the applicable rules and
regulations of such exchange, or if the Common Stock is not listed or admitted
for trading on any national securities exchange, then "Independent" as such term
is defined in applicable rules and regulations of the New York Stock Exchange,
Inc.)
2.21 "Participant" means an Optionee who is granted Options
pursuant to Section 4 of the Plan.
<PAGE>
2.22 "Plan" means the Ixion Biotechnology, Inc. 1994 Stock Option
Plan, as it may be amended from time to time.
2.23 "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as such rule may be amended from time to time.
2.24 "Secretary" means the Secretary of the Company.
2.25 "Securities Act" means the Securities Act of 1933, as amended.
2.26 "Termination of Employment" means:
(a) With respect to any Employee, the time when the
employee-employer relationship between the Optionee and the Company, its
subsidiaries or affiliated entities, is terminated for any reason, with or
without cause. The Committee, in its absolute discretion, shall determine the
effect of all other matters and questions relating to Termination of Employment,
including without limitation, the question of whether a particular leave of
absence constitutes a Termination of Employment; provided, however, that, with
respect to Incentive Stock Options, a leave of absence shall constitute a
Termination of Employment if, and to the extent that, such leave of absence
interrupts employment for the purposes of Section 422(a)(2) of the Code and the
then applicable regulations and revenue rulings under said Section.
Notwithstanding any other provision of this Plan, and subject to any applicable
agreements between the Optionee and the Company, the Company has an absolute and
unrestricted right to terminate the Optionee's employment at any time for any
reason whatsoever, with or without cause.
(b) With respect to any Outside Director, Consultant, or Member of the
Scientific Advisory Board, the time when such person ceases to be a Director,
Consultant, or Member of the Scientific Advisory Board of the Company for any
reason, with or without cause, including without limitation, a termination by
resignation, removal, death, disability, or failure to be nominated or reelected
by the Company's stockholders. Nothing in this Plan or any Stock Option
Agreement hereunder shall confer upon any such person, Consultant, or Member of
the Scientific Advisory Board, any right to continue his or her association with
the Company or shall interfere with or restrict in any way the rights of the
Company and its stockholders, which are hereby expressly reserved, to remove any
such person at any time for any reason whatsoever, with or without cause.
3. Stock Subject to Plan.
3.1 Stock Subject to Plan. The stock subject to an Option shall be
shares of the Company's Common Stock. The aggregate number of such shares which
may be issued upon exercise of Options granted to Directors, Members of the
Scientific Advisory Board, Employees, and Consultants shall not exceed 500,000.
<PAGE>
3.2 Types of Awards. Options granted under the Plan may be intended to
qualify for favorable tax treatment as Incentive Stock Options, and as
Nonqualified Options, being those not qualified or intended for such favorable
tax treatment under the Code.
3.3 Unexercised options. If any Option expires or is canceled without
having been fully exercised, additional Options for the number of shares of
Common Stock that would have been issued upon exercise of such Option may be
re-granted under this Plan, subject to limitations of Section 3.1.
3.4 Changes in Company Capitalization. In the event that (i) the
outstanding shares of Common Stock are hereafter changed into or exchanged for a
different number or kind of shares or other securities of the Company, or of
another entity, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, or (ii) the number of shares is increased or
decreased by reason of a stock split, stock dividend, combination of shares or
any other increase or decrease in the number of such shares of Common Stock
effected without receipt of consideration by the Company (provided, however,
that conversion or exchange of any convertible or exchangeable securities of the
Company shall not be deemed to have been "effected without receipt of
consideration"), then the Committee shall make appropriate adjustments in the
number and kind of shares for the purchase of which options may be granted,
including adjustments to the limitations in Section 3.1 on the maximum number
and kind of shares which may be issued on exercise of an Option.
4. Granting of Options.
4.1 Eligibility. Any Officer or other key Employee of the Company and
any Outside Director, Consultant, or Member of the Scientific Advisory Board
shall be eligible to be granted Options. Each Outside Director, including a
member of the Committee, each Member of the Scientific Advisory Board, and each
Consultant shall be eligible to be granted only Nonqualified Options.
4.2 Incentive Stock Options. No Incentive Stock Option shall b
granted unless it qualifies as an "incentive stock option"
under Section 422 of the Code when granted.
4.3 Grants. (a)
(a) The Committee shall from time to time, in its
absolute discretion:
(i) Determine which Employees are key Employees,
taking into account the nature of the services rendered by the particular
Employee, the Employee's potential contribution to the long-term success of the
Company, and such other factors as the Committee deems relevant, and select from
among the key Employees (including those to whom Options have been previously
granted under the Plan, Outside Directors who are not members of the Committee,
Consultants, and Members of the Scientific Advisory Board, such of them as in
its opinion should be granted Options; and
<PAGE>
(ii) Determine the number of shares to be subject
to such Options granted to such selected individuals, and determine whether
such Options are to be Incentive Stock Options or Nonqualified Options; and
(iii) Determine the terms and conditions of such
Options.
(b) Upon the selection of such individual to be granted an
Option, the Committee shall instruct the Secretary to issue such Option and may
impose such conditions on the grant of such Option as it deems appropriate.
Without limiting the generality of the preceding sentence, the Committee may, in
its discretion and on such terms as it deems appropriate, require as a condition
of the grant of an Option to an individual that the individual surrender for
cancellation some or all of the unexercised Options which have been previously
granted to him. An Option, the grant of which is conditioned upon such
surrender, may have an Option price lower (or higher) than the Option price of
the surrendered Option, may cover the same (or a lesser or greater) number of
shares as the surrendered Option, may contain such other terms as the Committee
deems appropriate and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, Option period or any other term or
condition of the surrendered Option.
4.4 Granting of Nonqualified Options to Outside Directors.
(a) Each person who is an Outside Director of the Company at
the date of the adoption of this Plan shall be granted Nonqualified Options to
purchase 2,000 shares of Common Stock.
The Committee shall grant to each Outside Director
annually (so long as he or she is an Outside Director on each such anniversary
date) Nonqualified Options to purchase an additional 2,500 shares of Common
Stock.
4.5 Administration of the Plan.
(a) The Plan shall be administered by the Committee. The
Committee shall consist of at least two Outside Directors (if there are such)
selected by the Board of Directors, one of whom, if possible, shall be a
Disinterested Person. Committee members may resign by delivering written notice
to the Secretary. Vacancies on the Committee shall be filled by the Board of
Directors.
(b) Except as otherwise provided in the Plan and except as
otherwise expressly stated to the contrary in the Company's Certificate of
Incorporation, Bylaws, or elsewhere, the Committee shall have the sole
discretionary authority (i) to select the Officers, other key Employees,
Directors, Consultants, or Members of the Scientific Advisory Board who are to
be granted Options under the Plan, (ii) to determine the number of Options to be
granted to any person at any time, (iii) to authorize the granting of Options,
(iv) to impose such conditions and restrictions on Options as
<PAGE>
it determines appropriate, (v) to interpret the Plan and the Options, (vi) to
prescribe, amend and rescind rules and regulations relating to the Plan, and
(vii) to take any other actions in connection with the Plan and to make all
determinations under the Plan as it may deem necessary or advisable for the
administration of the Plan. The determinations of the Committee on the matters
referred to in this Section 4 shall be binding and conclusive on all persons.
<PAGE>
(c) A majority of the members of the Committee shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by all of the members of the Committee shall be fully effective as if it
had been made by a majority vote at a meeting duly called and held.
(d) The Committee may delegate to one or more persons any of
its powers, other than its power to authorize the granting of Options, or
designate one or more persons to do or perform those matters to be done or
performed by the Committee, including administration of the Plan. Any person or
persons delegated or designated by the Committee shall be subject to the same
obligations and requirements imposed on the Committee and its members under the
Plan.
(e) Members of the Committee shall receive such compensation
for their services as members as may be determined by the Board of Directors.
All expenses and liabilities incurred by members of the Committee in connection
with the administration of the Plan shall be borne by the Company. The Committee
may employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company, and its Officers and Directors shall be
entitled to rely upon the advice, opinions, or valuations of any such persons.
All elections taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, the
Company, and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan. Members of the Committee and each person or
persons designed or delegated by the Committee shall be entitled to
indemnification by the Company for any action or any failure to act in
connection with services performed by or on behalf of the Committee for the
benefit of the Company to the fullest extent provided or permitted by the
Company's Certificate of Incorporation, Bylaws, any insurance policy or other
agreement intended for the benefit of the Committee, or by any applicable law.
5. Terms of Options.
5.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with the Plan. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to qualify such Options as "incentive stock options" under
Section 422 of the Code.
5.2 Vesting of Options.
<PAGE>
(a) Options granted to Outside Directors in accordance with
Section 4.4 hereof shall vest 20% at the end of the first year of service after
the grant and 1/12 of 20% for each month thereafter. All other Options granted
under the Plan shall vest as determined by the Committee and as set forth in the
respective Stock Option Agreement, whether such vesting is based on the
attainment of performance goals, chronologically, or otherwise.
(b) Options which have been granted but not yet vested under
this Section 5.2 shall be forfeited if the Optionee dies, becomes disabled, or
leaves the employment of the Company, its subsidiary, or affiliated entity for
any or no reason, with or without cause, or otherwise, unless provided to the
contrary in any agreement approved by the Committee between the Optionee and the
Company, its subsidiary, or affiliated entity, which agreement shall govern any
further vesting of Options.
5.3 Option Exercise Price.
(a) The price per share for Options granted pursuant to
Section 4.3 shall be set by the Committee; provided, however, that the price per
share shall be not less than 100% of the Fair Market Value of such shares on the
date such Option is granted; provided, further, that, in the case of an
Incentive Stock Option, the price per share shall not be less than 110% of the
Fair Market Value of such shares on the date such Option is granted in the case
of an individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary of the Company.
(b) The price of shares subject to each Nonqualified Option
granted pursuant to Section 4.4 shall be the Fair Market Value of such shares on
the date such Option is granted.
5.4 Exercise Periods.
(a) No Option may be exercised in whole or in part until it
has vested, except as may be provided in Sections 5.4(c) or 5.6 or as may
otherwise be provided for in a Stock Option Agreement which has been approved by
the Committee.
(b) Subject to the provisions of Sections 5.2, 5.4(c), 5.4(d)
and 5.6, Options shall become exercisable at such times and in such installments
(which may be cumulative) as the Committee shall provide in the terms of each
individual Stock Option Agreement; provided, however, that by resolution adopted
after an Option is granted the Committee may, on such terms and conditions as it
may determine to be appropriate and subject to Sections 5.2, 5.4(c), 5.4(d) and
5.6, accelerate the time at which such Option or any portion thereof may be
exercised, or such rights may be set forth in an agreement between the Optionee
and the Company which has been approved by the Committee.
(c) No portion of an Option which is unexercisable at
Termination of
<PAGE>
Employment shall thereafter become exercisable; provided,
however, that provision may be made that such Option shall become exercisable in
the event of a Termination of Employment as may be determined by the Committee,
or such rights may be set forth in an agreement between the Optionee and the
Company which has been approved by the Committee.
(d) To the extent the aggregate Fair Market Value of Common
Stock with respect to which Incentive Stock Options (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company) exceeds
$100,000, such options shall be treated as Nonqualified Options. The rule set
forth in the preceding sentence shall be applied by taking Options into account
in the order in which they were granted. For purposes of this Section 5.4(d),
the Fair Market Value of Common Stock shall be determined as of the time the
Option with respect to such Common Stock is granted.
(e) No Option may be exercised to any extent by anyone
after the first to occur of the following events:
(i) In the case of an Incentive Stock Option:
(A) the expiration of ten years from the
date the Option was granted;
(B) in the case of an Optionee owning
(within the meaning of Section 424(d) of the Code), on the Date of Grant,
more than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary of the Company, the expiration of ten years from the
date the Option was granted;
(C) except in the case of any Optionee
who is disabled (within the meaning of Section 22(a)(3) of the Code), the
expiration of three months from the date of the Optionee's Termination of
Employment for any reason other than such Optionee's death unless the Optionee
dies within said three-month period;
(D) in the case of an Optionee who is
disabled (within the meaning of Section 22(a)(3) of the Code), the
expiration of one year from the date of the Optionee's Termination of
Employment for any reason other than such Optionee's death unless the Optionee
dies within said one-year period;
(E) the expiration of one year from the date
of the Optionee's death.
(ii) In the case of a Nonqualified Option:
(A) the expiration of ten years and one
day from the
<PAGE>
date the Option was granted; or
(B) the expiration of one year from the
date of the Optionee's Termination of Employment (whether
by death or otherwise).
(f) Subject to the provisions of Section 5.4(a), the Committee
shall provide, in terms of each individual stock Option Agreement when such
Option expires and when it becomes unexercisable, and (without limiting the
generality of the foregoing) the Committee may provide in the terms of
individual Stock Option Agreements that said Options expire immediately upon a
Termination of Employment; provided, however, that provision may be made that
such options shall become exercisable in the event of a Termination of
Employment because of the Optionee's retirement, death, disability, or as may
otherwise be determined by the Committee.
5.5 Adjustments in outstanding Options. In the event that the
outstanding shares of Common Stock subject to Options are changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of merger, consolidation, recapitalization,
reclassification, or the number of shares is increased or decreased by reason of
a stock split, stock dividend, combination of shares or any other increase or
decrease in the number of such shares of Common Stock effected without receipt
of consideration by the Company (provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration"), the Committee shall make appropriate
adjustments in the number and kind of shares as to which all outstanding
Options, or portions thereof then unexercised, shall be exercisable, to the end
that after such event the Optionee's proportionate interest shall be maintained
as before the occurrence of such event. Such adjustment in an outstanding Option
shall be made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the price resulting
from rounding-off share quantities or prices) and with any necessary
corresponding adjustment in Option price per share; provided, however, that, in
the case of Incentive Stock Options, each such adjustment shall be made in such
manner as not to constitute a "modification" within the meaning of Section
424(h)(3) of the Code. Any such adjustment made by the Committee shall be final
and conclusive upon all Optionees, the Company, and all other interested
persons.
5.6 Change of Control, Merger, Consolidation, Acquisition, Liquidation
or Dissolution. Notwithstanding the provisions of Section 5.5, in its absolute
discretion, and on such terms and conditions as it deems appropriate, the
Committee may provide by the terms of any Option that such Option cannot be
exercised after a change of control or the merger or consolidation of the
Company with or into another entity, the acquisition by another entity
(excluding any employee benefit plan of the Company or any or other fiduciary
holding securities under an employee benefit plan of the Company) of all or
substantially all of the Company's assets or 51% or more of the Company's then
outstanding voting stock, or the liquidation or dissolution of the Company, and
if the Committee so provides, it may, in its absolute discretion and on such
terms and conditions as it deems appropriate, also provide, either by the terms
of such Option or by a resolution adopted prior to the occurrence of such change
of control, merger, consolidation, acquisition, liquidation or dissolution,
that, for
<PAGE>
some period of time prior to such event, such Option shall be
exercisable as to all shares covered thereby, notwithstanding anything to the
contrary in Section 5.4(a), Section 5.4(b) and/or any installment provision of
such Option; and if the Committee so provides, it may, in its absolute
discretion and on such terms and conditions as it deems appropriate, also
consent to, cause or otherwise effectuate an assumption, assignment, or other
transfer of the Plan and any outstanding Stock Option Agreements by or to the
successor entity.
5.7 No Right to Continued Employment. Nothing in this Plan or in any
Stock Option Agreement issued hereunder shall confer upon any Optionee any right
to continue in the employ of the Company or its subsidiaries or shall interfere
with or restrict in any way the rights of the Company, and its subsidiaries,
which are hereby expressly reserved, to terminate or discharge any optionee at
any time for any reason whatsoever, with or without cause.
<PAGE>
6. Exercise of Options.
6.1 Person Eligible to Exercise. During the lifetime of the Optionee,
only such Optionee may exercise an Option (or any portion thereof) granted to
such Optionee. After the death of the Optionee, any exercisable portion of an
Option may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement, be exercised by the personal
representative of such Optionee or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
6.2 Partial Exercise. At any time and from time to time prior to the
time when any exercisable Option or exercisable portion thereof becomes
unexercisable under the Plan or the applicable Stock Option Agreement, such
Option or portion thereof may be exercised in whole or in part; provided,
however, that the Company shall not be required to issue fractional shares and
the Committee may, by the terms of the Stock Option Agreement, require any
partial exercise to be with respect to a specified minimum number of shares.
6.3 Manner of Exercise. An exercisable Option, or any exercisable
portion thereof, may be exercised solely by delivery to the Secretary of all of
the following prior to the time when such Option or such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement:
(a) Notice in writing signed by the Optionee or other person
then entitled to exercise such Option or portion stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee; and
(b) either:
(i) Full payment (in cash or by check) for the
shares with respect to which such Option or portion is thereby exercised; or
(ii) With the consent of the Committee, (A)
shares of the Company's
<PAGE>
Common Stock owned by the Optionee duly endorsed for
transfer to the Company, or (B) subject to the timing requirements of Section
6.4, shares of the Company's Common Stock issuable to the Optionee upon exercise
of the Option, with a Fair Market Value on the date of Option exercise equal to
the aggregate Option price of the shares with respect to which such Option or
portion is thereby exercised; or
(iii) With the consent of the Committee, a full
recourse promissory note bearing interest (at least at such rate as shall then
preclude the imputation of interest under the Code or any successor provision)
and payable upon such terms as may be prescribed by the Committee. The Committee
may also prescribe the form of such note and the security to be given for such
note. No Option may, however, be exercised by delivery of a promissory note or
by a loan from the Company when or where such loan or other extension of credit
is prohibited by law; or
<PAGE>
(iv) With the consent of the Committee, any
combination of the consideration provided in the foregoing subsections (i),
(ii) and (iii); and
(c) The payment of the Company (or other employer) of all
amounts which it is required to withhold under federal, state or local law in
connection with the exercise of the Option; with the consent of the Committee,
(i) shares of the Company's Common Stock owned by the Optionee duly endorsed for
transfer, or (ii) subject to the timing requirements of Section 6.4, shares of
the Company's Common Stock issuable to the Optionee upon exercise of the Option,
valued at Fair Market Value as of the date of Option exercise, may be used to
make all or part of such payment; and
(d) Such representations and documents as the Committee, in
its absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including without limitation, placing legends on share certificates
and issuing stop-transfer orders to transfer agents and registrars; and
(e) In the event that the Option or portion thereof shall be
exercised pursuant to Section 6.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option or portion thereof.
6.4 Timing Requirements. Shares of the Company's Common Stock issuable
to the Optionee upon exercise of the Option may be used to satisfy the Option
price or the tax withholding consequences of such exercise only (i) during the
period beginning on the third business day following the date of release of the
quarterly or annual summary statement of sales and earnings of the Company and
ending on the twelfth business day following such date, or (ii) pursuant to an
irrevocable written election by the Optionee to use shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes (subject to the approval of
the Committee) made at least six months prior to the
<PAGE>
payment of such option price or withholding taxes.
6.5 Conditions to Issuance of Stock Certificates. The shares of Common
Stock issuable and deliverable upon the exercise of an Option, or any portion
thereof, may be either previously authorized but unissued shares or issued
shares which have then been reacquired by the Company. The Company shall not be
required to issue or deliver any certificate or certificates for shares of
Common Stock purchased upon the exercise of any Option or portion thereof prior
to fulfillment of all of the following conditions:
(a) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion determine to be necessary or advisable; and
<PAGE>
(b) The payment to the Company (or other employer corporation)
of all amounts which it is required to withhold under federal, state or local
law in connection with the exercise of the Option; and
(c) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
6.6 No Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
to any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders. Except in accordance with Section 3.4 hereof, no adjustment shall
be made for dividends (ordinary or extraordinary, whether cash or other
property) or distributions or other rights for which the record date is prior to
the date on which the exercise price has been received by the Company and shares
have been issued.
6.7 Transfer Restrictions. Unless otherwise approved in writing by the
Committee, no shares of Common Stock acquired upon exercise of any Option by any
Officer or Director may be sold, assigned, pledged, encumbered, or otherwise
transferred until at least six months have elapsed from (but excluding) the date
that such Option was exercised. The Committee, in its absolute discretion, may
impose such other restrictions on the transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate. Any such other
restriction shall be set forth in the respective Stock Option Agreement and may
be referred to on the certificates evidencing such shares. The Committee may
require any Optionee to give the Company prompt notice of any disposition of
shares of stock, acquired by exercise of an Incentive Stock Option, within two
years from the date of granting such Option or one year after the transfer of
such shares to such optionee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement to
give prompt notice of disposition.
7. Additional Provisions.
<PAGE>
7.1 Approval of Plan by Stockholders. This Plan will be submitted for
the approval of the Company's stockholders within twelve months before or after
the date of the Board of Director's initial adoption of the Plan. Options may be
granted prior to such stockholder approval; provided, however, that such Options
shall not be exercisable prior to the time when the Plan is approved by the
stockholders; provided, further, that if such approval has not been obtained at
the end of said twelve-month period, all Options previously granted under the
Plan shall thereupon be canceled and become null and void. The Company shall
take such actions with respect to the Plan as may be necessary to satisfy the
requirements of Rule 16b-3(b).
7.2 Nontransferability. No Option or interest or right therein or part
thereof shall be liable for the debts, contracts or engagements of the Optionee
or his successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy and divorce proceeding), and any attempted
disposition thereof shall be null and void and of no effect; provided, however,
that nothing in this Section 7.2 shall prevent transfers by will or by the
applicable laws of descent and distribution.
7.3 Securities Act. Upon issuance of Common Stock of the Company to the
Participant, or his heirs, the recipient of that stock shall represent that the
shares of stock are taken for investment and not resale and shall make such
other representations as may be necessary to qualify the issuance of the shares
as exempt from the Securities Act and applicable federal and state securities
laws and regulations, or to permit registration of the shares and shall
represent that he or she shall not dispose of those shares in violation of the
Securities Act or of applicable federal and state securities laws and
regulations. The Company reserves the right to place a legend on any stock
certificate issued pursuant to the Plan to assure compliance with this Section
and with the vesting requirements of Section 5.2. No shares of Common Stock of
the Company shall be required to be distributed until the Company shall have
taken such action, if any, as is then required to comply with the provisions of
the Securities Act or any other then applicable federal or state securities law
or regulation.
7.4 Withholding of Tax. The Company shall have the right to deduct from
any payment made under the Plan any federal, state or local income or other
taxes required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to deliver Common Stock upon exercise
of an Option that the Optionee pay to the Company such amount as may be
requested by the Company for the purpose of satisfying any liability for such
withholding taxes. Any grant under this Plan may provide by its terms that the
Optionee may elect, in accordance with any applicable regulations, to pay a
portion or all of the amount of such minimum required or additional permitted
withholding taxes in shares of Common Stock, subject to the timing restrictions
set forth in Section 6.4 hereof. The Optionee shall authorize the Company to
withhold, or shall agree to surrender back to the Company, on or about the date
such withholding tax liability is determinable, shares of Common Stock
previously owned by such Optionee or a portion of the shares that were or
otherwise would be distributed to such Optionee pursuant to such award having a
Fair Market Value equal to the amount of such required or permitted withholding
taxes to be paid
<PAGE>
in shares.
7.5 Termination and Amendment of Plan. The Committee may at any time
suspend or terminate the Plan, or make such modifications of the Plan as it
shall deem advisable, provided that the Plan not be changed to increase the cost
of the Plan to the Company. However, without approval of the Company's
stockholders given within twelve (12) months before or after the action by the
Committee, no action of the Committee may, except as provided in Section 3.4,
increase any limit imposed in Section 3.1 on the maximum number of shares which
may be issued upon exercise of Options, materially modify the eligibility
requirements of Section 4.1, reduce the minimum Option price requirements of
Section 5.3, extend the limit imposed on this Section 7.5 on the period during
which Options may be granted or amend or modify the Plan in a manner requiring
stockholder approval under Rule 16b-3. Notwithstanding anything to the contrary
contained herein, the Committee shall not amend or modify the Plan more than
once every six (6) months or in any other manner inconsistent with the
requirements of Rule 16b-3(c)(2)(ii) except to the extent required by changes in
the Code, the Employee Retirement Income Security Act of 1974, or regulations
and rules issued thereunder. No termination or amendment of the Plan may,
without the consent of a Participant, adversely affect the rights of such
Participant notwithstanding anything to the contrary herein. No Option may be
granted during any period of suspension of the Plan nor after termination of the
Plan, and in no event may any Option be granted under this Plan after the first
to occur of the following events:
(a) The expiration of ten years from the date the Plan is
adopted by the Board of Directors; or
(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 7.1.
7.6 Duties of the Company. The Company shall, at all times during the
term of each Option, reserve and keep available for issuance or delivery such
number of shares of Common Stock as will be sufficient to satisfy the
requirements of all Options at the time outstanding, shall pay all original
issue taxes with respect to the issuance or delivery of shares pursuant to the
exercise of such Option and all other fees and expenses necessarily incurred by
the Company in connection therewith.
7.7 Absence of a Committee. Should the Board of Directors fail to
appoint the Committee or should there be no Committee for any other reason, then
the Plan shall be administered by the Board of Directors. All action with
respect to Options granted to any Officer or key Employee who is subject to
Section 16 of the Exchange Act shall be taken by the Board of Directors if each
member is a Disinterested Person, or if the entire Board of Directors is not
comprised of Disinterested Persons, then by not less than two of the Directors
who are Disinterested Persons. In the absence of a Committee, the Board of
Directors (or that portion thereof comprised in accordance with this Section
7.7) shall have all the powers of the Committee as set forth herein in
administration of the Plan.
<PAGE>
7.8 Effective Date of Plan. In accordance with Section 7.5 hereof, the
effective date of the Plan will be the date on which it was approved by the
stockholders of the Company. The Plan was adopted by the Board of Directors,
subject to stockholder approval on August 31, 1994.
8. General Provisions.
8.1 No Rights. No Employee shall have any claim or right to be granted
Options under the Plan. Neither the adoption and maintenance of the Plan nor the
granting of Options pursuant to the Plan shall be deemed to constitute a
contract of employment between the Company and any Employee or to be a condition
of the employment of any person. The Plan and any Options granted under the Plan
shall not confer upon any Participant any right with respect to continued
employment by the Company, nor shall they interfere in any way with the right of
the Company to terminate the employment of any Participant at any time, and for
any reason, with or without cause, it being acknowledged, unless expressly
provided otherwise in writing, that the employment of any Participant is "at
will".
8.2 Costs of Administration. The Company shall pay all costs and
expenses of administering the Plan.
8.3 Controlling Laws. The granting of Options and the issuance of
shares of Common Stock under the Plan shall be subject to all applicable laws,
rules and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required. The provisions of this Plan
shall be interpreted so as to comply with the conditions and requirements of the
Securities Act, the Exchange Act, and rules and regulations issued thereunder,
including without limitation Rule 16b-3, unless a contrary interpretation of any
such provisions otherwise required by applicable law. Except to the extent
preempted by Federal law, this Plan and all Stock Option Agreements entered into
pursuant hereto shall be construed and enforced in accordance with, and governed
by, the laws of the State of Delaware, determined without regard to its conflict
of laws rules.
8.4 No Obligation to Exercise. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
8.5 Language. Whenever the context so indicates, the singular or plural
number, and the masculine, feminine or neuter gender shall each be deemed to
include the other.
8.6 No Employment Contract. The Plan is not a contract of employment,
and the terms of employment of any recipient of any award hereunder shall not be
affected in any way by the Plan or related instruments except as specifically
provided therein. The establishment of the Plan shall not be construed as
conferring any legal rights upon any recipient of any award hereunder for a
continuation of employment, nor shall interfere with the right of the Company or
any subsidiary to discharge any recipient of any award hereunder and to treat
him or here without regard to the effect with such treatment might have upon him
or her as the recipient of any award hereunder.
<PAGE>
8.7 No Rights as Stockholder. No Optionee of any Option shall have any
rights as a stockholder with respect to any shares subject to his or her Option
prior to the date on which he or she is recorded as the holder of such shares on
the records of the Company. No Optionee of any Option shall have the rights of a
stockholder until he or she has paid in full the Option price.
BIOQUEST CORPORATION
SERVICE CONTRACT / CONFIDENTIALITY AGREEMENT
Contract No. C100-99-24p Revision 11-29-99
In order to protect the rights and, and proprietary information between BioQuest
Corp. (a Florida Corporation) and its affiliates (collectively "BioQuest") and
Ixion Biotechnology Inc. (a Delaware Corporation), and its affiliates
(collectively "Ixion"), the parties hereto, intending to be legally bound, agree
that:
1. The parties' representatives for providing, receiving and conducting
business activities are:
For BioQuest:Alexander A. Rubido
Institution: BioQuest Corp.
815 N.W. 57 Ave., Suite 202
Miami, Florida 33126
For Ixion: Weaver H. Gaines
Institution: Ixion Biotechnology Inc.
13709 Progress Blvd.
Box 13, Suite 11
Alachua, Florida 32615
2. BioQuest Corp., hereinafter shall be known as BioQuest and Ixion,
hereinafter shall be known as Client.
3. The Services shall encompass the following: Quality Assurance, Regulatory
Assurance, and Product Development Management as set forth in the attached
Product Development Assessment Report.
4. The sole purpose of the Services is to support Client and provide
consulting information to Client regarding specific areas of interest to
Client as set forth in the attached Product Development Assessment Report.
5. BioQuest or one of its affiliated units (together BioQuest) will perform
the contracting services as set forth in the attached Product Development
Assessment Report.
6. As full consideration for the services provided hereunder, and Client's
agreement to the terms and conditions hereof, BioQuest will enroll Client
into its single rate Fast-Track Program and invoice Client monthly. In
addition, BioQuest will invoice Client for reimbursable expenses incurred
by BioQuest with the prior approval of Client.
7. This Agreement shall be effective, unless extended by written agreement of
the parties, beginning November 29, 1999, and ending November 29, 2002.
8. BioQuest represents that its staff has the requisite expertise, ability and
legal right to render the Services and will perform the Services in a
professionally responsible and efficient manner. BioQuest will abide by all
the laws, rules and regulations that apply to the performance of the
Services, Including applicable requirements regarding equal employment
opportunity and the provisions of Executive Order 11246 and related rules
(if applicable).
9. During the term of this Agreement and surviving the termination or
expiration thereof, BioQuest shall not disclose or use Confidential
Information, or allow it to be used, for its own benefit or the benefit of
others, and shall protect Confidential Information by using the same degree
of care, but not less than a reasonable degree of care, as it uses to
protect their own Confidential Information. Confidential Information shall
include all information disclosed by Client relating to Services provided
hereunder, except any portion thereof which: (a) is in BioQuest's
possession before receipt thereof under this Agreement, as evidenced by
BioQuest's written records; or (b) is disclosed or provided to BioQuest
after full execution of this Agreement by a third party who has a right to
make such disclosure; or (c) is or becomes part of the public domain
through no fault of BioQuest. Further, BioQuest agrees not to use
Confidential Information and/or Materials for any purpose other than that
indicated in this Agreement without prior written approval of Client.
BioQuest will require each of its employees performing Services to comply
with these requirements. Upon termination or expiration of this Agreement
BioQuest will return to Client all drawings, specifications, manuals and
other printed or reproduced material (including information stored on
machine readable media) provided by Client to BioQuest and all copies of
such information made by BioQuest.
10. In the event that BioQuest is required by judicial or administrative
process to disclose Confidential Information, BioQuest shall promptly
notify Client and allow Client a reasonable time to oppose such process.
<PAGE>
11. Amendments shall be implemented according to the provisions of this
Agreement. The Agreement in its entirety and existing revision will remain
in force unless amended or otherwise permissible under this Agreement.
12. Either BioQuest or Client may terminate this Agreement with or without
cause upon thirty (30) days written notice following the agreed review of
this Agreement. Termination of this Agreement shall not affect any rights
or obligations which have accrued under the terms and conditions of this
Agreement prior thereto.
13. This Agreement may not be changed or terminated orally by or on behalf of
either party. In the event of the actual or threatened breach of any of the
terms of this Agreement by either party, the other party will have the
right to terminate the Agreement by providing thirty (30) days written
notice.
14. In event of the actual or threatened breach of any of the terms of this
Agreement, BioQuest will have the right to specific performance and
injunctive relief. The rights granted by this paragraph are in addition to
all other remedies and rights available at law or in equity. This Agreement
shall be construed according to the laws of Florida for contacts made
within that state and shall be enforceable by any court located in the
state.
15. This agreement supersedes all prior Agreements and understandings between
the parties hereto, respecting the subject matter of this Agreement.
16. All additions or modifications to this Agreement, including any attachment
referred to in paragraph 19 or amendments to this Agreement, must be made
in writing and executed by both parties.
17. Client undertakes to indemnify and hold harmless BIOQUEST from any and all
liability, loss, damage or expense (including attorney's fees) Client may
suffer as a result of any claims, demands, costs or judgements against it
arising out of services performed and carried out pursuant to this
Agreement, except where liability, loss damage, or expense is caused by, or
arises out of, the negligence of BIOQUEST or its officers, agents and
employees.
18. This Agreement is to be executed in duplicate. Please return one fully
executed copy to: Business Development, BioQuest Corp., 815 NW 57th Ave.,
Suite 202, Miami, Florida, 33126, USA.
19. Attachment No X Yes. If Yes, number of pages 7.
Very Truly Yours, AGREED AND ACCEPTED:
BIOQUEST CORPORATION INSTITUTION
Name Ixion Biotechnology, Inc.
By /s/ Alexander Rubido Address 13709 Progress Blvd,
Alexander Rubido Box 13, Suite 11
Director, Business Development Alachua, Florida 32615
Authorized Signature
Date Nov. 29, 1999 /s/ Weaver H. Gaines
Printed Name Weaver H. Gaines
Title Chairman and CEO
Date 11/30/99
<PAGE>
Ixion Biotechnology
Product Development Assessment Report
Contents
1. Objectives ------------------------------------- 2
2. Scope ------------------------------------- 2
3. Limitations ------------------------------------- 2
4. Roles and Responsibilities ------------------------------------ 2
4.1 Quality Assurance Management ----------------------------------- 2
4.2 Regulatory Assurance Management -------------------------------- 3
4.3 Product Development Management -------------------------------- 3
<PAGE>
1. Objectives
1.1. Bring Ixion Biotechnology products to market
1.1.1. Establish Ixion Biotechnology Quality Policy and Quality
System
1.1.2. Guide Ixion Biotechnology Product Development Practices
1.1.3. Guide Ixion Biotechnology Regulatory Compliance
1.1.4. Prepare Ixion Biotechnology Regulatory submissions
1.1.5. Establish Ixion Biotechnology Risk Assessments
1.2. Provide value-added, cost effective services to Ixion
Biotechnology
1.2.1. Provide specialized services as needed
1.2.2. Optimize use of resources available
1.2.3. Provide access to BioQuest Corporation industry resources
1.2.4. Increase the overall value of Ixion Biotechnology for
investment prospects
2. Scope
2.1. Ixion operations administered from Alachua, FL
2.1.1. Quality Assurance Management
2.1.2. Regulatory Assurance Management
2.1.3. Product Development Management
2.2. Ixion Biotechnology development stage projects
2.2.1. XentrIX Monitor
2.2.2. Ox-Control(TM) (whole cell)
2.2.3. Ox-Control(TM) (extract)
2.2.4. IxC1-62/47
2.3. Movement of Ixion Biotechnology new technology (Feasibility)
stage projects into development
2.3.1. Clostridium difficile
2.3.2. Diabetes projects
2.4. Ixion Biotechnology holds patent position on a Kit, Materials and
Methods for detecting and quantitating oxalate. This merits
feasibility assessment for potential diagnostic product
development.
3. Limitations
3.1. Ixion Biotechnology does not possess manufacturing capabilities
3.2. Ixion Biotechnology does not possess marketing or distribution
resources
3.3. Ixion Biotechnology progress is dependent on their success at
raising capital
4. Roles and Responsibilities
4.1. Quality Assurance Management
4.1.1. BioQuest Corporation will act as Ixion Biotechnology's
Quality Systems Management entity. This responsibility will
require BioQuest Corporation to have the authority and power
to establish and maintain Ixion Biotechnology's quality
policies and procedures.
4.1.2. BioQuest Corporation will perform quality audits (including
vendor audits) and present findings in management reviews.
4.1.3. BioQuest Corporation will establish and maintain Ixion
Biotechnology's quality documentation.
4.2. Regulatory Assurance Management
<PAGE>
4.2.1. BioQuest Corporation will develop an execute Regulatory
Approval Plans for Ixion Biotechnology's product offerings.
4.2.1.1.XentrIX Monitor will be classified as an RUO product to
support acquisition of data for NDA filing of IxC1-62/67.
4.2.1.2.IxC1-62/67 will require an NDA filing
4.2.1.3.Therapeutic diabetes products will require complex PMA
filings.
4.3. Product Development Management
4.3.1. XentrIX Monitor
4.3.1.1. XentrIX Monitor is a mature development project.
Formal product definition and manufacturing/
assembly procedures under design control will
qualify this product for initial market release as
a Research Use Only (RUO) test for identification
of Oxalobacter formigenes (a normal component of
human intestinal flora).
4.3.1.2. Although the market for XentrIX Monitor is limited,
the use of the assay will be elemental in
establishing the rest of the Oxalobacter/Oxalte
product line. Filing for a 510(k) is anticipated
with data gleaned from following the Ox-Control
products and in support of the IxC1-62/67 filing.
4.3.1.3. A Development Plan establishing Design Input and Project Schedule
will be established
* Business Plan
* Quality Plan
* Process Development Plan
* Verification Plan
* Regulatory Approval Plan
* Reliability Plan
* Service/Customer Service/Technical Service Plans
* Design Transfer and Manufacture
* Post Release Support
* Technical Service Plan
* Operating Plan
* Project Schedule
4.3.1.4. A Design Review will be performed as soon as possible to document
Design Output of the Feasibility Program.
4.3.1.4.1 Product formulation
* Patent/Literature Review
4.3.1.4.2. Animal study data
4.3.1.4.3. Preclinical trials data (300 samples)
* Protocols and Raw Data
4.3.1.4.4. CLIA lab data
* Protocols and Raw Data
4.3.1.4.5. Proposed testing of Ox-Control users
4.3.1.4.6. Labeling requirements
4.3.1.4.7. Vendor qualification status and plan
4.3.1.4.8. Manufacturing/Assembly plan
4.3.1.4.9. Risk Assessment
* Interviews and surveys
4.3.2. Ox-Control(TM)
4.3.2.1. Ox-Control(TM) (Oxalobacter formigenes whole cell).
Establishing the organism as safe, normal flora of the gut
should be straight forward with historical data. The
production of GMP material is essential.
<PAGE>
4.3.2.2. A Development Plan establishing Design Input and Project Schedule
will be established
* Business Plan
* Quality Plan
* Process Development Plan
* Verification Plan
* Regulatory Approval Plan
* Reliability Plan
* Service/Customer Service/Technical Service Plans
* Design Transfer and Manufacture
* Post Release Support
* Technical Service Plan
* Operating Plan
* Project Schedule
4.3.2.3. A Design Review will be performed as soon as possible to document
Design Output of the Feasibility Program. The review may be
conducted in conjunction with the XentrIX Monitor as safety data
will be common to both.
* Product formulation
* Patent/Literature Review
* Animal study data
* Preclinical trials data
* Protocols and Raw Data
* CLIA lab data
* Protocols and Raw Data
* Proposed testing of Ox-Control users
* Protocol
* Regulatory Submission Plan
* Review probiotic products on the market
* Labeling requirements
* Vendor qualification status and plan
* Manufacturing plan
* Identify licensing partners and their roles should be given
priority
* Identify OEM vendors for fermentation and formulation
* Risk Assessment
* Interviews and surveys
4.3.2.4. Ox-Control(TM) (Oxalobacter formigenes extract). Establishing the
formulation as safe should be straight forward with historical
data, as well as, data from the whole cell product. The production
of GMP material is again essential.
4.3.2.5. A Development Plan establishing Design Input and Project Schedule
will be established
* Business Plan
* Quality Plan
* Process Development Plan
* Verification Plan
* Regulatory Approval Plan
* Reliability Plan
* Service/Customer Service/Technical Service Plans
* Design Transfer and Manufacture
* Post Release Support
* Technical Service Plan
* Operating Plan
* Project Schedule
<PAGE>
4.3.2.6. A Design Review will be performed as soon as possible to document
Design Output of the Feasibility Program. The review may be
conducted in conjunction with the XentrIX Monitor and Ox-Control
(whole cell) as safety data will be common to all.
* Product formulation
* Patent/Literature Review
* Animal study data
* Preclinical trials data
* Protocols and Raw Data
* CLIA lab data
* Protocols and Raw Data
* Proposed testing of Ox-Control users
* Protocol
* Regulatory Submission Plan
* Review probiotic products on the market
* Labeling requirements
* Vendor qualification status and plan
* Manufacturing plan
* Identify licensing partners and their roles should be given
priority
* Identify OEM vendors for fermentation, purification and
formulation
* Risk Assessment
* Interviews and surveys
4.3.3. IxC1-62/47
4.3.3.1. IxC1-62/47 is the therapeutic product which will justify
filing a 510(k) for XentrIX Monitor.
4.3.3.2. A Development Plan establishing Design Input and Project
Schedule will be established. The schedule must integrate
the development of the XentrIX Monitor and Ox-Control
products.
* Business Plan
* Quality Plan
* Process Development Plan
* Fix formulation
* Verification Plan
* Regulatory Approval Plan
* Product claims
* IND requirements
* Clinical Protocols
* Reliability Plan
* Service/Customer Service/Technical Service Plans
* Design Transfer and Manufacture
* GMP manufacture
* Validation
* Post Release Support
* Technical Service Plan
* Operating Plan
* Project Schedule
4.3.4. Diabetes Division- Feasibility Project
4.3.4.1. Ixion has developed a technology for generating an unlimited
supply of functional islets from stem cells from both rodent
and human sources in vitro.
4.3.4.2. A Feasibility Plan establishing proof of concept and reduction
to practice will be established. The plan will address:
* Increased understanding of the biology of islet producing stem
cells
<PAGE>
* Evaluation of proprietary encapsulation material(s) for
transplanted islets or islet producing cells
* Identification / definition of unique cell surface markers
expressed by islet producing cells for use in isolating islet
producing cells from the pancreas directly.
4.4. Costs for the Development Process are essentially recurring on a per
product basis with variations occurring mostly in the regulatory
submission activities required. An approximate cost breakdown under
the Fast Track Program for the XentrIX(TM)Oxalobacter formigenes
Monitor product follows. Concurrent Product Development of the
remainder of Ixion's product pipeline would be additive to this
estimate.
XentrIXTM Oxalobacter formigenes Monitor- Diagnostic
Assumptions and Calculations
Kit components provided will be OEM manufactured and assembled. These include:
- -------------------------------------- -------------------------- --------------
Component Number of Constituents Source
- -------------------------------------- -------------------------- --------------
Culture Swab Transport System 3 Vendor A
- -------------------------------------- -------------------------- --------------
Culture Swab Specimen Preparation Kit 5 Vendor A
- -------------------------------------- -------------------------- --------------
Amplification Kit 8
Sample Diluent Vendor B
10X PCR Buffer Vendor B
Magnesium Chloride Vendor B
Primers Vendor C
DNTP's Vendor C
(+) Control Vendor C
(-) Control Vendor C
DNA Polymerase Vendor D
- -------------------------------------- -------------------------- --------------
Detection Kit 7
Probe Vendor C
Digoxigenin Conjugate Vendor E
Substrate A Vendor E
Substrate B Vendor E
Solution A (Blocking) Vendor B
Buffer A Vendor B
Buffer B Vendor B
- ------------------------------------ -------------------------- ---------------
Kit Summary Totals 23 5
- ----------------------------------- -------------------------- ---------------
Materials required but not provided;
Reagent Preparation - 6 (Standard Lab Supplies)
Specimen Preparation - 11 (Standard Lab Supplies)
Amplification and Detection - 50
* Formulations to be made - 9
* Additional OEM reagents/products - 4
* Specialized Equipment - 6
* Remaining Standard Lab Supplies - 31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from Financial Statements for the 12 months ended December 31, 1999, and is
qualified in its entirety by reference to such form 10KSB for annual period
ended December 31, 1999.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> JAN-01-1999
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,361
<SECURITIES> 0
<RECEIVABLES> 28,920
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,216
<PP&E> 174,144
<DEPRECIATION> (62,192)
<TOTAL-ASSETS> 552,819
<CURRENT-LIABILITIES> 658,135
<BONDS> 0
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0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 552,819
<SALES> 99,486
<TOTAL-REVENUES> 102,636
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,072,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,697
<INCOME-PRETAX> (1,125,790)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,125,790)
<EPS-BASIC> (.42)
<EPS-DILUTED> 0
</TABLE>
