Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations
Business
Nanobac
is a research-based bio-lifescience company formed in 1994 as a Florida
corporation. The current business described below commenced in June 2003 with
the acquisition of NanobacLabs Pharmaceuticals, Inc.
We
are a
life science company dedicated to the discovery and developments of products
and
services to improve people's health through the detection and treatment of
Calcifying Nanoparticles (“CNPs”), otherwise known as "nanobacteria". The
Company's research is directed toward establishing the pathogenic role of
nanobacteria in soft tissue calcification, particularly in coronary artery
heart
disease, prostatitis and vascular disease.
Nanobac’s
drug discovery and development is focused on new and existing compounds that
effectively inhibit, destroy or neutralize CNPs. Nanobac manufactures and
markets In Vitro Diagnostic (IVD) kits and reagents for detecting calcifying
nanoparticles. IVD products include assays, proprietary antibodies and reagents
for uniquely recognizing CNPs. Nanobac's BioAnalytical Services works with
biopharmaceutical partners to develop and apply methods for avoiding, detecting,
and inactivating or eliminating CNPs from raw materials. Nanobac's drug
discovery and development efforts are focused on developing new and existing
compounds that effectively inhibit, destroy or neutralize CNPs.
Calcification
is a significant feature in most diseases that are leading causes of death,
including heart disease. Calcification is shown in numerous studies to block
circulation, cause inflammation and cell disruption, and is a sign of various
cancers. We have decided to have a sharpened focus on drug therapy based on
findings by Nanobac scientists that certain drugs, when combined, are effective
at halting the calcification process. Some of these drug combinations have
not
been tested in animals or humans.
Our
plan
is to focus on the following priorities over the next 12-18 months:
|
·
|
Therapy
-
We
are entering into agreements to support the United States Food and
Drug
Administration pre-Investigational New Drug “(PIND”) to test our
proprietary drug combinations to treat stone-forming diseases, with
a
preliminary focus on prostatitis, which affects millions of men and
currently is largely untreatable. We also expect to conduct tests
with
other stone forming diseases such as gallstones and kidney
stones.
|
|
·
|
Pharmaceutical
Drug Development -
The
FDA approved Nanobac to move forward with PIND 73,524 for Chronic
Prostatitis/Chronic Pelvic Pain Syndrome (“CP/CPPS”). We are currently
evaluating several contract service providers who have formulation
and
manufacturing capabilities. Once a contract is entered into, we expect
to
begin assembling the supporting documentation for completing the
Investigational New Drug (“IND”) application. We intend to have the IND
submitted by the end of the third quarter, financing permitted. The
submission is part of the process for obtaining FDA approval to begin
clinical studies to determine if Nanobac’s therapy is effective for Type
III Prostatitis patients. Additional clinical and non-clinical studies
will be determined by the outcome of the first
study.
|
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Business
(continued)
The
decision to proceed with the clinical development program (guidance for which
is
given by the FDA and the purpose for which is to inform prescribers and patients
about the documented benefits of a product, in this case, a new drug
combination) is on hold until proper funding is obtained by the Company. The
kinetics (the study of reaction rates, an important area of chemistry) pilot
study is the first study to be submitted to the FDA for commencing Nanobac’s IND
and starting clinical trials. The study will evaluate EDTA and two well
established bisphosphonates (etidronate and alendronate). (EDTA is the acronym
for the chemical compound ethylenediamine tetraacetic acid. EDTA refers to
the
chelating agent. This amino acid is widely used to sequester di- and trivalent
metal ions). To meet the requirements set forth by the FDA, stability testing
is
required for any drug to be utilized in any clinical trial. Therefore, the
use
of a Good Manufacturing Process (“GMP”) compliant facility is required to
formulate and manufacture the EDTA.
·
|
Infection
-
The
gold standard for proving that something is infectious and causes
diseases
is Koch's postulates. We intend to validate earlier findings on Koch's
postulates with calcifying nanoparticles in laboratory animals, including
testing whether the infection can be prevented or treated with a
proprietary drug combination. In June 2006, a new study published
by
independent scientists in a peer reviewed journal demonstrated key
elements of Koch’s postulates by showing that CNPs are implicated in
formation of black pigment gallstones in an animal model. In November
1406, we announced that we entered into an agreement to validate
this
finding with the same scientists including Dr. LiMin Wang from Shantou
University Medical College, Guangdong, China, who will be the Principle
Investigator.
|
Characterization
-
We have
preliminary photographic and biochemical evidence that calcifying nanoparticles
self-replicate in non-precipitating conditions, suggesting further that they
have a self-sustaining mechanism and might be infectious. In a recent agreement
with Fetzer Memorial Trust, we have begun experiments at our NASA laboratory
in
Houston to demonstrate this replication via time-lapse photography using
award-winning CytoViva microscope technology capable of breaking through the
200
nanometer (nm) barrier for light microscopes. Our Scientific Director at NASA’s
Johnson Space Center has recently taken preliminary photographs of CNPs at
magnifications that we believe had not been previously achieved. We own the
intellectual property arising from the above experiments.
|
·
|
Thrombosis
-
Thrombosis
is the cause of death in most hemodialysis patients. We intend to
validate
findings that calcifying nanoparticles discovered in human blood
provoke
thrombosis and might be preventable.
|
|
·
|
Diagnostics
-
We believe that our proprietary Elisa antibody test uniquely recognizes
calcifying nanoparticles known as nanobacteria, and plan to further
validate the functionality of this diagnostic test.
|
All
of
the aforementioned activities will require additional funding from third
parties. No assurance can be given that such funding will be available at
commercially reasonable terms, if at all.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Business
(continued)
Protein
Array Development
Our
monoclonal antibody (mAb 8D10) used in our NanoCapture™ and Nano-Sero™ ELISA
kits detects CNPs. This is the first step in our diagnostic information to
clinicians. From this base knowledge, we characterized the antibody targets
and
developed a Surface Antigen Pattern ImmunoAssay (“SAPIA”) for finding out what
antigens are present on the accessible surface of CNPs. We can utilize this
technique to map the antigens in human identified CNP blood samples. Previously,
specific antibodies against calcium-dependent conformation of Factor II, Factor
IX and Factor X have been produced and used in analysis of the auto assembly
and
catalytical activation of the clotting cascade. 8D10 is the first case known
to
us where the noncovalent phosphate-mediated interaction with calcium phosphate
mineral is the key element detected. Since blood does not normally contain
apatite mineral, this target is specific for the detection of CNPs.
We
screened serum samples of patients with 13 diseases, 40 samples per disease
using ELISA tests for CNPs and for anti-CNP antibodies. The results indicate
CNPs are present in several diseases with a very high correlation and
prevalence. In diseases such as Parkinson’s disease and breast cancer, there are
negative and positive patients. CNPs also caused a measurable immune response
with IgG antibodies. Further studies are needed. Further studies include running
more disease state samples, creating more specific antibodies to different
diseases, running those sample panels with new antibodies, performing the
statistical analysis for sensitivity, specificity, positive prediction and
negative prediction values. Upon completion of the studies, we will likely
seek
a GMP kit manufacturing partner to manufacture and validate the kits. We will
concurrently go to diagnostic equipment manufacturers and discuss platform
solutions and possible level of interest in a joint development
project.
We
will
continue optimizing our proprietary diagnostics, with a clear focus on
developing effective therapies in cooperation with well-established partners
including NASA, Mayo Clinic, Cleveland Clinic, and numerous other institutions.
Once these experiments are completed, we hope to have a compelling and
well-rounded scientific basis for the Company to move forward.
Recent
Developments
Beginning
in late October 2007, we are offering our NanoCapture™ and Nano-Sero™ ELISA kits
for the detection of CNPs through an agreement with American Health Associates
“
under the trade name of “NB2”.
During
September 2007 our Board of Directors approved a stock buy-back program for
up
to 20% of Nanobac’s outstanding public float. As of November 14, 2007, we did
not have sufficient financial resources to initiate any buy back of Nanobac
shares.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Business
(continued)
Patents
-
We
have
filed applications for a number of patents, have been granted patents, and
await
prosecution of pending application in the US and International
Stages.
Patent
|
|
General
Subject Matter
|
Expiration
Date
|
US
5,135,851
|
U.S.
|
-Method
for the culture and detection of nanobacteria also known as calcifying
nanoparticles
(issued
in 1992)
|
August
11, 2010
|
US
6,706,290
PCT/EP1999/004555
|
U.S.
& International Application
(PCT)
|
-Methods
for the eradication of Nanobacteria from articles and animals using
various novel combinations of systems, chemicals, compounds, drugs,
prodrugs, supplements, etc.
(issued
in 2004)
|
Jul
6, 2018
|
|
U.S.
& PCT Applications Filed
|
-Methods
and Compositions (combinations) for treating diseases characterized
by
pathological calcification
(Filed
in 2004)
|
|
|
U.S.
& PCT Applications Filed
|
-Methods
and combinations of compositions including Bisphosphonates, chelators,
and
citrates
(Filed
in 2004)
|
|
|
U.S.
|
-Methods
for the treatment of disease associated with calcification and/or
plaque
formation
(Filed
in 2004)
|
|
|
U.S.
& PCT Application Filed
|
-Detection
of antibodies against compositions of conformationally changed proteins
comprising calcium binding protein hydroxy apatite complexes and
novel in
vitro test methods
(Filed
in 2005)
|
|
|
U.S.
& PCT Applications filed
|
-Methods
and compositions to detect calcifying nanoparticles including the
identification and quantification of proteins thereon and correlation
to
diseases thereof
(Filed
in 2005)
|
|
There
can
be no assurance that our patents or pending applications will afford legal
protection against competitors or provide significant proprietary protection
or
competitive advantage. In addition, our patents or pending applications could
be
held invalid or unenforceable by a court, or infringed or circumvented by
others, or others could obtain patents that we would need to license or
circumvent. Competitors or potential competitors may have filed patent
applications or received patents, and may obtain additional patents and
proprietary rights relating to proteins, small molecules, compounds, or
processes competitive with ours. Additionally, for certain of our product
candidates, competitors, or potential competitors may claim that their existing
or pending patents prevent us from commercializing such product candidates
in
certain territories. Further, when our patents expire, other companies could
develop new competitive products to our products.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Patents
(continued) -
Trade
secret protection for our unpatented confidential and proprietary information
is
important to us. To protect our trade secrets, we generally require our staff
members, material consultants, scientific advisors, and parties to collaboration
and licensing agreements to execute confidentiality agreements upon the
commencement of employment, the consulting relationship, or the collaboration
or
licensing arrangement with us. However, others could either develop
independently the same or similar information or obtain access to our
information.
Results
of Operations
The
following table presents the percentage of period-over-period dollar change
for
the line items in our Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2007 and 2006. These
comparisons of financial results are not necessarily indicative of future
results.
|
|
|
|
|
|
|
|
Three
months ended Sep 30
|
|
Nine
months ended Sep 30
|
|
|
|
2007
|
|
2006
|
|
%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
Revenue
|
|
$
|
5,809
|
|
$
|
23,894
|
|
|
-76%
|
|
$
|
13,253
|
|
$
|
222,745
|
|
|
-94%
|
|
Cost
of revenue
|
|
|
4,667
|
|
|
11,286
|
|
|
-59%
|
|
|
10,829
|
|
|
79,104
|
|
|
-86%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
1,142
|
|
|
12,608
|
|
|
-91%
|
|
|
2,424
|
|
|
143,641
|
|
|
-98%
|
|
Gross
Profit percentage
|
|
|
20%
|
|
|
53%
|
|
|
|
|
|
18%
|
|
|
64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
163,229
|
|
|
273,813
|
|
|
-40%
|
|
|
2,505,393
|
|
|
1,534,972
|
|
|
63%
|
|
Research
and development
|
|
|
258,840
|
|
|
357,296
|
|
|
-28%
|
|
|
922,947
|
|
|
1,142,634
|
|
|
-19%
|
|
Impairment
loss on intangible asset
|
|
|
0
|
|
|
0
|
|
|
0%
|
|
|
0
|
|
|
585,000
|
|
|
-100%
|
|
Depreciation
and amortization
|
|
|
114,556
|
|
|
117,860
|
|
|
-3%
|
|
|
346,488
|
|
|
423,888
|
|
|
-18%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(535,483
|
)
|
|
(736,361
|
)
|
|
-27%
|
|
|
(3,772,404
|
)
|
|
(3,542,853
|
)
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (Expense)
|
|
|
(300,280
|
)
|
|
(50,822
|
)
|
|
491%
|
|
|
(1,636,639
|
)
|
|
(127,477
|
)
|
|
1184%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
($835,763
|
)
|
|
($787,183
|
)
|
|
6%
|
|
|
($5,409,043
|
)
|
|
($3,670,330
|
)
|
|
47%
|
|
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Revenue
Revenue
for the three and nine months ended September 30, 2007 and 2006 is summarized
as
follows:
|
|
|
|
|
|
|
|
Three
months ended Sep 30
|
|
Nine
months ended Sep 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Nanobac
Supplement
|
|
$
|
0
|
|
$
|
2,202
|
|
|
|
|
$
|
122,495
|
|
Observation
Rights
|
|
|
0
|
|
|
6,000
|
|
|
|
|
|
12,000
|
|
Diagnostic
Products
|
|
|
5,809
|
|
|
15,692
|
|
|
13,253
|
|
|
88,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,809
|
|
$
|
23,894
|
|
$
|
13,253
|
|
$
|
222,745
|
|
Revenue
for the three and nine months ended September 30, 2007 was primarily from our
Finland office.
During
March 2006, we terminated the marketing and selling of dietary supplements
in
order for the Company to focus exclusively on the science related to CNPs,
which
we plan to lead to drug discovery and the development of diagnostic products
for
the detection and treatment of CNP related diseases. Accordingly, we had no
revenue from dietary supplements for the three or nine months ended September
30, 2007. We expect no revenue from dietary supplements in future periods.
Revenue
from observation rights was recognized over the agreement’s 12-month term using
the straight-line method. This term ended on August 31, 2006, accordingly,
there
is no revenue from observation rights in future periods.
Beginning
in October 2007, we have initiated plans to offer our NB2 diagnostic tests
through an agreement with American Health Associates. We had previously offered
NB2 diagnostic tests through November 2006. We do not anticipate material
revenue from this initiative in 2007.
Cost
of Revenue
Cost
of
revenue consists of direct materials and testing services in our Finland office.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Selling,
General and Administrative
During
January 2007, we issued 3,000,000 shares of our common stock to each of the
members of our Board of Directors (total of 12,000,000 shares). The fair value
of these shares as of the date of issuance was $1.6 million, which is included
in our selling, general and administrative (“SG&A”) expenses.
Excluding
the stock issuance referred to above; for the three and nine month periods
ended
September 30, 2007, 77% and 88% of SG&A expenses, respectively, were
comprised of payroll and professional fees. The majority of professional fees
are related to patents and public company expenses for audit, legal and investor
relations. Other significant SG&A expenses include facility rental and
insurance.
SG&A
decreased approximately $123,000 or 62% for the three months ended September
30,
2007 as compared to the three months ended September 30, 2006. This decrease
reflected a reduction in payroll and professional fees as expenses were
minimized to reduce the cash requirements for the Company while maintaining
our
investment in research and development expenses.
SG&A
increased approximately $958,000 for the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006. $1.6 million of this
increase was attributable to the stock issuance to the Board of Directors as
described above. In addition, we recorded a $147,000 royalty expense in 2007
in
connection with potential payments due under Subscription agreements and our
patents and professional fees increased by $140,000. These increases were offset
by decreases in payroll expenses of $146,000 as we eliminated payroll associated
with the sale of Nanobac Supplements; a decrease rent expense of $135,000
primarily associated with the abandoned lease described below; and a decrease
in
other compensation associated with a stock grant bonus issued in 2006 of
$560,000.
During
March 2006, the Company ceased occupying leased office space in Tampa, Florida.
As a result of the early abandonment of this office lease, a charge to earnings
of approximately $106,000 for the acceleration of lease payments associated
with
the abandoned lease has been recognized in the accompanying financial statements
for the nine months ended September 30, 2006. An additional charge is included
in other expense for the write-off of leasehold improvements.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Research
and Development
For
the
nine months ended September 30, 2007 and 2006 research and development
(“R&D) expenses consisted of the following types of expenses:
|
Nine
Months ended Sep 30
|
|
2007
|
2006
|
U.S.
Payroll and medical directors
|
56%
|
52%
|
Finland
payroll and laboratory
|
17%
|
33%
|
Research
studies
|
20%
|
11%
|
Other
|
7%
|
4%
|
|
100%
|
100%
|
R&D
expenses decreased approximately $100,000 for the three months ended September
30, 2007 as compared to the three months ended September 30, 2006 and decreased
approximately $219,000 for the nine months ended September 30, 2007 compared
to
the nine months ended September 30, 2006. This decrease primarily reflected
a
decrease in Finland payroll and operating costs as the Finland operations are
being contracted.
Impairment
loss on intangible assets
During
March 2006, we established a plan to discontinue the sale of dietary
supplements. As a result of the above decision, the product rights’ intangible
asset was deemed fully impaired and an impairment loss of $585,000 was
recognized during the nine months ended September 30, 2006.
Depreciation
and amortization
Approximately
95% of depreciation and amortization are related to the amortization of
intangible assets (primarily patents) acquired in the June 2003 acquisition
of
LABS and the November 2003 acquisition of OY. Amortization expense decreased
for
the three and nine months ended September 30, 2007 compared to the three and
six
months ended September 30, 2006 as the amortization of product rights was
eliminated due to the impairment of this intangible asset in March 2006 as
described above.
Operating
Loss
Our
operating loss increased to $3.8 million for the nine months ended September
30,
2007 compared to $3.5 million for the nine months ended September 30, 2006.
Approximately $1.6 million of the 2007 loss was the result of the stock issuance
to our Board of Directors. This was partially offset by $560,000 of stock
issuances and the $585,000 impairment loss on intangible assets that occurred
during 2006.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Other
income (expense)
Other
income (expense) for the three and nine months ended September 30, 2007 and
2006
is summarized as follows:
|
|
|
|
|
|
|
|
Three
months ended Sep 30
|
|
Nine
months ended Sep 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
Related
party loans
|
|
|
($46,319
|
)
|
|
($52,807
|
)
|
|
($135,203
|
)
|
|
($137,087
|
)
|
Other
|
|
|
(1,917
|
)
|
|
(40
|
)
|
|
(2,986
|
)
|
|
(268
|
)
|
Derivative
gain
|
|
|
(296,833
|
)
|
|
0
|
|
|
2,667
|
|
|
0
|
|
Loss
on related party debt extinguishment
|
|
|
0
|
|
|
0
|
|
|
(1,560,000
|
)
|
|
0
|
|
Loss
on disposition of assets
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(18,330
|
)
|
Foreign
exchange gain (loss)
|
|
|
44,413
|
|
|
1,197
|
|
|
58,545
|
|
|
25,435
|
|
Other,
net
|
|
|
376
|
|
|
828
|
|
|
338
|
|
|
2,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
($300,280
|
)
|
|
($50,822
|
)
|
|
($1,636,639
|
)
|
|
($127,477
|
)
|
The
derivative gain relates to five million exercisable warrants for which we do
not
have sufficient authorized and unissued shares. The related derivative liability
for the warrants was computed based upon the value of our stock as of January
30, 2007 as quoted on established markets, using the Black-Scholes method,
assuming an expiration date of the warrants of August 31, 2009, a 100%
volatility percentage and an annual interest rate of 4.87%. This was the date
the Company first had insufficient authorized and unissued shares to allow
the
issuance of shares of its common stock if the warrants were fully exercised.
The
fair value of the derivative liability was again determined at September 30,
2007, the last date of the period, based upon the Black-Scholes methodology
described above. Since the value of the Company’s common stock, as quoted on
these established markets, decreased between these dates, the total amount
of
the obligation decreased resulting in the recognition of a derivative gain.
The
loss
on related party debt extinguishment relates to the settlement of $2.3 million
of related party debt in exchange for the issuance of 30,000,000 shares of
our
common stock valued at $3.9 million based on the trading price of the Company’s
stock on the date of the transaction of $0.13 per share.
Loss
on
disposition of assets is attributable to leasehold improvements in connection
with the abandonment of our lease in March 2006. Foreign currency gain results
from exchange rate changes between the U.S. dollar and the Euro on intercompany
advances between our U.S. subsidiary and our Finland subsidiary.
Net
Loss
We
are
experiencing significant losses as we conduct research and development related
to nanobacteria. We believe it will take significant time before we will earn
meaningful revenue to offset our expenses and there is no assurance that we
will
be able to accomplish this goal. As a result of the losses, we are dependent
on
affiliates of our CEO and other investors to provide sufficient cash sources
to
fund our operations.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Liquidity
and Capital Resources
Since
the
United States Bankruptcy Court confirmed a plan of reorganization that allowed
the Company to emerge from Chapter 11 during calendar 2002, the Company has
financed its activities primarily through loans made by entities affiliated
with
our current Chief Executive Officer (referred to herein as “the Affiliated
Entities”) and the sale of common stock. The stockholder loans were made as
funding was needed and were extremely advantageous to the Company in that the
amounts were funded as the Company needed financial infusions and allowed the
Company to avoid the costs and distractions of attempting to raise these amounts
from unrelated parties. It is unrealistic to believe that unrelated parties
would have offered terms as generous as those obtained from the Affiliated
Entities, and it is also unlikely that any financing could have been obtained
under any terms without the financing of the Affiliated Entities.
As
discussed in the Company’s most recent Form 10-KSB, since August of 2004, the
Company has received $1.4 million (net of $125,000 of expenses) from three
unaffiliated investors and one affiliate for shares of the Company’s stock and
an equal amount of warrants to acquire additional shares of the Company’s stock.
The exact number of shares to be issued is dependent upon the average closing
bid price of the Company’s stock on the five trading days immediately prior to
the date on which a registration statement for these shares is declared
effective. The purchase price of the shares is equal to the lesser of (1) $.12
or (2) 52% of the average closing price described above. An additional $1.5
million is to be received from these investors within five days of registering
the common shares and warrants. A registration statement was filed in 2005
for
these shares and is now dormant. Additional information concerning the above
obligation is included in the Company’s most recent Form 10-KSB and is
incorporated herein by reference.
As
of
September 30, 2007, we had total assets of $7.3 million of which only $40,000
were current assets. At September 30, 2007, we had total current liabilities
of
$6.7 million and a working capital deficit of $6.6 million. Approximately $3.6
million of the $6.6 million working capital deficit is attributable to the
related party loans from CEO Affiliated Entities described above.
Net
cash
used in operations for the nine months ended September 30, 2007 was $801,000.
The negative cash flow from operations reflects the $5.4 million net loss for
the period offset by non-cash charges of $1.6 million for the common stock
issuance to our Board of Directors, $1.6 million for the loss incurred on the
extinguishment of related party debt in exchange for our common stock, $346,000
for non-cash charges for depreciation and amortization and $962,000 increase
in
current liabilities.
Net
cash
provided by investing activities for the three months ended September 30, 2007
of $49,000 primarily reflects the return of a $50,000 security deposit.
Net
cash
provided by financing activities for the three months ended September 30, 2007
was $753,000, which is attributable to related party loans from CEO Affiliated
Entities described above.
As
noted
above, cash from related party loans financed our negative cash flow from
operations. We are dependent on raising additional funding necessary to
implement our business plan. Should we not be successful in raising cash from
our CEO and other investors, we are unlikely to continue as a going concern.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Forward
Looking Statements
Our
disclosure and analysis in this Form 10-QSB contains some forward-looking
statements, within the meaning of the Private Securities Litigation Reform
Act
of 1995 (“the Act”), that set forth anticipated results based on our plans and
assumptions. From time to time, we also provide forward-looking statements
in
other materials we release to the public as well as oral forward-looking
statements. Such statements give our current expectations or forecasts of future
events; they do not relate strictly to historical and current facts. We have
tried wherever possible to identify such statements by using words such as
“anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”,
“will” and similar expressions in connection with any discussion of future
operating or financial performance.
In
light
of the important factors that can materially affect results, including those
set
forth above and elsewhere in this report, the inclusion of forward-looking
information herein should not be regarded as a representation by us or any
other
person that our objectives or plans will be achieved. We may encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to market our products and services;
competitive conditions within our industry may change adversely; we may be
unable to retain existing key management and research personnel; our forecasts
may not accurately anticipate market demand; and there may be other material
adverse changes in our operations or business. Certain important factors
affecting the forward looking statements made herein include, but are not
limited to (i) accurately forecasting expenditures; (ii) obtaining new sources
of external financing; (iii) successfully conducting experiments to support
that
CNPs are an infectious in accordance with Koch’s postulates and (iv)
successfully implementing and protecting our intellectual property. Assumptions
relating to budgeting, marketing, product development and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its capital
expenditure or other budgets, which may in turn affect the Company's financial
position and results of operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Item
3: Controls and Procedures
Disclosure
controls and procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this report. Based on their
evaluation, our principal executive officer and principal financial officer
have
concluded that there are no material weakness in our internal controls and
procedures.
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports we
file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Item
3: Controls and Procedures (continued)
Section
404 of the Sarbanes-Oxley Act of 2002
Section
404 of the Sarbanes-Oxley Act of 2002 requires our report on Form 10-KSB for
2007 to include a report of management on internal control over financial
reporting. Internal control over financial reporting, as defined under these
rules, is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
In
our
report, we will be required, among other things, to assess the effectiveness
of
our internal control over financial reporting. The report must also disclose
any
material weaknesses in internal control over financial reporting identified
by
management, and if there are any material weaknesses, we must conclude that
our
internal control over financial reporting was not effective. A material
weakness, under the applicable rules, is a control deficiency, or combination
of
control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not
be
prevented or detected.
In
conducting our ongoing assessment of its internal control over financial
reporting to prepare for compliance with the requirements under Section 404
of the Sarbanes-Oxley Act, we have identified a lack of segregation of duties
to
be a potential material weakness in internal controls. Lack of segregation
of
duties is inherent to our company due to the small number of employees. Our
assessment is still in process to determine if this situation is actually a
material weakness or if there are any other material weaknesses. We have also
identified our procedures for accounting for stock-based transactions as having
a material weakness. To correct this material weakness, we have instituted
procedures whereby we will reconcile our stock records to the transfer agent
records on a quarterly basis.
Changes
in internal controls
There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation except for the material weakness and our corrective plan as described
above.
PART
II - OTHER INFORMATION
Item
1: Legal Proceedings
Except
as
described below, we know of no material, active or pending legal proceedings
against us, nor are we involved as a plaintiff in any material proceedings
or
pending litigation. There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial stockholders are an
adverse party or have a material interest adverse to us.
On
August
10, 2004, we were served with a civil action as filed in the Superior Court
of
Fulton County State of Georgia by Foltz Martin LLC and Openbook Learning Club,
Inc. (“Foltz”). This suit alleges that the Company is liable for approximately
$67,000 of liabilities plus approximately $11,000 interest for services
performed by the plaintiffs for HealthCentrics, Inc. in 2003 and 2004. The
Company owned 100% of HealthCentrics from December 2003 through March 2004
when
HealthCentrics was sold by the Company to an affiliate. During December 2005,
a
final judgment was awarded to Folz by the Superior Court of Fulton County for
approximately $79,000 and this amount is included in accrued liabilities in
the
accompanying financial statements.
On
January 19, 2006, we were served with a civil action as filed in the Superior
Court of Fulton County State of Georgia by EliteCorp Atlanta, LLC (“EliteCorp”).
This suit alleges that the Company is liable for approximately $318,000 of
liabilities plus approximately $110,000 interest for services performed by
the
plaintiffs for HealthCentrics, Inc. in 2003 and 2004. We responded to this
action on February 17, 2006 and denied virtually all the allegations of
EliteCorp. We do not believe that the Company is liable for the obligations
of
HealthCentrics.
During
January 2007, the Company, along with the Company’s CEO and a Board of Director
member was served with civil action in the Circuit Court of Cook County,
Illinois by Nutmeg Group LLC, the sole unaffiliated holder of subscription
agreements described in our most recent Form 10KSB. The suit is seeking damages
for alleged breaches of contract by the Company and the affiliates as a result
of the alleged failure to deliver stock and warrants that were allegedly due
to
be delivered under certain subscription agreements between the parties.
Additionally, the suit seeks the recovery of $65,000 for penalties for failure
to register shares subject to the registration rights agreement. We filed a
motion to quash summons, contending there is no jurisdiction in Illinois for
this matter. The Court granted a substantial portion of the Company’s motions to
dismiss. The Court also granted Nutmeg a chance to replead.
Management
believes that no amount is owed and therefore, no liability related to the
aforementioned matters has been recorded in the financial
statements.
Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
From
November 2004 through February 2005, we executed Subscription Agreements with
three unaffiliated investors and one affiliated investor. These investors paid
us 50% of the subscription price at execution and the remaining 50% is due
within five days from the date that a registration statement is declared
effective for the common shares that are being issued. In exchange for the
cash
consideration, we are to issue these investors shares of our common stock equal
to the amount paid divided by the lesser of (a) $0.12 or (b) fifty-two percent
of the average closing bid price for our common stock for the five days
immediately prior to the date on which a registration statement is declared
effective (“The Fixed Price”). In addition, each of these investors will receive
an equivalent number of warrants with expiration dates of five years from the
date of issuance. One half of these warrants will be priced at 110% of the
Fixed
Price and the remainder will be priced at 150% of the Fixed Price. During 2006,
the CEO Affiliate acquired the rights and obligations under the above Stock
Subscription Agreements from two of the three unaffiliated investors except
for
common stock previously issued to these investors and 2.7 million of the
warrants. The minimum number of shares and warrants that will be issued under
these Subscription Agreements (assuming a Fixed Price of $0.12 per share) is
as
follows:
|
|
Number
of Shares
|
|
Per
Share
|
|
Proceeds
|
|
Common
Stock, previously issued:
|
|
|
|
|
|
|
|
Unaffiliated
Investors
|
|
|
8,125,000
|
|
$
|
0.12
|
|
$
|
975,000
|
|
Affiliates
|
|
|
4,166,667
|
|
$
|
0.12
|
|
|
500,000
|
|
|
|
|
12,291,667
|
|
|
|
|
$
|
1,475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, future issuances
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
Investors
|
|
|
5,416,667
|
|
$
|
0.12
|
|
$
|
650,000
|
|
Affiliates
|
|
|
6,875,000
|
|
$
|
0.12
|
|
|
825,000
|
|
|
|
|
12,291,667
|
|
|
|
|
$
|
1,475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
Investors
|
|
|
8,125,000
|
|
$
|
0.13
|
|
|
|
|
Affiliates
|
|
|
4,166,667
|
|
$
|
0.13
|
|
|
|
|
Unaffiliated
Investors
|
|
|
5,416,667
|
|
$
|
0.18
|
|
|
|
|
Affiliates
|
|
|
6,875,000
|
|
$
|
0.18
|
|
|
|
|
|
|
|
24,583,333
|
|
|
|
|
|
|
|
The
actual number of shares and warrants that ultimately will be issued under these
Subscription Agreements may be substantially higher due to the variability
of
the Fixed Price. Based on our recent traded price of $0.06 to $0.13 per share,
up to four times as many shares and warrants would be issued as described above.
Further, we do not have sufficient authorized shares to issue the common stock
and warrants required under the above subscription agreements. Our stockholders
need to approve any increase in our authorized shares.
Each
of
these investors received their shares in reliance upon Section 4(2) of the
Securities Act of 1933, because each of the holders was knowledgeable,
sophisticated and had access to comprehensive information about us. At all
relevant times we were a reporting company under the Securities Exchange Act
of
1934 and there was readily available adequate current public information with
respect to the Company.
Item
3: Defaults upon Senior Securities
None.
Item
4: Submission of Matters to a Vote of Security Holders
None.
Item
5: Other Information
None
Item
6: Exhibits and Reports on Form 8-K
|
(a)
|
The
following exhibits are filed as part of this
report:
|