SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
(Mark
One)
xANNUAL
REPORT UNDER
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR
ENDED DECEMBER 31, 2005.
oTRANSITION
REPORT UNDER
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM ______ TO ________
DNAPrint
Genomics, Inc.
(Name
of
small business issuer in its charter)
Utah
(State
or
other jurisdiction of
incorporation
or organization)
59-2780520
(I.R.S.
Employer Identification No.)
(Address
of principal executive offices) (Zip Code) (Issuer's telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
NONE
Securities
registered under Section 12(g) of the Exchange Act:
(Title
of
class)
Common
Stock, par value $.01
Check
whether the issuer is not required to file reports pursuant to Section 13
or
15(d) of the Exchange Act. [_]
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 [_]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[_]
No [X]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [_]
State
issuer's revenues for its most recent fiscal year. $1,275,503
State
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 a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) As of February 28, 2006, the aggregate market
value
of the voting and non-voting common equity held by non-affiliates was
$5,488,340.
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date. As of February 28, 2006: 303,076,509.
If
the
following documents are incorporated by reference, briefly describe them
and
identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security holders;
(2) any
proxy or information statement; and (3) any prospectus filed pursuant to
Rule
424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The list
documents should be clearly described for identification purposes (e.g.,
annual
report to security holders for fiscal year ended December 24, 1990). NONE.
Transitional
Small Business Disclosure Format (check one): Yes
[_]
No [X]
PART
I
FORWARD-LOOKING
STATEMENTS
Statements
in this Form 10-KSB Annual Report may be “forward-looking statements.”
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or
any
other statements relating to our future activities or other future events
or
conditions. These statements are based on our current expectations, estimates
and projections about our business based, in part, on assumptions made by
our
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in the forward-looking statements due to numerous
factors, including those risks discussed in this Form 10-KSB Annual Report,
under “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in other documents which we file with
the Securities and Exchange Commission.
In
addition, such statements could be affected by risks and uncertainties related
to our financial condition, factors that affect our industry, market and
customer acceptance, changes in technology, fluctuations in our quarterly
results, our ability to continue and manage our growth, liquidity and other
capital resources issues, competition, fulfillment of contractual obligations
by
other parties and general economic conditions. Any forward-looking statements
speak only as of the date on which they are made, and we do not undertake
any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Form 10-KSB Annual Report, except as
required by law.
HISTORY
We
initially incorporated under the laws of the State of Utah on January 3,
1983 as
Lexington Energy, Inc. and subsequently changed our focus to human genome
sciences. In connection with this change in focus, on July 15, 2000, we acquired
DNAPrint Genomics, Inc. through the issuance of 9,600,000 shares of our common
stock. After the acquisition, we focused on the discovery and development
of our
TruLine products - TruSeq™, SNiPscan™ and TruSpin™. We actively engaged in human
identification analysis and used our proprietary TruLine products to reduce
the
cost of producing a genetic profile to less than 50% of the standard price.
Our
strategy was to sell our proprietary reagent to geneticists at universities,
hospitals and commercial laboratories working on genotyping projects. The
reagent kit was designed to save researchers money in reagent costs. Companies
that sold the reagents, however, made advances in their own reagents, which
lowered the cost and ultimately negated the benefit of using our products.
The
technology was thus abandoned.
In
2001,
Dr. Tony Frudakis, our founder, teamed with other scientists to conduct research
to develop new genomics products with consumer, forensic and pharmacogenomics
applications. However, lack of funding limited the amount of research conducted.
We implemented cost cutting measures to conserve cash. In spite of these
hardships; we were able to continue our research and development efforts
on a
reduced and limited basis throughout most of 2002 and 2003.
During
2002, our Board of Directors began a search for new leadership. After a search
for a new CEO/President, Mr. Richard Gabriel agreed to accept the position
without requiring immediate cash compensation. Because we did not have cash
available to pay Mr. Gabriel's salary, he agreed to enter into an employment
contract for one year that granted him 1,500,000 shares of our stock in lieu
of
immediate cash compensation.
As
CEO
/President, Mr. Gabriel agreed to seek additional executive management,
particularly a Chief Financial Officer, a Chief Operating Officer and a Chief
Medical Officer and to locate a firm to represent us in raising investment
capital sufficient to build and sustain the business over the next 2-3 years.
Mr. Gabriel and the new management team successfully completed these
goals.
Mr.
Gabriel hired our Chief Financial Officer and Chief Operating Officer, Monica
Tamborini, and our Chief Medical Officer, Dr. Hector J. Gomez. In May of
2003,
Mr. Gabriel also convinced Ms. Tamborini and Dr. Gomez to agree to work
initially without requiring immediate cash compensation. They agreed to enter
into employment contracts with us for one year in return for stock grants
of
1,000,000 and 1,250,000 shares respectively.
With
executive management in place, we next developed a strategic plan to achieve
our
short term goal of securing financing and our longer term goals of growth
and
stability. Where prior management saw partnering and licensing arrangements
as
the way to success, new management's view was that growth would occur with
proven success. Management has emphasized demonstrating that our current
products are viable, and management believes the shortest path to that goal
is
through concentrating our initial sales efforts on the consumer and forensic
markets. While we expect pharmacogenomics products to outperform other market
products in the long run, their introduction to market has a longer time
horizon
and requires larger investments of time, personnel and capital before they
produce revenue and generate cash flow.
Management
sought investment bankers to represent us in our search for financing. In
April
2003, we engaged an investment banking firm to assist us in our efforts to
raise
debt and/or equity capital. In December 2003, we successfully agreed to place
$8,000,000 of our securities over approximately a 20-month period. Prior
to
completing this transaction, we had received funds from earlier private
offerings. Together, these transactions gave us the critically required capital
to fund our ongoing operations until our new financing was in place. In addition
to the previously raised capital, management sought additional capital to
fund
expansion and acquisitions. Along with our investment bankers, we secured
a
commitment from Dutchess Private Equity Partners, LLC for the sum of $35
Million
over a 24-month period. We also negotiated to acquire a stake in Biofrontera,
a
privately held German Biotechnology company. Mr. Richard Gabriel and Ms.
Monica
Tamborini are common, non-voting shareholders of less than 1% combined ownership
in Biofrontera AG. Mr. Gabriel was made aware of the opportunity to invest
in
Biofrontera AG and presented it to our Board of Directors and was given
instructions to proceed with the investment opportunity.
Effective
September 28, 2004, we agreed to acquire a majority interest in Biofrontera
AG
over a 24-month period for a purchase price of 20 million Euros. Prior to
the
closing of the transaction, however, we concluded that proceeding with the
proposed acquisition was not in our best interest. Therefore, we terminated
the
Biofrontera agreement on February 18, 2005.
On
July
8, 2005, we entered into an agreement to purchase, and simultaneously closed
upon the purchase of, an equity interest in Biofrontera. We purchased the
interest in Biofrontera from Technologie-Beteiligungs-Gesellschaft mbH, an
instrumentality of the German government. The securities purchased were shares
of Biofrontera’s series A Preferred Stock, as well as certain debt instruments.
On August 8, 2005, we converted the securities purchased into Biofrontera’s
common stock. We paid approximately 1.8 million Euros ($2.1 million) for
our
interest in Biofrontera. On September 19, 2005, we paid an additional 98,245
Euros ($121,000) for an additional 98,145 shares of Biofrontera common stock
increasing our ownership of Biofrontera to approximately 18%. In connection
with
the transaction, two of the members of our Board of Directors, Richard Gabriel
and Hector Gomez, were retained on the Biofrontera board. In addition, to
induce
the shareholders of Biofrontera to consent to our investment in Biofrontera,
we
entered into a put agreement with another Biofrontera shareholder, Heidelberg
Innovation. Pursuant to this agreement, if by December 31, 2005 Biofrontera
had
not completed an offering of debt securities for at least 10 million Euro,
Heidelberg Innovation could have required us to purchase its ownership interest
in Biofrontera of approximately 49% for 1.6 million Euro (approximately $1.96
million). During September 2005, Biofrontera completed its debt securities
offering. Therefore, our put obligation to Heidelberg Innovation was terminated.
At that time, the board seat previously held by Hector Gomez was filled by
a
representative of the debt securities group. In March 2006,
Biofrontera announced that it intends to undertake a public offering of equity
securities during 2006-2007.
We
acquired Trace Genetics late in the second quarter of 2005. Trace Genetics
brought two new complementary technologies to our autosomal testing for
determining the percentage of a person's ancestry: Y-chromosome testing for
tracing ancestry by following the direct paternal line and mitochondrial
(mtDNA™) testing for the direct maternal line. Trace also maintains one of the
largest Native American mtDNA™ databanks in North America. Other similarly large
databases are controlled by groups such as the Sorensen foundation, various
Native American foundations and tribes, and some Universities.
On
October 12, 2005, we formed DNAPrint Pharmaceuticals, Inc., a wholly-owned
pharmaceutical subsidiary focused on personalized medicine.
On
October 25, 2005, we acquired all of the stock of Kenna Technologies, Inc.
Kenna
develops software and related technologies for building computational models
that mimic complex biological systems. We expect that Kenna’s computational
models will become key components for our development of more effective
therapies and diagnostic products. In acquiring Kenna, we also gain access
to
Kenna’s BoneFusion and CellCycleFusion models, which simulate bone remodeling
processes and molecular pathways. These pathways are common targets of current
cancer therapies. We exchanged 1,500,000 shares of our common stock for all
the
outstanding shares of Kenna. In addition, we hired certain key employees
of
Kenna, including Drs. Barbara Handelin and Tandy Herren, who will support
the
clinical development of our pharmacogenomics products with simulations to
help
design optimal clinical trials.
On
November 30, 2005, we acquired certain assets used in the drug and diagnostic
discovery business of Toronto-based Ellipsis Biotherapeutics Corporation.
We
formed a wholly-owned Canadian company, also named Ellipsis Biotherapeutics
Corporation to operate these assets. Ellipsis performed
contract
SNP genotyping for academic centers, hospitals, human health care corporations
and biotech companies. Its diverse services include human, plant and animal
analyses.
The
acquired assets consist of Ellipsis’ operating assets, including genotyping
equipment, automated sample preparation devices, DNA preparation,
measurement and amplification technologies, laboratory equipment, computers
and office supplies related to these activities, the corporate premises,
name and logo and certain intellectual property and committed contracts.
We
anticipate that the Ellipsis assets will assist with clinical genomics and
genotyping. In consideration for the Ellipsis assets, we issued 6,500,000
shares
of our common stock and assumed certain liabilities in the approximate amount
of
$600,000. Dr. Laurence Rubin has agreed to continue managing the operations
in
Toronto.
RESEARCH
AND DEVELOPMENT
The
primary objective of our near term research and development efforts in
pharmacogenomics will be to expand our library of predictive drug response
tests
to include multiple therapeutic areas including commonly used FDA approved
drug
therapies. Although our products are diverse and address different market
areas
and needs, the base technology is the same. Research in one area often provides
benefit to our other products.
In
2004,
we conducted research for enhancements to DNAWitness™. The research included
much needed sample collection for our eye and hair color studies. As a result
of
our past research, in early June of 2004, we introduced a new tool to our
forensic customers. We compiled a volunteer photo database that we can use
to
help investigators visualize the DNA donor. This new tool augments the
effectiveness of our product, DNAWitness™. During the third quarter of 2004, we
completed work on our eye color service, RETINOME™, and EURO-DNA™, a service
that allows customers to determine their Northern European, Mediterranean,
Middle Eastern and Indo European ancestry and introduced them to the market.
We
continue our research work on STATINOMETM and ace inhibitor projects.
We also, in conjunction with researchers at the Moffitt Cancer Center, continue
work on OVANOMETM and other identified cancer projects. We continue
to evaluate and analyze our preliminary results and to extend those results
to
other patients’ samples for Taxol, Statins, and Ace inhibitor work.
Our
work
in forensics is continuing to expand the physical descriptors that can be
derived from crime scene DNA samples. Our research also continued in hair
color,
skin shade, and we carried on work to improve our recently introduced eye
color
predictor model. Additionally, we continue to collect volunteer photo database
samples and will incorporate those new samples into our forensic photo database
array in the near future.
During
2005, we began our work on EPO with Beth Israel Deaconess Medical Center
and Dr.
Arthur Sytkowski a director at Beth Israel. EPO is a glycoprotein naturally
made
by the body to stimulate red blood cell production; the currently marketed
forms
are manufactured using recombinant DNA technology and are used to treat anemia
or low blood cell count.
Also
during 2005, we entered into an agreement with Dr. Mark Froimowitz to develop
a
series of methylphenidate analogs or Ritalin-like compounds targeting the
clinical development of enhanced pharmaceuticals for the treatment of drug
addiction, attention deficit hyperactivity disorder and depression.
STRATEGIC
ALLIANCES
Moffitt
Cancer Center
During
2006, our OVANOME™ technology is under development with researchers at the
Moffitt Cancer Center in Tampa, Florida, and we are in the midst of completing
an initial 80 person trial under an approved Internal Review Board, or IRB,
which approves all clinical trial related work at the center. We are also
enrolling an additional 200 subjects to further validate and support the
data we
obtained in our earlier trial.
Beth
Israel Deaconess Medical Center License Agreement
Effective
April 4, 2005, we entered into a license agreement with Beth Israel Deaconess
Medical Center, a Massachusetts nonprofit corporation, to develop a new,
more
potent and longer acting form of the anemia drug Erythropoietin, or
EPO.
EPO
is a
glycoprotein naturally made by the body to stimulate red blood cell production.
The currently marketed forms are manufactured using recombinant DNA technology
and are used to treat anemia or low blood cell count. Under the agreement,
Beth
Israel has granted us an exclusive license to United States and foreign patents
related to certain forms of EPO. We have the right to develop, use, market
and
sell products derived from the licensed patents.
In
exchange for the license, we paid Beth Israel a $25,000 signing fee and agreed
to make certain milestone payments linked to their progress in developing
marketable products from the licensed technology. The total of payments,
if all
milestones are reached, is $2,150,000. The milestone payments are nonrefundable.
Up to $200,000 of this amount is creditable against future royalties. In
addition to the milestone payments, we must also pay Beth Israel an annual
royalty of 4% of the net sales of all products developed from the licensed
technology. A minimum royalty payment of $100,000 a year is due upon the
commencement of commercial sales in any territory worldwide.
Consulting
Agreement with Dr. Arthur Sytkowski
On
June
7, 2005, we entered into a consulting agreement with Dr. Arthur Sytkowski,
the
Director of Beth Israel, to consult on the development of a new, more potent
and
longer acting form of EPO. On September 1, 2005, we entered into a new
consulting agreement amending and restating the existing consulting agreement.
Under the amended consulting agreement, Dr. Sytkowski has agreed to perform
certain consulting services, including advising on medical, regulatory and
patent issues, training personnel and providing assistance with EPO research
and
development. In exchange for the services, we will pay Dr. Sytkowski $10,000
a
month for twelve months, five annual incentive payments of $25,000 each,
and
certain milestone payments linked to our progress under the Beth Israel license
in developing marketable products from the licensed EPO technology. The total
of
all payments to Dr. Sytkowski under the agreement, assuming all milestones
are
reached, is $370,000. The milestone payments will be reduced - dollar for
dollar
- to the extent Dr. Sytkowski receives payments from Beth Israel relating
to the
same milestone events under the Beth Israel license.
Collaborative
Research Agreement with Beth Israel
During
late June 2005, we entered into a collaborative research agreement with Beth
Israel to provide three researchers to us to conduct certain research work
related to our EPO research. On August 15, 2005, this agreement was amended.
The
total cost per the amended agreement is $352,192. We paid $176,096 during
2005
and the remaining $176,096 is due in 2006.
Consultant
Agreement with Member of Our Scientific Advisory Board
During
May 2005, we entered into a one-year agreement with our Scientific Advisory
Board member, to continue collaboration with us to develop commercial tests
for
genetic ancestry and particular physical phenotypes. We have agreed to
compensate this consultant with quarterly payments of $4,000 and 2,500 shares
of
our common stock. The term of this agreement is one year with automatic renewals
each year unless either party provides written notice of its intent not to
renew
within thirty days prior to the annual anniversaries of this agreement. During
May 2005, we also entered into a license agreement with this consultant.
This
license will remain in force in perpetuity as long as we are not in default
of
the agreement. We agreed to provide the consultant with a number of shares
of
our common stock equal to 2.5% of the net revenues derived from a product
and
any subsequent versions of the products developed with his help.
License
Agreement with Dr. Mark Froimowitz
On
October 25, 2005, we entered into an exclusive licensing agreement with Dr.
Mark
Froimowitz to develop a series of compounds targeting the clinical development
of enhanced pharmaceuticals for the treatment of drug addiction, attention
deficit hyperactivity disorder, or ADHD, and depression. The licensed compounds
are analogs of Ritalin, a well-known drug used for treatment of ADHD. The
analogs are designed specifically to have a slow onset and increased half-life
in the bloodstream, thus reducing a patient’s required daily dosage and the
potential for drug abuse. We have the exclusive right to develop, use, market
and sell products derived from the licensed compounds. We are obligated to
pay
the licensor a two percent quarterly royalty fee on the net sales of products
covered by the license. Minimum annual maintenance fees of $25,000 are required
for the license term, but will be deducted from royalties. Additionally,
the
license requires progress payments of up to $275,000 upon the successful
development and approval of licensed products. The license’s initial five year
term is supplemented by options capable of extending the license term for
up to
twenty years.
License
Agreement with Harvard Medical School
On
January 24, 2006, we entered into an exclusive license agreement with Harvard
College through the Laboratory for Translational Research at Harvard Medical
School. The Harvard License provides for sponsored research and the clinical
development and commercialization of a diagnostic test targeting early
identification of the population at risk of developing vascular diabetic
complications. The research will be conducted under the supervision of Dr.
Jose
Halperin. The sponsored research payments total approximately $2.5 million
and
will be paid in quarterly installments of approximately $208,333 over
approximately three years.
Under
the
Harvard License, we have the exclusive right to develop, market and sell
products and services derived from the research. We must pay the Licensor
a six
percent royalty on the net sales of products and services covered by the
License
and thirty percent of all non-royalty sublicense income. We are also required
to
pay escalating minimum annual license maintenance fees totaling $850,000
through
January 1, 2012. We are obligated to make annual license maintenance fees
of
$250,000 through the Harvard License term, but, beginning January 1, 2013,
the
annual license fee of $250,000 is credited against royalty payments.
Additionally, we paid the Licensor previously incurred patent costs of
approximately $100,000 upon the execution of the License, and are responsible
for paying the costs associated with patent application, maintenance and
prosecution during the License term.
Research
Sponsorship Agreement with Massachusetts
College of Pharmacy and Health Sciences
In
January 2006, we entered into a research sponsorship agreement with the
Massachusetts College of Pharmacy and Health Sciences, under which Dr. Mark
Froimowitz will lead a research project that relates to the compounds that
we
license from him. The area of research is the synthesis and testing of monoamine
transporter inhibitors as possible human medications for drug abuse, for
attention deficit hyperactivity disorder, and for depression. The specific
research covered by this agreement is the synthesis of quantities of compounds
sufficient for animal testing, including developing methods for the resolution
or chiral synthesis of compounds. We will pay a total of $300,000 to
Massachusetts College of Pharmacy and Health Sciences for this research work
which will be paid in monthly installments of $25,000 over one year. We will
acquire all intellectual property associated with the research
results.
THE
PHARMACOGENOMICS MARKET
A
1998
study of hospitalized patients published in the Journal
of the American Medical Association
reported
that in 1994, adverse drug reactions accounted for more than 2.2 million
serious
cases and over 100,000 deaths, making adverse drug reactions (ADRs) one of
the
leading causes of hospitalization and death in the United States. As noted
by
Ross
and
Ginsburg in the American Journal of Clinical Pathology,“As
many
as 20% to 40% of people receiving pharmaceutical agents may be receiving
the
wrong drug.”
Currently,
there is no simple way to determine whether people will respond well, badly,
or
not at all to a medication; therefore, pharmaceutical companies are limited
to
developing drugs using a "one size fits all" system. This system allows for
the
development of drugs to which the "average" patient will respond. However,
as
the statistics above show, one size does not fit all, sometimes with devastating
results. As discussed at the March 11, 2006 American Society for Clinical
Phamacology and Therapeutics Conference by Janet Woodcock, M.D. Deputy Director
of the FDA, the American medical system cannot afford to continue to ignore
the
obvious variability in how individuals respond to most drugs. There is
increasing obligation for the pharmaceutical industry - and the regulatory
oversight agencies - to use all available knowledge and technologies to
accelerate the development of drugs that can be prescribed with better
understanding of which patients can safely take which medicines that also
will
be effective treatment from them. Dr. Woodcock also said:
“At
the
FDA, we currently see only a trickle of applications containing pharmacogenomic
information, but we expect this trickle to become a flood over the next five
years. And this is only good news for patients and their families. For the
first
time, physicians will have a chance to treat people as individuals, not as
members of a "population." We will also be able to treat patients based on
the
actual biology of the disease--not just according to their symptoms. People
often have similar symptoms, but actually have very different underlying
diseases that need different treatments. The pharmacogenomics revolution
gives
us a chance to sort this out and to treat people with the kind of therapy
that's
appropriate for them, personally. This gives all of us the chance to fulfill
the
promise of all the discovery and all the investment in biological science
that's
been going on during the last 30 years. And it will really help and enhance
the
health of all Americans.”
Testing
individuals to predict their genetic pre-disposition to drug response is
known
as pharmacogenomics. The term comes from the words pharmacology and genomics
and
is thus the intersection of pharmaceuticals and genetics. Pharmacogenomics
enables physicians to tailor drug therapies (formulation and dosage) for
individuals based on their genetic composition. By using predictive response
genetic testing, rates of therapeutic success (known as treatment efficacy)
are
increased, and ADRs are decreased. Pharmacogenomics combines traditional
pharmaceutical sciences such as biochemistry with annotated knowledge of
genes,
proteins and single nucleotide polymorphisms known as SNPs. According to
Human
Genome Project Information, Pharmcogenomics (www.ornl.gov/sci/techresources.Human_Genome/medicine/pharma.shtml),
Pharmacogenomics is anticipated to provide the following benefits:
| 1. |
More
powerful medicines that are targeted to specific diseases. This will
maximize therapeutic effects and decrease damage to nearby healthy
cells.
|
| 2. |
Better,
safer drugs the first time by analyzing a patient’s genetic code or
important segments of the patient’s code versus trial and error
prescribing based on reviewing the impact of a drug after a patient
takes
it.
|
| 3. |
More
accurate methods of determining appropriate drug doses not based
only on a
patient’s weight or body mass but also based on the patient’s metabolism.
This will maximize the therapy’s value and minimize the chance for
overdose.
|
| 4. |
Improvements
in the drug discovery and approval process because trials are targeted
for
specific genetic population groups providing a higher chance of success.
This can reduce costs of trials and risk of poor side effects. Previously
failed drug candidates might be revived if they can be matched
appropriately with a specific population.
|
| 5. |
Decreases
in overall cost of health care because of reduced ADRs, reduced failed
drug trials, shortened FDA drug approval timeframes, limited treatment
duration because the drug is more effective, linked to early detection
and
resulting in better preventative care.
|
The
major
barrier to pharmacogenomics progress is complexity of the research efforts
that
are still in early stages of finding gene variations that affect drug response.
Millions of SNPs must be potentially identified and analyzed to see if they
affect drug responsiveness. Additionally, many genes work in combination
and
thus, understanding the impact of combinations of SNPs will be critical.
Unfortunately, this effort is also time consuming and expensive.
In
November 2003, the FDA issued "Guidance for Industry Pharmacogenomic Data
Submissions.” We believe that, in this guidance, the FDA offers support for
pharmaceutical companies developing drugs using genetic testing and genomic
research for drug approvals. Under the guidelines, if a genetic test is new
or
is not widely accepted, then its use is `voluntary' to the drug's submission.
If
a test is `validated and accepted' then the guidelines suggest its inclusion
in
the submission. In both cases, our products and services can provide a valuable
tool for drug development. We can help identify patients who might not respond
favorably to a new medication, either by failure to gain the intended treatment
objective or by expression of an adverse reaction, and thus eliminate those
patients from the treatment or clinical trial. This testing could improve
the
drug's efficacy statistics because there may be fewer non-responders in the
trial and reduce its toxicity profile because there would be fewer individuals
who have an adverse drug reaction. This testing may increase the likelihood
that
the drug meets FDA requirements and gains market approval.
Our
Pharmacogenomics Products
At
the
annual shareholder meeting in June 2005, Dr Hector J. Gomez, the Chairman
of our
Board of Directors, announced that we will focus on leveraging our expertise
in
DNA technology into the development of particular test/drug combinations,
called
theranostics. Theranostics is defined as the clinically-targeted integration
of
diagnostics and therapeutics according to Current Drug discovery September
2002.
We believe theranostics adds value to the clinical trial process, improves
the
real-time treatment of disease, and makes treatment more
cost-effective.
In
October 2005, we created a new subsidiary, DNAPrint Pharmaceuticals, to focus
on
delivering diagnostic and theranostic products to the market in support of
pharmacogenomic opportunities. We are developing several Theranostics Projects.
The following table contains certain information on the status for our
diagnostic products that are in development as of February 28,
2006:
|
THERANOSTICS
|
INDICATION
|
DEVELOPMENT
STAGE
|
|
PT-401
|
Anemia
- Renal Failure
|
Preclinical
|
|
PT-501
|
ADHD
|
Preclinical
|
|
PT-502
|
Drug
Addiction
|
Preclinical
|
|
PT-503
|
Depression
|
Preclinical
|
PT-401
Anemia
-
Renal Failure: As announced on March 14, 2006, tests of our Super EPO dimer
in
animal models of anemia showed that it was several times more effective and
longer acting than the currently available erythropoietin. In vitro testing
in
cell cultures revealed significant positive biological activity. In addition,
in
vivo testing in mice demonstrated robust stimulation of red blood cell
production. Further analytical testing showed unique biochemical properties
that
distinguish it from currently marketed red blood cell growth stimulating
drugs.
PT-501
ADHD, PT-502 Drug Addiction, PT-501 Depression: In January 2006, we entered
into
a Research Sponsorship Agreement with the Massachusetts College of Pharmacy
and
Health Sciences for the potential development of compounds as possible
medications for drug abuse, attention deficit hyperactivity disorder and
depression.
Our
Diagnostic Projects
We
currently have several diagnostic projects under development. The status
as of
February 2006 is as follows:
|
DIAGNOSTICS
|
INDICATION
|
DEVELOPMENT
STAGE
|
|
OVANOME
|
Ovarian
Cancer
|
Diagnostic
Ph II
|
|
STATINOME
|
Safety
of Statins
|
Diagnostic
Ph II
|
|
DIABETES-CD59
|
Diabetic
Complications
|
Preclinical
|
Ovanome:
During
2005, we began a study with Genomics Collaborative Division of Seracare
Life Sciences Inc. Samples
have been received from them and used to conduct a validation of the test.
This
has advanced the development and improved the quality of the diagnostic
test.
Statinome:
During
2005, we began a study with Genomics Collaborative Division of Seracare
Life Sciences Inc.
that
also included the statinome program. Samples have been received from them
and used to conduct a validation of the test. An abstract was presented at
the
last meeting of the American Society of Clinical Pharmacology and Therapeutics
(March, 10, 2006 in Baltimore). Also, a paper has been prepared and submitted
for publication.
Diabetes
C59:
On
January 24, 2006, we entered into an exclusive license agreement with Harvard
College through the Laboratory for Translational Research at Harvard Medical
School. The Harvard License provides for sponsored research and the clinical
development and commercialization of a diagnostic test targeting early
identification of the population at risk of developing vascular diabetic
complications. The research will be conducted under the supervision of Dr.
Jose
Halperin.
Our
Growth Strategies in the Pharmacogenomic Market
By
leveraging our proprietary technologies, we believe we are positioned to
serve
the growing compliance and operational needs of pharmaceutical companies
and
institutional researchers. We will continue to seek product and market
relationships that expand and enhance our ability to apply our technology
to
existing medications or new medications, improving drug efficacy and reducing
patient side effects by better understanding the genetic makeup of individuals.
We believe the future of drug development and drug approval as outlined by
recent FDA writings will force the industry to recognize smaller market
opportunities with higher efficacy profiles and significantly reduced or
diminished side effects.
We
will
continue work on OVANOME(TM), a Taxol screening diagnostic test, and
STATINOME(TM), a test for the cardiac drug market, which are both
currently under development. Our OVANOME™ technology is under development with
researchers at the Moffitt Cancer Center in Tampa, Florida, and we are in
the
midst of completing an initial 80 person trial under an approved Internal
Review
Board, or IRB, which approves all clinical trial related work at the center.
We
are also enrolling an additional 200 subjects to further validate and support
the data we obtained in our earlier trial. We will continue to explore joint
venture opportunities, particularly within the pharmacogenomic segment, in
order
to potentially expand our position within the pharmaceutical market. A major
goal of our joint venture program is to seek opportunities for a drug pipeline
acquisition. Our recent licensing of a ‘Super’ Erythropoietin (EPO) molecule
from Beth Israel Deaconess Hospital is a step forward in that direction.
We plan
to combine our ability to screen patients and track patient response to the
standard form of EPO when compared to our newer, ‘Super EPO’. We believe this
will improve our clinical efficacy and reduce the unwanted side-effects of
standard EPO treatment for anemia.
THE
FORENSICS MARKET
Testing
DNA from a crime scene to create a physical profile is a new market based
on
evolving technologies. Common hereditary traits such as skin pigmentation,
eye
color, hair color, earlobe attachment and height can theoretically be predicted
through analysis of DNA sequences. We believe that we are the first to use
DNA
gathered as evidence from a crime scene to successfully predict the donor's
continental genetic origin and linking that to our photo-database gallery,
providing law enforcement officers with a general description of the donor.
There
are
approximately 1,200,000 reported incidents of violent crime (rape, robbery,
and
aggravated assault) in the U.S. each year. In the vast majority of violent
crimes, DNA evidence is left at a crime scene or on a victim's body. Of these
1.2 million reported incidents, only about 600,000 cases result in arrests.
Forensic DNA tests can enable a greater degree of success in prosecuting
violent
criminals.
Our
Products for the Forensics Market
We
created DNAWitness™ 2.5 for the forensics market. Law enforcement officers use
this testing service to determine genetic heritage from DNA samples obtained
from crime scenes, saving time and money by narrowing the list of potential
suspects. Current forensic DNA products in the market act like a fingerprint
and
can only be used to match DNA specimens. To our knowledge,
DNAWitness™
is the
first forensic product that provides predictive capability.
DNAWitness™
provides
the percentage of genetic make up amongst the four possible groups of
Sub-Saharan African, Native American, East Asian, and European. When
appropriate, DNAWitness™
allows
for a breakdown of the European ancestry into four components: Northwestern
European, Southeastern European, Middle Eastern and South Asian. The results
of
these tests can be very useful for inferring certain elements of physical
appearance.
In
2005,
DNAWitness was used in approximately 100 cases.
The
Louisiana Serial Killer Case was one case where the use of DNA Witness was
considered a major contributor to identifying the killer who has since been
convicted and sentenced. This case was featured at an educational workshop
for
law enforcement at the American Academy of Forensic Scientists in February
2006.
Additionally, DNAWitness received national attention when police made an
arrest
in a case involving the double murder of two women in Napa, California, after
narrowing down a list of potential suspects. The test eliminated an entire
group
of individuals who worked and lived in the Napa Valley area as potential
suspects.
Initial
DNAWitness™ 2.5 customers include medical examiner's offices, special task
forces, sheriffs' departments, and district attorney's offices from various
cities. Initial response from preliminary application of this forensics version
to various high profile criminal cases has been promising.
During
July 2005, we expanded our DNAWitnessTM
product
suite which now includes:
DNAWitness™
2.5 -- Tests crime scene DNA to assist detectives, forensic scientists and
medical examiners in corroborating eyewitness reports and confirming suspect
identities. DNAWitness™ 2.5 provides a BioGeographical Ancestry report that
includes a photo database for reference samples of individuals. Reported
ancestral origins are Sub-Saharan African, Native American, East Asian and
Indo-European.
EUROWitnessTM
1.0 --
Tests crime scene DNA to determine more specific geographic origins if the
test
sample ancestry is 50% or more Indo-European. EUROWitness 1.0 provides a
BioGeographical Ancestry report that includes relative percentages of Northwest
European, Southeast European, Middle Eastern or South Asian.
RetinomeTM
-- A
predictive test for individual eye color from DNA. RETINOME™ predicts eye color
if the sample is 50% or greater European ancestry as to whether eye color
is
blue, mostly blue, brown or mostly brown. A representative eye photo database
is
also provided along with relevant photo database pictures of the individual
references.
STR-WitnessTM
-- A
genetic "matching" used as a bar code to track and report the samples.
STR-Witness™ is the same test used for determining an individual's identity from
an available DNA sample. Crime labs run this test to screen the Federal Bureau
of Investigation's Combined DNA Index System (CODIS) database for possible
matches.
DNAWitness-YTM
-- A
Y-chromosome test that determines the direct paternal ancestral lineage from
the
male sex chromosome. DNAWitness-Y™ can be used as an identification tool in
cases where a mixture of male and female samples exists.
DNAWitness-MitoTM
-- A
mitochondrial DNA test that examines ancestral lineages along the maternal
line.
DNAWitness-Mito™ can be used as an identification tool when other DNA testing
fails to yield results or the DNA sample is too deteriorated.
Growth
Strategy in Forensics
We
are
investigating avenues to encourage federal, state and local governments,
crime
laboratories and law enforcement agencies to use DNAWitness™ to help solve cold
cases, current serial killer cases and other violent crimes. By using
DNAWitness™ on a routine basis, witness information can be corroborated, and
where no witness is present, DNAWitness™ can provide a "fuzzy sketch" of the
persons who left evidence at a crime scene, possibly reducing the cost and
delay
inherent to unguided investigation of a large pool of potential suspects..
Our
2006
and 2007 plans include seeking American Society of Crime Laboratory Directors
or
"ASCLD" accreditation of our laboratory for forensics work tied to court
testimony. Once accredited, either through acquisition of another forensic
operation or development of our own operation, we will also be able to offer
conventional DNA testing to our clients. Accreditation would allow us to
capture
a greater portion of this market and to offer a full range of services to
our
clients. We continue to go to trade shows to increase the awareness of our
products with the law enforcement community.
THE
CONSUMER PRODUCTS MARKET
The
consumer genealogy market is fueled by a natural desire to understand our
family
lineage and our genetic heritage. The total world market is currently estimated
at $75 million and is expected to grow 5% annually. There is also a market
for
paternity and other tests related to family lineage. We serve both of these
consumer markets through direct sales and independent distributors.
Our
Products for the Consumer Product Market
We
were
one of the first companies to offer DNA tests that predict genetic heritage
for
this market. Additionally, to the best of our knowledge, we offer the only
pan-chromosomal assay for genetic ancestry which provides information on
a
person’s maternal and paternal lineages.
Our
genealogy product, ANCESTRYbyDNA™
2.5,
provides an inference of an individual’s genetic ancestry or heritage.
ANCESTRYbyDNA™
2.5
carefully selects and analyzes certain genetic markers from the human genome
which are more prevalent in people from one continent versus another. Using
complex statistical algorithms, ANCESTRYbyDNA™
2.5 can
determine which of the major bio-geographical ancestry groups, Sub-Saharan
African, European, East Asian or Native American, a person belongs. The genetic
test can also determine the relative percentages of these ancestry groups
which
are present in cases of people of mixed background. We market this product
to
individuals or groups interested in understanding their lineage or learning
more
about their genetic ancestry.
We
introduced EURO-DNA™
1.0 in
the marketplace in late 2004. The EURO-DNA™
1.0
product
measures European sub-ancestry. “European” ancestry, as determined by
ANCESTRYbyDNA™
2.5,
refers to a type of ancestry shared by people who derived from the Middle
East
some 50,000 years ago and spread to occupy Europe, the Middle East, parts
of
Eurasia and South Asia. EURO-DNA™
1.0
breaks the European ancestry into 4 groups, reporting individuals’ ancestral
percentages for each of the following: Northwestern European, Southeastern
European, Middle Eastern and South Asian.
In
June
2005, we acquired Trace Genetics, an identity genomics company located in
Richmond California. The company had three ancestry tests that were added
to our
family of tests. They include:
| 1. |
“Ancestry
Mito” mtDNA Test which traces the origin of the customer’s direct maternal
line (mother’s mother’s mother). There are 30 major maternal lineages
(haplogroups) that have been identified
worldwide.
|
| 2. |
Native
American mtDNA test which tests the customer’s mtDNA sequence against the
Native American mtDNA database to see if we can make any tribal matches
when the customer is one of 5 haplogroups that are Native American
in
origin.
|
| 3. |
“Ancestry-Y”
SNP which traces the origin of the customer’s direct paternal line
(father’s father’s father). There are 18 major paternal lineages
(haplogroups) that have been identified worldwide. Two of the 18
haplogroups are found in Native American populations (Q, C). This
test
includes these two haplogroups.
|
Growth
Strategy in Consumer Products
We
currently have seven distributors that sell our consumer products. We use
our
distributors as well as Internet and paper-based publication advertising
(i.e.
through Google and Family Tree magazine) to grow sales of our consumer products.
Our consumer sales volumes seem to increase when we are featured in articles
and
television spots. We have been featured in multiple local and national
publications and television programs. We will continue to strive to get the
article and television spot coverage as well as pursue other avenues of
marketing. Our consistent sales come through our distributors. We will also
continue to pursue adding distributors to increase our sales volume of our
consumer products.
Contract
genotyping is the process of reading a genetic sequence and identifying
differences in the sequence letters. This information helps researchers
understand how human differences are expressed at the gene level. We provide
universities and drug discovery companies the ability to outsource some or
all
of their research needs for genotyping. The pharmaceutical and drug discovery
segments of the outsourcing market continue to grow.
Our
Genotyping Services
We
provide services that range from sequencing and genotyping to the entire
process
of SNP discovery to large industrial customers. Contract genotyping is the
process of reading a genetic sequence and identifying differences in the
sequence letters. For example, in comparing diseased tissue with normal tissue,
we are able to see the differences in the sequence letters. This information
helps researchers understand how human differences are expressed at the gene
level. They can then search for and develop preventative treatment and effective
therapeutic courses to alleviate disease symptoms.
A
critical factor to the success of research and development of pharmacogenomics
assays is the ability to do high through-put genotyping. To this end, we
acquired certain assets from a Canadian company and formed our subsidiary
Ellipsis. Ellipsis has a Beckman-Coulter SNPstream that is capable of using
a
new 48-plex system, which allows for greater capacity of SNP testing at less
cost. We currently have a total of three SNPstream machines enabling us to
offer
testing services that can validate markers at high volumes, which is especially
useful in the later stages of drug and diagnostics development during large
clinical trials.
Ellipsis
also has an Illumina Beadstation 500G system, which also runs very high capacity
analysis. The Illumina system is 50 to 100 times higher capacity but is not
as
efficient from an expense perspective at lower numbers of SNPs making the
Illumina a more ideal research tool in screening whole genomes across hundreds
of thousands of SNPs.
These
platforms enable us to do a variety of testing of DNA samples for
pharmacogenomic efforts as well as generating revenue from projects for academic
and business organizations. Ellipsis has extensive experience working with
DNA
samples from a variety of sources and projects, including agricultural to
human
disease applications.
In
October 2005, we acquired Kenna Technologies. Kenna develops software and
related technologies for building computational models that mimic complex
biological systems. By acquiring Kenna, we also gained access to Kenna’s
BoneFusion and CellCycleFusion models, which simulate bone remodeling processes
and molecular pathways. These pathways are common targets of current cancer
therapies. Utilizing these models may lead to shorter drug development timelines
and thus reduced costs as they help in the design of optimal clinical trials.
Computational models, developed with our proprietary methods test multiple
complex scenarios of dosing, patient factors, disease progression over time,
genetic variation in drug response and can provide insight into the potential
outcomes of long term treatments which are too costly to test in human studies.
We are currently using these models with respect to the PT-401 Super EPO
project
and will use these and other models in our research and development of our
products. We also hired certain key employees of Kenna, including Drs. Barbara
Handelin and Tandy Herrin, who will support the clinical development of our
PT-401 with simulations to help design optimal clinical trials.
We
continue to pursue customers within the contract genotyping market. To date,
our
customers have come to us either through client referrals or our general
website. In the future, we plan to concentrate our genotyping services on
specific diseases, including cancer, neurological disorders, and heart disease.
By concentrating on specific diseases, we hope to develop an expertise that
will
attract customers in those areas requiring external assistance and additional
research capacity. Through this strategy, we will continue to build our
reputation as a reliable and cost effective supplier of high quality data.
INTELLECTUAL
PROPERTY
Trademarks
We
regard
our trademarks, copyrights, domain names, trade dress, trade secrets,
proprietary technologies, and similar intellectual property
as important to our success, and we rely on trademark, and copyright law,
trade-secret protection, and confidentiality and/or license agreements with
our
employees, customers, partners, and others to protect our proprietary rights.
We
have licensed in the past, and expect that we may license in the future,
certain
of proprietary rights, technologies or copyrighted materials, from third
parties
and we rely on those third parties to defend their proprietary rights,
copyrights and technologies.
We
claim common law trademark rights to the marks DNA
Print, DNA Witness, EURO-DNA and Ancestry by DNA.
Patent
Applications
We
have
filed claims for international and domestic patent protection. The patents,
if
issued, will help ensure protection of our bioinformatics platforms, analytical
software, genome maps and genetic classifiers in forensic, consumer products,
and pharmacogenomics applications. The most significant patent applications
cover the bioinformatics platforms and genome maps. Other applications describe
the mathematical process of finding complex genetic information and the actual
processes that find the gene variants responsible for specific complex genetic
traits.
Four
of
our patent applications, 'Compositions...Pigmentation', Single…..Patients,
Markers….Ancestry and 'Compositions...Statin', have entered National Phases and
are pending review and we believe, approval in the U.S. and designated
countries. The pigmentation patent is important because it includes the methods
and compositions for determining skin shade, eye color or any other pigmentation
application. Our Statin patent application includes the use of method for
determining a person's ability to respond favorably to a particular statin
drug,
not the class as a whole. We may also obtain data to support our claim for
all
statins and the use of our AIMs in in the development of the assay.
As
discoveries warrant, we will continue to apply for future additional patents.
Listed below are our current patent pending applications.
Pending
Patent Applications
|
Efficient
Methods and Apparatus for High-Throughput Processing of Gene Sequence
Data
|
US2003/0171875A1
|
| |
|
|
Methods
for the Identification of Genetic
|
US2003/0171878A1
|
|
Features
for Complex Genetics Classifiers
|
WO
03/048318
|
| |
|
|
Methods
and Apparatus for use in Genetics Classification Including Classification
Tree
|
WO
03/048999
|
|
Analysis
|
|
| |
|
|
Methods
and Apparatus for use in Complex Genetics Classification
|
WO
03/048372
|
|
Based
on Correspondence Analysis and Linear-Quadratic Analysis
|
|
| |
|
|
Composition
and Methods for the Inference
|
US10/156,995
|
|
Of
Pigmentation Traits
|
US60/346,303
|
| |
PCT/US02/16789
|
| |
AU2002/312112
|
| |
CA2,448,569
|
| |
EP02739467.5
|
| |
hk04109585.8
|
| |
JP2003/500216
|
| |
|
|
Compositions
and Methods for Inferring
|
US10/188,359
|
|
A
Response to a Statin
|
PCT/US02/20847
|
| |
AU2002/316485
|
| |
CA2,486,789
|
| |
EP02746794.3
|
| |
JP2003/509083
|
| |
|
|
Single
Nucleotide Polymorphisms and Combinations Thereof Predictive
of
|
PCT/US02/38345
|
|
Paclitaxel
Responsiveness in Cancer Patients
|
AU2002360452
|
| |
CA2,468,312
|
| |
EP02795709.1
|
| |
HK05102575.4
|
| |
JP2003-546736
|
| |
US60/334,310
|
| |
US60/410,363
|
| |
US10/496,605
|
| |
|
|
Compositions
and Methods for Inferring Ancestry
|
US10/644,594
|
| |
PCT/US03/26229
|
| |
US11/356,729
|
| |
US60/654,672
|
| |
|
|
Methylphenidate
Analogs and Methods of Use Thereof
|
US11/256063
|
| |
PCT/US2005/038030
|
| |
|
|
Methods,
Products and Treatments for Diabetes
|
US09/835752
(Granted)
|
| |
US10/833,581
|
| |
US10/870,342
|
| |
|
|
Anti-Glycated
CD59 Antibodies and Uses Thereof
|
US2004/019392
|
| |
|
|
Multiplex
Assays for Inferring Ancestry
|
331832-000045/WO
|
| |
|
|
Compositions
and Methods for Inferring an Adverse Effect in Response to a
Drug
|
US05/41326
|
| |
|
|
Markers
and Methods for Accurate Estimates of Human Ancestry
|
AU2003265572
|
| |
CA2,496,155
|
| |
EP03788685.0
|
| |
JP2005-502072
|
| |
US60/404,357
|
| |
US60/467,613
|
| |
US10/644,594
|
| |
US03/26229
|
| |
|
|
Methods
and Compositions for Inferring Eye Color
|
US60/544,788
|
| |
US60,548,370
|
| |
PCTUS05/04513
|
| |
|
COMPETITION
Numerous
entities are attempting to identify genomic variation predictive of specific
diseases and drug response and to develop products and services based on
these
discoveries. We face competition in these areas from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions
and
government and other publicly-funded agencies, both in the United States
and
abroad, most of which have substantially greater capital resources, research
and
development staffs, facilities, manufacturing and marketing experience,
distribution channels and human resources than do we. Our key competitors
include, but are not limited to, PPGx, Inc., a leading international developer
and supplier of research-based pharmacogenomics services and products which
recently announced the launch of its GeneTrials(TM) Bioinformatics Platform.
Also, large pharmaceutical companies have their own internal research and
development efforts that could surpass or eliminate our technology from the
market.
These
competitors may discover, characterize or develop important technologies
applying genomics before us or develop proprietary products and services
that
are more effective than those technologies that we develop. Additionally,
these
competitors may obtain regulatory approvals for their drugs and diagnostics
more
rapidly than we or our customers do, any of which could limit our ability
to
market effectively our products and services. If our patent applications
are not
awarded or if our competitors in the field of genetic research develop and
receive approval of patents that supersede our applications, we could be
forced
to cease the development of our products, services and
technologies.
Some
companies and governments are marketing or developing databases and informatics
tools to assist participants in the healthcare industry and academic researchers
in the management and analysis of genomic data. "Informatics tools" is a
term
used by scientists to describe software, computer programs or mathematical
programs that analyze data sets or collected information that is stored in
data
files. Such computer programs can take an apparently meaningless block of
numbers from a laboratory experiment and evaluate trends, look for statistical
relationships and group or segregate the numbers according to their levels
of
importance to the scientist. They are tools to evaluate information. Our
competitors have developed or plan to develop databases containing gene
sequence, genomic variation or other genomic information and are marketing
or
plan to market their data to pharmaceutical and biotechnology companies or
plan
to make freely available their databases. These entities include, but are
not
limited to:
| · |
Genaissance
Pharmaceuticals: a provider of pharmacogenomic support services,
including
high-throughput sequencing, this company was recently acquired by
another
company called Clinical Data, Inc.
|
| · |
Evolutionary
Bioinformatics: Bioinformatics and genomics consulting, specializing
in
comparative genomics, functional genomics and model
organisms.
|
| · |
deCODE
Genetics: Advanced bioinformatics and high throughput genotyping
facility
|
| · |
Celera
Genomics: Drug discovery systems and
services.
|
| · |
Cellular
Genomics: A biotechnology company focused on the discovery and validation
of novel drug targets.
|
| · |
Correlogic
Systems: Developing tools and processes for proteomic and genomic-based
clinical diagnostic systems and new drug
discovery.
|
| · |
Epoch
Biosciences: Technologies useful in genetic research, diagnostics,
drug
development, infectious disease detection, prenatal testing and population
screening to assess risk of disease or to predict response to
drugs.
|
| · |
Eragen
Biosciences: Designs, develops, and markets functional genomic and
drug/diagnostic discovery platform products, and technologies to
the
pharmaceutical, biotechnology and agro-biology
industries.
|
In
addition, numerous pharmaceutical and biotechnology companies, either alone
or
in collaboration with our competitors, are developing genomic research programs
that involve the use of information that can be found in these databases.
Genomic
technologies have undergone, and are expected to continue to undergo, rapid
and
significant change. Our future success will depend in large part on maintaining
a competitive position in the genomics field. Others may rapidly develop
new
technologies that may result in our test or technologies becoming obsolete
before we recover the expenses that we incur in connection with the development
of these products. Our developed proprietary products and services could
become
obsolete if our competitors offer less expensive or more effective drug
discovery and development technologies, including technologies that may be
unrelated to genomics.
We
also
compete in the forensic DNA testing market, consumer DNA products market
and
contract services outsourcing market. We have introduced new products in
the
last year and improved our flagship product, ANCESTRYbyDNA™, part of the
consumer DNA market, by upgrading it from 76 marker sets to 175 marker sets.
Additionally, we have increased our ability to include DNA sampling from
Northern European, Middle Eastern, Mediterranean and IndoEuropean by introducing
EURO-DNA™ 1.0. However, sales have not improved as dramatically as expected
perhaps due to an increase in pricing from $199 to $219 for ANCESTRYbyDNA™ and a
combined price of $399 for inclusion of a EURO-DNA™ test along with the
ANCESTRYbyDNA™ test.
In
the
consumer market, which is mainly supported by genealogy enthusiasts, we remain
concerned that our potential reward from developing products will be limited
by
a sudden lack of interest. Our competitors include companies like:
o
Sorenson Genetics- One of the larger suppliers of paternity and ancestry
testing.
o
DNA
Testing Center, Inc. - A testing service for mitochondrial, paternity and
y
chromosome testing for the consumer market and forensics market as
well.
Either
of
these firms or other companies could create a product that is competitive
to our
products, and reduce our current sales volumes.
Similarly,
we have competitors in the field of forensics that includes the following
companies and agencies:
o
Orchid-
The original inventors of Single Nucleotide Polymorphismanalysis machines
and
SNP technologies through its Orchid Cellmark division is considered one of
the
premier independent DNA testing laboratories in forensics. This competitor
not
only has the scientific background but the financial means and expertise
to
create a product that directly competes with ours in the forensics
market.
o
FSS- A
United Kingdom based firm that processes nearly 85% of the UK's criminal
DNA
samples also has the ability to create a product that is competitive to our
products and is exploring entering the U.S. market.
o
Bode
Systems, A division of Choicepoint- A significant competitor that, like FSS
and
Orchid has the ability to create and market a similar product to ours and
eliminate us from the forensics market.
o
FBI,
Quantico Laboratories- The Federal Bureau of Investigation (FBI) has significant
development resources and we believe they are contracting with Orchid and
others
to develop identity tests that will help them identify potential DNA donors
from
crime scene DNA. The bureau also invests federal research money on its own
research to develop testing processes and procedures that it would approve
for
law enforcement.
o
The
National Institutes of Justice regularly provides grants to local and state
police crime laboratories and University researchers that are competitive
to our
technology. We have applied for two grants and will continue to apply but
have
been rejected. In each application, despite the rejection, we have developed
the
proposed technology and brought it to the forensics market.
Forensic
DNA and consumer DNA technologies have undergone, and are expected to continue
to undergo, rapid and significant change. Our future success will depend
in
large part on maintaining a competitive position in these fields. Others
may
rapidly develop new technologies that may result in our tests or technologies
becoming obsolete before we recover the expenses that we incur in connection
with the development of these products. Our products and services could become
obsolete if our competitors offer less expensive or more effective discovery
and
development technologies, including technologies that may be unrelated to
genomics.
Employees
As
of
December 31, 2005, we had twenty full-time employees. None of our employees
are
represented by a labor union. We consider our relations with our employees
to be
good. We plan to add additional staff as needed to handle all phases of our
business.
RISKS
Before
deciding to invest in us or to maintain or increase your investment, you
should
carefully consider the risks described below, in addition to other available
information. Each of the following risks could harm our business, financial
condition and results of operations. These risks could cause the trading
price
of our common stock to decline and you could lose all or part of your
investment.
RISKS
RELATED TO OUR FINANCIAL CONDITION AND BUSINESS
REGULATORY
OVERSIGHT OF OUR PRODUCTS AND SERVICES MAY INCREASE OUR COSTS TO MARKET OUR
PRODUCTS AND SERVICES AND ADVERSELY AFFECT OUR ABILITY TO MARKET OUR PRODUCTS
AND SERVICES.
Currently,
there is limited Food and Drug Administration, or FDA, regulation of genetic
tests. Within the field of personalized health and medicine, governmental
and
other entities may enact patient privacy and healthcare laws and regulations
that may limit the generation and use of genomic variation data. "Genomic
variation data" is the information obtained when scientists search the gene
for
differences across the entire human genome for changes and variations.
To
the
extent that FDA laws and regulations limit the use of our products and services
or impose additional costs on our customers, we may be unable to market
effectively our products and services and we may not generate sufficient
revenue
to sustain our operations. Furthermore, we may be directly subject to
regulations as a provider of diagnostic information. A diagnosis is the
evaluation of a patient or a sample to determine what the status of the patient
might be. The information that results from this evaluation is called
`diagnostic information' and would include such information as height, weight,
sex, age, blood pressure, sugar levels and many other pieces of data.
The
Secretary's Advisory Committee on Genetic Testing, an advisory panel to the
Secretary of the U.S. Department of Health and Human Services, has recommended
that the FDA expand its regulation of genetic testing to require FDA approval
for all new genetic tests and labeling of genetic tests. If the FDA adopts
this
recommendation, it may require us, or our customers, to apply for FDA approval
as a prerequisite to marketing genetic tests that incorporate our intellectual
property. If the FDA were to deny any application of this kind, it could
adversely affect our business, and we may be unable to generate sufficient
revenue to sustain our operations.
To
the
extent that government regulations restrict the sale of our products and
services or impose other costs, we may be unable to provide our products
and
services to our customers on terms sufficient to recover our
expenses.
OUR
SUCCESS WILL DEPEND, IN PART, ON HOW RAPIDLY THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRY IMPLEMENTS GUIDANCE FROM THE U.S. DEPARTMENT OF HEALTH
AND THE FDA REGARDING A POTENTIAL EXPANSION OF REGULATION OF OUR INDUSTRY.
WITHOUT THIS IMPLEMENTATION BY THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRY,
WE
MAY BE UNABLE TO MARKET EFFECTIVELY OUR TESTS AND SERVICES, AND WE MAY NOT
GENERATE SUFFICIENT REVENUE TO SUSTAIN OUR OPERATIONS.
On
November 3, 2003, the FDA issued draft guidance that encouraged drug and
biologic developers to conduct pharmacogenomic tests during drug development
and
clarified how the FDA will evaluate the resulting data. "Pharmacogenomic
tests"
are clinical laboratory tests of all kinds to determine whether a drug is
working or not working on a patient that is experiencing a particular illness
or
expressing a disease. It has only been recently that genetic scientists have
been able to link genetic testing to the performance of a drug. The term
is
often used within the pharmaceutical industry to describe the testing of
individuals for their genetic influences on the effectiveness of a drug,
or more
precisely, whether something in a person's genes that would either enhance
or
prevent the treatment of that individual's disease with a particular drug.
The
FDA
guidance provides specific criteria and recommendations on the submission
of
pharmacogenomic data in connection with Investigational New Drug Applications,
New Drug Applications and Biological License Applications. Before any company
or
individual can treat a single human patient with a new chemical entity, often
referred to as a NCE, or a new biological entity, referred to as a NBE,
scientists must first prove that the potential drug is safe within existing
treatment regimes. For example, new chemical entities used to treat cancer
might
be allowed to be much more toxic to other cells in the body than would a
treatment for other less lethal diseases. Scientists file for permission
to the
FDA to treat human patients and package all the information into an application
with the FDA called the `Investigational New Drug Application' or IND.
The
draft
FDA guidance includes information on the type of data needed and how the
FDA
will or will not use such data in regulatory decisions. The FDA asked for
voluntary submissions of research information in order to gain experience
as the
field of pharmacogenomics evolves. In addition, the FDA held a workshop in
November 2003 to discuss its draft guidance and stated that the agency plans
in
the near future to issue final guidance on the co-development of a
pharmacogenomic test and drug. Our success will depend, in part, on how rapidly
the pharmaceutical and biotechnology industry implements the guidance and,
accordingly, the validity of our test and services as a basis for identifying
genomic variation and for correlating drug response with genomic variation.
Without this implementation by the pharmaceutical and biotechnology industry,
we
may be unable to market effectively any test we may have as well as any of
our
services, and we may not generate sufficient revenue to sustain our
operations.
PUBLIC
OPINION ON ETHICAL ISSUES RELATED TO THE CONFIDENTIALITY AND APPROPRIATE
USE OF
GENETIC TESTING COULD REDUCE THE POTENTIAL MARKETS FOR OUR PRODUCTS AND
SERVICES, WHICH COULD PREVENT US FROM GENERATING SUFFICIENT REVENUE TO SUSTAIN
OUR OPERATIONS.
Public
opinion on ethical issues related to the confidentiality and appropriate
use of
genetic testing results may influence governmental authorities to call for
limits on, or regulation of the use of, genetic testing. In addition,
governmental authorities or other entities may call for limits on, or regulation
of the use of genetic testing or prohibit testing for genetic predisposition
to
certain conditions, particularly for those that have no known cure. The
occurrence of any of these events could reduce the potential markets for
our
products and services, which could prevent us from generating sufficient
revenue
to sustain our operations.
For
example, the FDA has approved a medication for use in African Americans called
BilDil that was developed by a pharmaceutical company called NitroMed. Recently,
articles have appeared accusing the FDA and NitroMed of `racial discrimination'
and claiming that no drugs should be developed using genetic testing that
might
separate out individuals by `race, color or creed' without regard to the
benefit
which might be caused for the African American patient. According to such
critics, the potential harm in the form of increased discrimination far
outweighs the benefits. Several noteworthy genetic scientists have also voiced
their opinions that our technology and technologies similar to those developed
by NitroMed and others are discriminating and should not be developed or
approved by the Federal, State or local governments.
IF
WE DO
NOT SUCCESSFULLY DISTINGUISH AND COMMERCIALIZE OUR PRODUCTS AND SERVICES,
WE
WILL NOT ATTRACT A SUFFICIENT NUMBER OF CUSTOMERS. ACCORDINGLY, WE MAY BE
UNABLE
TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS OR GENERATE REVENUE SIGNIFICANT
ENOUGH TO SUSTAIN OUR OPERATIONS.
Numerous
entities are attempting to identify genomic variation predictive of specific
diseases and drug response and to develop products and services based on
these
discoveries. We face competition in these areas from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions
and
government and other publicly-funded agencies, both in the United States
and
abroad, most of which have substantially greater capital resources, research
and
development staffs, facilities, manufacturing and marketing experience,
distribution channels and human resources than do we. Also, large pharmaceutical
companies have their own internal research and development efforts that could
surpass or eliminate our technology from the market. One of our key competitors
is PPGx, Inc., a leading international developer and supplier of research-based
pharmacogenomics services and products which recently announced the launch
of
its GeneTrials(TM) Bioinformatics Platform.
Our
competitors may discover, characterize or develop important technologies
applying genomics that are more effective than those technologies which we
develop. Additionally, these competitors may obtain regulatory approvals
for
their drugs and diagnostics more rapidly than we do, which could limit our
ability to market effectively our products and services. If our patent
applications are not awarded or if our competitors in the field of genetic
research develop and receive approval of patents that supersede our
applications, we could be forced to cease the development of our products,
services and technologies.
Some
companies and governments are marketing or developing a number of databases
and
informatics tools to assist participants in the healthcare industry and academic
researchers in the management and analysis of genomic data. "Informatics
tools"
is a term used by scientists to describe software, computer programs or
mathematical programs that analyze data sets or collected information that
is
stored in data files. Such computer programs can take an apparently meaningless
block of numbers that are recorded from a laboratory experiment and evaluate
trends, look for statistical relationships and group or segregate the numbers
according to their levels of importance to the scientist. Our competitors
have
developed or plan to develop databases containing gene sequence, genomic
variation or other genomic information and are marketing or plan to market
their
data to pharmaceutical and biotechnology companies or plan to make freely
available their databases.
WE
ALSO
FACE SERIOUS COMPETITION FROM COMPETITORS IN THE FORENSIC DNA TESTING MARKET,
CONSUMER DNA PRODUCTS MARKET AND THE CONTRACT SERVICES OUTSOURCING MARKETS.
AND
IF WE ARE UNABLE TO COMPETE IN THESE MARKETS, WE WILL NOT GENERATE REVENUES
SIGNIFICANT ENOUGH TO SUSTAIN OUR OPERATIONS.
We
remain
skeptical that the consumer market for our products, which is mainly supported
by genealogy enthusiasts, will remain strong enough to justify significant
expenditures to develop new products. It is possible that the application
of
genetic testing to genealogy is a passing fad and that public interest in
genetic genealogy testing will substantially decrease.
ALTHOUGH
MANY OF OUR COMPETITORS USE SIMILAR TECHNOLOGIES, THEIR APPROACH TO DATA
ANALYSIS MIGHT BE COMPLETELY DIFFERENT AND MORE EFFICIENT THAN OURS. THIS
MAY
CAUSE CONSUMERS TO CHOOSE OUR COMPETITOR'S PRODUCTS AND SERVICES OVER OURS
AND
FORCE US TO CHANGE OUR PRODUCTS AND SERVICES TO THE MORE EFFICIENT FORM OF
DATA
ANALYSIS OF OUR COMPETITORS.
We
evaluate the mixture of genetic inheritance within individuals and relate
that
information to biological information. Another approach to finding similar
information is to evaluate large groups of individuals in `pools' of DNA
and
look for differences or similarities amongst the data. Our approach may prove
to
be too cumbersome for the industry to adopt, and the industry may not want
to
accept it because it is `too personal', meaning that overall `generic'
descriptors might be more immediately valuable to the industry than knowing
whether or not a single individual will respond favorably to a medication
treatment. The `pooled' approach is more often the approach that many
pharmaceutical companies and our competitors practice. Additionally, our
technology depends upon looking at individuals within a population pool and
therefore projecting the results of many individual samples upon a general
population that may not be clearly identified. Our competitors rely upon
self-reporting descriptors such as `African American', `Caucasian' or `Hispanic'
to pool their DNA samples. We do not presuppose the reported identity of
an
individual but rather look at their inherited genetic markers that tell us
what
group to associate them with. This approach may not be accepted by the industry
and a pooled method, although not as accurate, may become the standard. This
would significantly impact our ability to promote, sell, license of further
develop our products, services or technologies within any of our current
markets.
WE
HAVE
HAD LOSSES SINCE OUR INCEPTION WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO
ACHIEVE OUR BUSINESS OBJECTIVES. WE MAY NEVER BE ABLE TO REDUCE THESE LOSSES,
WHICH WILL REQUIRE US TO SEEK ADDITIONAL DEBT OR EQUITY FINANCING THAT MAY
NOT
BE AVAILABLE TO US.
We
incorporated under the laws of the State of Utah on January 3, 1983 as Lexington
Energy, Inc. We have incurred losses and experienced negative operating cash
flow since our formation. For the year ended December 31, 2005, we had a
net
loss of $8,715,852 and a working capital deficit of $7,577,917. We expect
to
continue to incur significant expenses. Our operating expenses have been
and are
expected to continue to outpace revenues and result in significant losses
in the
near term. We may never be able to reduce these losses, which will require
us to
seek additional debt or equity financing. If such financing is available,
you
may experience significant additional dilution.
WE
CONTINUE TO BE A DEVELOPMENTAL STAGE ENTERPRISE COMPANY AND WE DO NOT KNOW
WHEN
OUR PHARMACOGENOMICS PRODUCTS WILL FINISH THEIR DEVELOPMENT.
We
continue to devote substantially all of our efforts to establishing our business
products, and our principal operations have not commenced yet. We are still
in
the research and development phase of our pharmacogenomics product/services
and
have a few years prior to any of these products being developed.
OUR
INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS
A
GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In
their
report dated February 24, 2006, our independent registered public accounting
firm has expressed doubt about our ability to continue as a going concern
in our
financial statements for the years ended December 31, 2005 and 2004. The
auditors raised concerns about our ability to continue as a going concern
as a
result of recurring losses from operations, a working capital deficit, and
our
need for a significant amount of capital financing to proceed with our business
plan. Our ability to continue as a going concern is subject to our ability
to
generate a profit and/or obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our securities,
increasing sales or obtaining loans and grants from various financial
institutions where possible.
WE
NEED
IMMEDIATE FUNDS AND MAY NOT BE ABLE TO OBTAIN ANY ADDITIONAL FINANCING IN
THE
AMOUNTS OR AT THE TIMES THAT WE MAY REQUIRE THE FINANCING. ADDITIONALLY IF
WE
OBTAIN FINANCING, IT MAY NOT BE ON ACCEPTABLE TERMS. WE WILL HAVE TO CURTAIL
OUR
BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING.
We
may
need immediate funds and may not be able to obtain any additional financing
in
the amounts or at the times that we may require the financing or, if we do
obtain any financing, that it would be on acceptable terms because of the
following:
-
we have
limited assets to pledge as security for the loan;
-
we are
in poor financial condition; and
-
we may
be viewed as a high market risk.
In
addition, we have entered into an Investment Agreement with Dutchess Private
Equities Fund, II, L.P. Dutchess has committed to purchase our common stock
on a
monthly basis up to an aggregate purchase price of $35 million over a two-year
period. The Dutchess Agreement requires us to put stock to Dutchess each
time we
raise funds. If Dutchess were to sell the stock we put to them, it will likely
have a depressive effect on the market price of our common stock. This decrease
in our market price may hinder our ability to obtain necessary funding from
certain sources, including obtaining additional funding from the sale of
our
securities or obtaining loans and grants from various financial institutions
where possible.
Our
failure to obtain sufficient additional financing could result in the delay
or
abandonment of some or all of our development, expansion and expenditures,
which
could harm our business and the value of our common stock.
WE
MAY
NOT HAVE ADEQUATE PATENT PROTECTION AND CONFIDENTIALITY AGREEMENTS FOR OUR
PROPRIETARY TECHNOLOGY. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
THERE IS A RISK THAT THEY WILL BE INFRINGED UPON OR THAT OUR TECHNOLOGY
INFRINGES UPON ONE OF OUR COMPETITOR'S PATENTS. AS A RESULT, WE MAY EXPERIENCE
A
LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY HARMED.
To
the
extent possible, we anticipate filing patent applications for protection
on
future products that we develop. It is possible that patents we apply for
may
not be issued and that any current or future patents will not afford us
commercially significant protection of our products or that we will not have
adequate resources to enforce our patents. Inasmuch as we intend to sell
our
products in foreign markets, we also intend to seek foreign patent protection
for our products and technologies. The patent laws of other countries may
differ
from those of the United States as to patentability of our products and
technologies, and the degree of protection afforded. Our products may infringe
on the patents of others, and we may not have the financial or other resources
necessary to successfully defend a claim of violation of proprietary rights.
We
also rely on confidentiality and nondisclosure arrangements with our employees
and entities we do business with. These agreements may not provide us with
meaningful protection.
IF
WE ARE
UNABLE TO RETAIN THE SERVICES OF MESSRS. RICHARD GABRIEL, TONY FRUDAKIS AND
HECTOR GOMEZ, WE MAY NOT BE ABLE TO CONTINUE OPERATIONS.
Our
success depends to a significant extent upon the continued service of Mr.
Richard Gabriel, our President and Chief Executive Officer, Dr. Tony Frudakis,
our Founder and Chief Scientific Officer, and Dr. Hector Gomez, our Chairman
of
the Board and Chief Medical Officer. We have employment agreements in place
with
Messrs. Gabriel, Frudakis, and Gomez. We do not maintain key-man insurance
on
the lives of Messrs. Gabriel, Frudakis, and Gomez. If Messrs. Gabriel, Frudakis,
and Gomez were to resign, the loss could result in loss of sales, delays
in new
product development and diversion of management resources, and we could face
high costs and substantial difficulty in hiring qualified successors and
could
experience a loss in productivity while any such successor obtains the necessary
training and experience. In addition, in order to successfully implement
and
manage our business plan, we are dependent upon, among other things,
successfully recruiting qualified personnel who are familiar with the specific
issues facing the deciphering of complex genetic traits. In particular, we
must
hire and retain experienced management personnel to help us continue to grow
and
manage our business, and skilled genetic technicians to further our research
and
development efforts. Competition for qualified personnel is intense. If we
do
not succeed in attracting new personnel or in retaining and motivating our
current personnel, our business could be harmed.
RISKS
RELATED TO OUR COMMON STOCK
OUR
COMMON STOCK IS SUBJECT TO "PENNY STOCK" RULES OF THE SEC, AND THE TRADING
MARKET IN OUR STOCK IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME
AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, the rules
require:
-
that a
broker or dealer approve a person's account for transactions in penny stocks;
and
-
the
broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be
purchased.
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
-
obtain
financial information and investment experience objectives of the person;
and
-
make a
reasonable determination that the transactions in penny stocks are suitable
for
that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny
stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prepared by the Commission relating to the penny stock
market, which, in highlight form:
-
sets
forth the basis on which the broker or dealer made the suitability
determination; and
-
that
the broker or dealer received a signed, written agreement from the investor
prior to the transaction.
In
addition, unless you have had an account with your brokerage firm for more
than
one year, or you have previously bought three different penny stocks from
that
firm, your brokerage firm must send you a written statement for you to sign
that
accurately describes your financial situation, your investment experience,
and
your investment goals, and that contains a statement of why your firm decided
that penny stocks are a suitable investment for you. The firm also must get
your
written consent to buy the penny stock.
If
penny
stocks are sold to you in violation of federal or state securities laws,
you may
be able to cancel your purchase and get your money back. If the stocks are
sold
in a fraudulent manner, you may be able to sue the persons and firms that
caused
the fraud for damages. If you have signed an arbitration agreement, however,
you
may have to pursue your claim through arbitration.
WE
MAY
NOT HAVE SUFFICIENT SHARES AVAILABLE TO FULLY ACCESS THE EQUITY LINE WITH
DUTCHESS AND MAY NEED TO SEEK ADDITIONAL CAPITAL TO MEET OUR WORKING CAPITAL
NEEDS.
We
may
only issue a put to Dutchess if we have registered the shares of common stock.
During March 2006, we intend to file a prospectus to register 600,000,000
shares
of common stock that we may issue pursuant to the equity line if the
Registration Statement is declared effective by the SEC. As of February 28,
2006
we have already issued 129,214,167 shares pursuant to prior registration
statements. We have assumed that we will not issue more than 600,000,000
shares
in addition to the 233,285,833 we already registered pursuant to the exercise
of
our put right under the Investment Agreement, although the number of shares
that
we will actually issue pursuant to that put right may be more than or less
than
600,000,000, depending on the trading price of our common stock. We currently
have no intent to exercise the put right in a manner that would result in
our
issuance of more than 600,000,000 shares, but if we were to exercise the
put
right in that manner, we would be required to file a subsequent registration
statement with the Securities and Exchange Commission and for that registration
statement to be deemed effective prior to the issuance of any such additional
shares.
If
we can
not raise sufficient funds pursuant to our Investment Agreement with Dutchess,
for our capital requirements, we will need to seek additional funding which
may
not be available on terms acceptable to us or at all.
DUTCHESS
MAY SHORT SELL OUR STOCK DURING THE PERIODS WE ISSUE A PUT WHICH MAY CAUSE
OUR
STOCK PRICE TO DECREASE.
Pursuant
to the Investment Agreement, Dutchess has the right to short sell the amount
of
stock we expect to issue to them during the period we issue a put. If Dutchess
actually sells our stock short, our stock price may decrease. If our stock
price
decreases, you may lose some or all of your investment.
EXISTING
STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF SECURITIES
PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS.
The
sale
of shares pursuant to our Investment Agreement with Dutchess will have a
dilutive impact on our stockholders. As a result, our net income per share,
if
any, could decrease in future periods, and the market price of our common
stock
could decline. In addition, the lower our stock price at the time we exercise
our put option, the more shares we will have to issue to Dutchess to draw
down
on the full equity line with Dutchess. If our stock price decreases, then
our
existing stockholders would experience greater dilution.
DUTCHESS
WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK,
WHICH
MAY CAUSE OUR STOCK PRICE TO DECLINE.
The
common stock to be issued under our agreement with Dutchess will be purchased
at
a 4% discount to the average of the two lowest closing bid prices of our
common
stock during the five trading days after our notice to Dutchess of our election
to exercise our put right. These discounted sales could cause the price of
our
common stock to decline and you may not be able to sell our stock for more
than
you paid for it.
OUR
STOCK
PRICES HAVE BEEN VOLATILE, AND THE FUTURE MARKET PRICE FOR OUR COMMON STOCK
IS
LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET FOR OUR SHARES
WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU TO
SELL
OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The
public market for our common stock has historically been very volatile. Any
future market price for our shares is likely to continue to be very volatile.
This price volatility may make it more difficult for you to sell shares when
you
want at prices you find attractive. We do not know of any one particular
factor
that has caused volatility in our stock price. However, the stock market
in
general has experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies.
Broad market factors and the investing public's negative perception of our
business may reduce our stock price, regardless of our operating performance.
Further, the market for our common stock is limited, and a larger market
may
never develop or be maintained. Market fluctuations and volatility, as well
as
general economic, market and political conditions, could reduce our market
price. As a result, this may make it difficult or impossible for you to sell
our
common stock.
We
currently lease an operating facility at 900 Cocoanut Avenue, Sarasota, Florida.
This lease expires May 31, 2006 with a three-month renewal option. The lease
requires monthly rent of approximately $5,765. The building consists of
approximately 4,000 square feet of laboratory and office space. We also lease
an
operating facility at 4655 Meade St., Suite 300, Richmond, California. This
lease expires August 1, 2006. The lease requires monthly rent of approximately
$5,547 for approximately 3,000 square feet of laboratory and office space.
We
also lease an operating facility at 700 Bay Street, Suite 2101, Toronto,
Canada.
This lease expires April 30, 2008 and has a three-year renewal option. The
lease
requires a monthly rent of approximately $6,300 CDN (approximately $5,355
USD)
for approximately 2,800 square feet of laboratory and office space. All of
these
facilities are in good condition.
On
October 27, 2003, we filed suit in the Circuit Court of the Twelfth Judicial
Circuit of Florida in and for Sarasota County, Florida, Civil Division moving
for an emergency order requiring impoundment of any and all computers and
associated materials of one of our former employees. On October 28, 2003,
the
Circuit Court Judge granted the order. The order was carried out on the same
day.
Our
Complaint alleges that a former employee inappropriately took confidential
company materials and then disclosed or threatened to disclose the information.
The Complaint seeks return of the property, a permanent injunction against
further and future disclosures by the former employee, attorney's fees and
related costs.
On
December 19, 2003, the former employee filed an Answer, Affirmative Defenses,
and Counterclaim with the Court generally denying the allegations of our
claim.
In addition, the Defendant counterclaimed and sued us for breach of an
Employment Agreement, based on a purported failure to pay certain health
benefits, and stock options.
On
January 9, 2004, the Court granted our Motion to Inspect, Examine and Download
Information from the Impounded Computer, subject to certain limitations designed
to protect the confidentiality of any information contained on the
computer.
The
Defendant withdrew his objection to our review of documents downloaded from
his
seized home computer. Based upon our review of the documents and report,
we
advised the Court that we believed these documents contained our confidential,
proprietary and trade secret information. At that time the Court ordered
a
preliminary mediation to discuss resolution of the matter. We participated
in
the mediation, but did not reach a resolution with the
Defendant. Therefore, we are proceeding with discovery.
On
July
8, 2005, a former consultant of ours, Lonnie Bookbinder, filed suit in the
Circuit Court of the Twelfth Judicial Circuit of Florida in and for Sarasota
County, Florida, Civil Division. The complaint, styled Bookbinder v.
DNAPrint Genomics, Inc., Richard Gabriel, Hector Gomez and GenBiomics, LLC,
names as defendants us, along with two of our directors and a dissolved limited
liability company in which two of our directors were members. The
complaint sought damages arising out of services Mr. Bookbinder claims to
have
provided on our behalf. We deny any liability to Mr. Bookbinder. We
filed and prevailed on a Motion to Dismiss the complaint because we believed
it
did not state a claim. Plaintiff then filed an Amended Complaint. We
have a Motion to Dismiss pending on the same grounds as that previously
filed. If our Motion to Dismiss is unsuccessful, we intend to defend
the litigation vigorously.
None.
Our
common stock is eligible for quotation on the OTC Bulletin Board. Set forth
below is a table summarizing the high and low bid quotations for our common
stock during its last two fiscal years.
|
QUARTER
|
HIGH
BID
|
LOW
BID
|
|
1st
Quarter 2004
|
1.400
|
0.720
|
|
2nd
Quarter 2004
|
1.000
|
0.500
|
|
3rd
Quarter 2004
|
0.600
|
0.260
|
|
4th
Quarter 2004
|
0.400
|
0.100
|
|
1st
Quarter 2005
|
0.260
|
0.020
|
|
2nd
Quarter 2005
|
0.510
|
0.034
|
|
3rd
Quarter 2005
|
0.202
|
0.013
|
|
4th
Quarter 2005
|
0.044
|
0.002
|
The
above
table is based on Over-The-Counter quotations. These quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions, and
may
not represent actual transaction.
We
have
never paid any cash dividends. The payment of dividends, if any, in the future
is within the discretion of our Board of Directors, and will depend upon
our
earnings, capital requirements and financial condition, and other relevant
factors. Management does not expect to declare dividends in the foreseeable
future.
Sales
of Unregistered Securities
During
the fourth quarter of 2005, we issued a total of 709,754 shares of our common
stock in exchange for services valued at approximately $15,201. These shares
were issued to consultants, who are sophisticated investors. We believe the
transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 promulgated thereunder. The offering was not
underwritten.
During
the fourth quarter of 2005, we issued a total of 2,928,043 shares of our
common
stock in exchange for compensation valued at approximately $41,870. These
shares
were issued to an employee, who is a sophisticated investor. We believe the
transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 promulgated thereunder. The offering was not
underwritten.
During
the fourth quarter of 2005, we issued a total of 1,499,998 shares of our
common
stock in exchange for all of the outstanding stock of Kenna. These shares
were
valued at approximately $22,500. These shares were issued to Kenna shareholders,
who are sophisticated investors. We believe the transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The offering was not underwritten.
During
the fourth quarter of 2005, we issued a total of 6,500,000 shares of our
common
stock in exchange for certain assets of a Canadian company formerly named
Ellipsis Biotherapeutics Corporation. These shares were valued at approximately
$149,500. These shares were issued to the shareholder of a Canadian company
formerly named Ellipsis Biotherapeutics Corporation, who is a sophisticated
investor. We believe the transaction was exempt from registration under Section
4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The
offering was not underwritten.
During
the fourth quarter of 2005, we issued 2,000,000 shares of our common stock
as in
exchange for services valued at approximately $34,000. These shares were
issued
to an investor relations firm, who is a sophisticated investor. We believe
the
transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 promulgated thereunder. The offering was not
underwritten.
During
the fourth quarter of 2005, we exercised put notices in accordance with our
Investment Agreement with Dutchess and received $1,114,971 of cash proceeds
for
which we have issued 63,193,359 shares of our common stock to
Dutchess. We believe the transaction was exempt from registration under Section
4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The
offering was not underwritten.
During
the fourth quarter of 2005, we issued a total of 35,940,814 shares of our
common
stock in conjunction with the convertible debenture and warrants with La
Jolla
who is a “sophisticated investor”. We believe the transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The offering was not underwritten.
During
the fourth quarter of 2005, we issued a total of 960,902 shares of our common
stock for the conversion of 1,278 of preferred stock by a “sophisticated
investor”. We believe the transaction was exempt from registration under Section
4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The
offering was not underwritten.
On
October 21, 2005, we issued to Dutchess a promissory note in the amount of
$1,380,000 for a purchase price of $1,150,000. In connection with the promissory
note we issued to Dutchess a non-interest bearing convertible debenture in
the
amount of $330,000 payable on October 21, 2010. The shares of common stock
underlying the debenture carry piggyback registration rights. The debenture
may
be converted at Dutchess’ option at a conversion price equal to the lesser of
75% of the lowest closing bid price during the 15 trading days prior to the
conversion date or $0.013. We believe the transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The offering was not underwritten.
On
December 22, 2005, we issued to Dutchess a promissory note in the amount
of
$1,380,000 for a purchase price of $1,150,000. In connection with the promissory
note we issued to Dutchess a non-interest bearing convertible debenture in
the
amount of $330,000 payable on December 15, 2010. The shares of common stock
underlying the debenture carry piggyback registration rights. The debenture
may
be converted at Dutchess’ option at a conversion price equal to the lesser of
75% of the lowest closing bid price during the 15 trading days prior to the
conversion date or $0.022. We believe the transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The offering was not underwritten.
During
2005, we granted a five-year warrant for 5,714,286 shares of our common stock
for consulting services performed. This warrant has an exercise price of
$0.0175
and was valued at $95,306 based upon the Black-Scholes model. This will be
expensed over the service period of the agreement. During 2005, we recorded
$23,827 of expense related to this warrant. We believe the transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933
and
Rule 506 promulgated thereunder. The offering was not underwritten.
During
2005, we granted a five-year warrant for 370,370 shares of our common stock
for
consulting services performed. This warrant has an exercise price of $0.27
and
was valued at $139,030 based upon the Black-Scholes model. This was expensed
over the service period of the agreement. During 2005, we recorded $139,030
of
expense related to this warrant. We believe the transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The offering was not underwritten.
During
2005, warrants to purchase 5,055,102 shares of common stock were granted
to
Athena as a fee for their services at a range of exercise prices from $0.0159
to
0.138 and expire five years from the grant date. These warrants were valued
at
$108,371 based upon the Black-Scholes model. As of December 31, 2005, none
of
these warrants were exercised. These were recorded as stock issuance costs.
We
believe the transaction was exempt from registration under Section 4(2) of
the
Securities Act of 1933 and Rule 506 promulgated thereunder. The offering
was not
underwritten.
The
following discussion and analysis should be read in conjunction with the
balance
sheet as of December 31, 2005 and the financial statements as of and for
the
years ended December 31, 2005 and 2004 included with this Form 10-KSB.
SUMMARY
Although
we have been in existence for a number of years, management's efforts to
develop
our business have not yet resulted in significant revenues. We have chosen
to
focus on increasing sales volume in the consumer and forensic markets while
continuing to develop products for introduction to the pharmacogenomics market.
We intend to support research and development as a vital component of our
overall growth strategy. Until (i) potential customers are familiar with
our
technology and products, which will come from continued research and development
and proven market use, and (ii) we introduce our pharmacogenomics products,
it
is unlikely that we will generate significant revenue.
The
following discussion of our historical financial results should be read against
this background.
REVENUES
AND COST OF SALES
For
the
years ended December 31, 2005 and 2004, revenues were $1,275,503 and $785,632,
respectively. A $489,871 increase in revenues from the prior year is a 62%
increase that was a result of the sales of our ANCESTRYbyDNA™ increasing
approximately $284,000, our paternity testing increasing approximately $79,000.
Our EURO-DNA™ 1.0 was introduced to the general public in the fourth quarter of
2004 and contributed approximately $127,000 of revenue over 2004. Additionally,
we recorded approximately $40,000 of revenues from our mtDNA™ product, $9,000 of
revenues from our DNAWitness-MitoTM
and
$23,000 of revenues from our Y-chromosome products which were added to our
product line when we acquired Trace Genetics. We also had $17,000 of other
revenue during 2005. These increases in revenue were offset by a decrease
in
genotyping of $76,000 and DNAWitness™ of $13,000.
In
addition to the revenues recognized in the accompanying statement of operations,
we also have recorded deferred revenues of $195,018 as of December 31 2005.
Deferred revenue resulted mainly from our ancestry client testing that was
not
complete as of December 31, 2005. These amounts will be recognized as revenue
during 2006.
During
2005 compared to 2004, our sales of ANCESTRYbyDNATM
increased approximately $284,000. This is due to increased awareness and
interest in genealogy, increased advertising in several markets and increased
press coverage during 2005. When we introduced our version 2.5 of
ANCESTRYbyDNATM
during
2004, we increased the pricing which has resulted in a lower volume of product
sold, but at a higher margin. The product is relatively new to the market,
and
we believe sales will continue to fluctuate from period to period until we
can
better determine through continued market research and time how and where
to
best market and sell this product. We have found that news articles produce
a
spike in volume, and we will continue to pursue this avenue of marketing
during
2006. We introduced another ancestry product, EURO-DNATM
1.0,
during late 2004, which resulted in an increase in sales of approximately
$127,000. Sales of our ancestry products were generated through advertising
in
Family Tree, a genealogy periodical, and through public exposure that we
received during the year in newspapers, magazines and television. In addition,
sales were generated through our various distributors and from our website
www.ancestrybydna.com. During 2005, we entered into agreements with seven
new
distributors to sell our ancestry products. One of our new distributors
accounted for approximately $234,000 of sales during 2005. During 2005, we
acquired Trace Genetics, Inc. which allowed us to introduce their products
mtDNA™ and Y-chromosome product. These products contributed to $63,000 of sales
during 2005. These consumer products are sold in similar markets as
ANCESTRYbyDNATM
and
EURO-DNATM,
therefore our advertising campaigns for these products are similar to those
for
our other consumer products.
Paternity
testing sales are generated primarily through our various distributors and
from
our website www.ancestrybydna.com. The majority of the $79,000 increase in
sales
during 2005 compared to 2004 was from a distributor that was added during
the
second quarter of 2004. Paternity testing is an add-on service, and we expect
revenues to continue to fluctuate in this market. While we have not yet
implemented a formal marketing and sales plan for this service, we continue
to
perform market research and gather information in order to define and implement
a formal marketing strategy. One distributor accounted for approximately
$110,000 of our paternity sales during 2005. We do not expect these revenues
to
continue during 2006 and are seeking to replace the potential short-fall.
We
have been increasing our direct marketing and mail campaign for our
ANCESTRYbyDNA™ and DNAWitness™ products and services as well as the Trace
Genetics products and services to offset this potential decrease in paternity
sales.
Genotyping
sales were generated primarily through work with universities, with one
university being our major client of this service. The decrease of genotyping
services of approximately $76,000 during 2005 compared to the same period
in
2004 was the result of decreased service provided to one university. To date,
our genotyping service customers have come to us either through client referrals
or our general website. In the future, we plan to concentrate our genotyping
services on specific diseases, including cancer, neurological disorders,
and
heart disease. By concentrating on specific diseases, we hope to develop
an
expertise that will attract customers in those areas requiring external
assistance and additional research capacity. One university accounted for
approximately $159,000 of our genotyping sales during 2005.
As
part
of our on-going genotyping contract services work for one of our new customers,
we have offered to perform ANCESTRYbyDNA testing services on 284 children
suffering from a disease known as ALL or Acute Lymphocyte Leukemia. We expect
to
submit a manuscript for publication during 2006 under a joint publication
agreement. Following this early pre-screening, the ALL program will test
nearly
3,000 children afflicted with this disease in hopes that we will be better
able
to help the research hospital determine the genetic markers that are inherited
and that may play a role in disease formation, advancement or remission.
Treatment protocols or treatment regimes include multiple drug therapies
and
include, Taxol and Taxol like derivatives as well as other chemotherapy
treatments and protocols. It is too early to determine the potential benefits
to
us, but we believe that the donation of our technology and services is crucial
to the development of better and improved treatments for ALL. Currently,
nearly
10-20% of the children afflicted with this disorder do not survive beyond
18-24
months after diagnosis. We believe that our technology, combined with the
research hospital’s other work and including the contracted genotyping work
performed by us for them, may help in reducing this dreadful
statistic.
We
continue to market our DNAWitness™ products through marketing to various
agencies, our attendance at trade shows and through our relationships with
Lynn
Peavey catalog, Orchid Biosciences, and ReliaGene Technologies. We continue
to
seek to develop other distributors of our services and products. Our products,
DNAWitness™ 2.0, RETINOME, and EURO-Witness 1.0 have been featured in the Lynn
Peavey Company catalog and the Lynn Peavey Web site. We trained Lynn Peavey
Company personnel to establish and conduct seminars and training programs
for
detectives, crime laboratory personnel and crime scene personnel on DNAWitness™.
Similarly, we have trained nearly 2,000 forensic personnel that include
detectives, prosecutors and forensic scientists about our technology and
its
use. We anticipate continuing to train personnel on the use of our technology
and products throughout 2006. The sales of our DNAWitness™ products decreased by
$13,000 during 2005. We believe that our forensic revenues will continue
to
fluctuate because these are new products, and there are no similar products
being marketed. We intend to continue to research the markets and refine
our sales and marketing strategy for our forensic products. We have identified
and applied for several grants and submitted our technology for federal review
for applications that include human identification and terrorist tracking.
We
have not had any grant funding of our research and development or deployment
of
our technology into any of these applications during 2005. We believe that
the
restraint of our sales in the forensics market does not originate from a
lack of
desire to use the technology by the detective or the prosecutor but rather
a
lack of funding for the increased staff that will be required to review cold
case files, open new investigations or identify missing persons from stored
human remains. We believe that the bulk of our investigative support will
come
through local and regional police, fire and detective agencies that do not
require any federal funding to use our services and technology. We will however,
continue to pursue much larger applications for our technologies on a global
basis and will participate in several forensic and biometric venues during
2006
that offer us a broad platform exposure to the world market. We are also
seeking
distributors of our products and services on a global basis applying our
technology wherever the need could arise. During 2005, we acquired Trace
Genetics, Inc. which allowed us to introduce DNAWitness-MitoTM
which
contributed approximately $9,000 of sales during 2005.
In
order
to build consistent sales, we have begun to implement formal sales and marketing
plans, including advertising and promotional campaigns. Implementing these
plans
results in increased expenses for personnel, advertising, promotion, and
the
collateral materials associated with these programs. We plan to continue
to add
to our advertising and presentation campaign during 2006, as cash flow permits.
Overall, our goal is to focus on increasing market awareness of all of our
products, particularly within the consumer and forensic markets.
Cost
of
sales increased $442,545 during 2005 compared to 2004. This was a result
of
increased revenues during 2005 compared to 2004. The cost of sales as a
percentage of revenue was 75% for 2005 compared to 65% for 2004. The increase
in
cost of sales as a percent of revenues is due to our refinement of our estimate
and allocation of research and development costs. Because of our small sales
volume, these results are not indicative of the margins that we expect to
attain
if our long-term goals are achieved. We anticipate that as we gain experience
and can begin to take advantage of economies of scale through increased
revenues; our margins will stabilize and begin to track in line with other
companies in similar industries. However, in the near term, while we continue
to
be a development stage enterprise, we expect that our margins will continue
to
fluctuate.
RESEARCH
AND DEVELOPMENT EXPENSES
Our
research and development costs consist of raw materials, laboratory supplies,
equipment expense, facilities costs and employment-related costs. These
R&D
expenses were incurred in support of our currently available consumer
and
forensics products and genotyping services and for our anticipated
pharmacogenomics products.
Research
and development costs increased from $1,561,142 in 2004 to $2,122,383
in 2005,
an increase of $561,241, or 36%. R&D costs on EPO; which began during 2005
was approximately $289,000 of costs during 2005. Also, we had an increase
spending of approximately $195,000 for R&D materials and approximately
$259,000 for direct labor costs during 2005 compared to 2004. These increases
in
R&D were offset by a decrease of approximately $200,000 of allocated costs
to R&D as a result from our refinement in estimates and allocation of
research and development costs.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
Another
significant component of our operating expenses is selling, general and
administrative expenses. These expenses resulted from (i) accounting and
other
fees associated with being a public company and other regulatory compliance
activities, (ii) legal fees associated with our patent filings and maintenance,
a lawsuit against a former employee and preparation of our securities law
filings, (iii) selling and marketing costs to promote our products and (iv)
administrative and other salaries and expenses.
For
the
year ended December 31, 2005, selling, general and administrative expenses
increased $813,567, from $2,050,981 in 2004 to $2,864,548, in 2005. Compared
to
2004, compensation cost for our three top executives during 2005 declined
by
approximately $824,000. This decline occurred primarily because the 2004
amount
included amortization of stock-based compensation costs for these executives
from a grant in a previous year. Because the relevant amortization period
ended
in May 2004, the 2005 amount did not include any expense related to the previous
grants. This was offset by an increase of $46,000 for the annual shareholders
meeting costs, increase of $381,000 for legal expenses, increase of
approximately $260,000 for consulting services, increase of approximately
$82,000 for accounting fees and services and an increase of approximately
$628,000 of advertising, marketing materials and investor relations expense.
Additionally, we allocated approximately $200,000 less selling, general and
administrative costs to research and development during 2005 compared to
2004
which in effect increased our selling, general and administrative expenses.
INTEREST
EXPENSE
During 2005,
we recognized a decrease of $8,105 compared to 2004 in interest expense.
The
decrease in interest expense is a result of a lower convertible debenture
balance during 2005 compared to 2004 as La Jolla exercised its conversion
rights
during 2005.
INTEREST
INCOME
During
December 2004, we made a loan in Euros to a German company. We record the
interest on this loan each period, and any adjustments for the foreign currency
translation are included in foreign currency loss included on our condensed
consolidated statements of operations. This loan was paid off during 2005.
We
did not have any such loans during 2004.
INTRINSIC
VALUE OF CONVERTIBLE DEBT AND NON-DETACHABLE WARRANTS AND DEBT DISCOUNT
AMORTIZATION
We
recorded $250,000 related to the intrinsic value of the convertible feature
of
the La Jolla debt. We also recorded a discount on notes payable of $5,820,000
related to the four Dutchess notes including the two incentive debentures.
This
$6,070,000 of debt discount is being amortized to interest expense over the
life
of the notes and convertible debentures. During 2005, we recorded $1,953,084
of
expense. The majority of the remaining debt discount will be expensed during
2006.
AMORTIZATION
OF DEFERRED FINANCING FEES
During
2005, we recorded $187,005 of deferred financing fees related to the La Jolla
debenture and the four Dutchess notes. These deferred financing fees are
being
amortized over the life of the notes. We also expensed $260,000 of financing
fees paid to Dutchess that did not have any basis allocable to the fees,
thus
they were expensed. During 2005, we recorded an increase over the same periods
in 2004 of $310,301 of amortization which included the $260,000 of directly
expensed fees.
The
balance sheet caption derivative liabilities consists of (a) embedded conversion
features bifurcated from the Dutchess notes and convertible debentures and
(b)
all other convertible preferred stock, convertible debt and outstanding
warrants. Based on their own contract terms, the instruments described in
clause
(b) are not considered to be derivatives, but because of the embedded conversion
feature of the Dutchess notes, we are required to record such instruments
at
fair value as a derivative liability.
The
following tabular presentation set forth information about the derivative
instruments at and for the year ended December 31, 2005:
| |
|
Dutchess
Derivatives
|
|
Convertible
Preferred Stock
|
|
Outstanding
Warrants
|
|
La
Jolla convertible debt
|
|
Total
|
|
Fair
value adjustments, income (loss):
|
$
|
(2,595,695)
|
$
|
313,851
|
$
|
292,794
|
$
|
(21,980)
|
$
|
(2,011,030)
|
These
fair value adjustments affect our computation of income or loss, but they
are
non-cash items.
The
shares that were issued as incentive shares and are outstanding also fall
under
the derivative criteria in accordance with EITF 00-19 and we had to record
at
fair value the 1,250,000 and 2,500,000 shares of common stock issued as
incentive shares in the two Dutchess notes and record them as Redeemable
Instruments. At December 31, 2005, the 1,250,000 shares had been sold by
Dutchess, the 2,500,000 shares which were retained by Dutchess were valued
at
$52,750, and a gain on derivatives was recorded of $400,125.
There
were no such derivatives during 2004.
FOREIGN
CURRENCY LOSS
During
2005, we recorded a foreign currency loss of $7,060 on a loan we made in
Euros.
This loan was repaid during 2005. We did not have any foreign currency
transactions during 2004.
OTHER
EXPENSES
Effective
September 28, 2004, we entered into an Investment Agreement with Biofrontera
and
the shareholders of Biofrontera to purchase certain Series B preferred shares
of
Biofrontera. After discussions with Biofrontera, on February 18, 2005, we
exercised our right to terminate the Biofrontera agreement. We expensed $105,252
of costs that related to this transaction during 2005 and $10,000 of costs
for
the same period related to another transaction that was not completed. We
expensed $293,007 of costs related to the Biofrontera transaction during
2004.
Also
during 2004, we paid $75,000 to George Frudakis (father of our Chief Scientific
Officer and a shareholder of the Company) to pay the principal of approximately
$45,000, accrued interest of approximately $4,000 and approximately $26,000
was
recorded as other expense on our Consolidated Statements of Operations to
satisfy in full any other claims related to his note and funding agreement.
LIQUIDITY
AND CAPITAL RESOURCES
General
During
2005, our operating requirements generated negative cash flow from operations
as
we continued to engage in testing and development of our products. Our cash
used
by operating activities during 2005 was $3,605,877. We also had principal
payments on capital lease obligations of approximately $208,000 and purchases
of
computers and equipment of approximately $124,000. The resulting cash shortfall
was financed primarily through the exercise of non-detachable warrants and
prepayment for future warrant exercises, a $250,000 ($235,000 of cash after
fee)
convertible debenture from La Jolla, puts under our agreement with Dutchess
and
$5,160,000 ($3,867,995 of cash after discount and fees) in notes issued to
Dutchess.
Our
consolidated financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. We have incurred losses since
our
inception, and have experienced and continue to experience negative cash
flows
from operations. In addition, we have a working capital deficiency of
approximately $7,577,917 (of which $6,981,306 was a derivative liability)
at
December 31, 2005, and will continue to have ongoing requirements for
substantial additional capital investment to accomplish our business plan
over
the next several years. Over the past few years, our operations have been
funded
through related party funding, sales of common stock and preferred stock,
issuance of notes, put notices with Dutchess and the issuance of convertible
debentures and the exercise of non-detachable warrants. We continue to
experience some success generating operating revenues; however, we do not
expect
our revenue stream to be sufficient to cover costs of operations in
the foreseeable future.
In
the
foreseeable future, we expect to receive funding from the minimum conversions
of
the outstanding debenture into common stock, the related exercise of the
non-detachable warrants and the Dutchess agreement. We believe this funding
will
be sufficient to cover our operating activities through 2006. If our share
price
continues to remain weak, or if any number of adverse factors or events occur,
we will not have enough equity to complete future acquisitions or possibly
to
continue operations beyond 2006. Management is adequately confident that
equity
financing or debt will be available to fund our operations until revenue
streams
are sufficient to fund operations; however, the terms and timing of such
equity
or debt cannot be predicted.
We
have
issued securities, including convertible debentures and convertible preferred
stock, that convert into our common stock at a continuously adjustable
conversion price based on a discount on the trading price of our common stock.
In addition, our Investment Agreement with Dutchess requires us to sell our
common stock at a continuously adjustable conversion price at a discount
to the
trading price of our common stock. As we draw down advances under the Investment
Agreement with Dutchess and more of our common stock is sold pursuant thereto,
the market price of our common stock could decrease significantly and make
further advances impractical or impossible during time periods in which we
may
need to raise capital to fund our operations and market and sell our products
and services. In addition, the issuance of our common stock upon exercise
or
conversion of our other securities may create a downward pressure on the
market
price of our common stock.
FINANCINGS
La
Jolla Cove Convertible Debenture and Warrants
On
November 25, 2003, we closed on a $500,000, 8% convertible debenture with
non-detachable warrants with La Jolla Cove Investors, Inc. We pay interest
on a
monthly basis with a principal balloon payment due on the extended maturity
date
of November 25, 2007. Per the agreement, La Jolla shall convert at least
5% of
the face value of the debenture each calendar month into our common stock.
The
number of common stock shares into which this debenture may be converted
is
equal to the dollar amount of the debenture being converted multiplied by
sixteen, minus the product of the conversion price multiplied by fifteen
times
the dollar amount of the debenture being converted, and the entire foregoing
result shall be divided by the conversion price. The conversion price is
equal
to the lesser of (i) $0.20 or (ii) 80% of the average of the five lowest
daily value weighted average price of our common stock during the twenty
trading
days prior to La Jolla’s election to convert. We have the right to reject a
conversion if the stock price is below $0.50 per share. If we exercise this
right, we then are obligated to pay the portion of the debenture the conversion
notice was for plus applicable unpaid accrued interest and a premium equal
to
10% of those amounts.
The
non-detachable warrants must be exercised concurrently with the conversion
of
debt to common stock by La Jolla. La Jolla has the right to exercise warrants
equaling fifteen times the dollar amount of the debenture being converted
at an
exercise price of $1.00. If La Jolla does not convert at least 5% of the
warrants per month, then La Jolla will not be able to collect interest on
the
debenture for that month. The warrants issued to La Jolla expire on
November 25, 2007.
On
February 18, 2004, the Convertible debenture and Warrant to Purchase Common
Stock agreements were amended. If La Jolla does not convert at least 5% of
the
face value of the debenture and exercise at least 5% of the warrants in any
particular calendar month, La Jolla may wire to us $375,000 less the dollar
amount of warrants exercised in that month within five business days of the
end
of the month. Should La Jolla fail to wire us such funds, La Jolla shall
not be
entitled to collect interest on the debenture for that month. If breached
more
than once, then we may terminate the agreements with La Jolla and the debenture
becomes due six months thereafter with accrued interest. For any month the
minimum payment was required to be paid and was not paid, La Jolla and we
agreed
in writing for them to not fund the payment.
On
June
28, 2005, La Jolla exercised its right to increase its note by $250,000 with
the
same terms as the previous convertible debenture except the annual interest
rate
is two percent. This convertible debenture has the same terms and conditions
as
the initial La Jolla note.
On
October 20, 2005, we amended the La Jolla convertible debenture and the warrant
granted to La Jolla to confirm that the warrant exercise price remained at
$1
per share after the twenty-to-one reverse stock split, the maturity date
of the
debenture and the expiration date of the warrant was extended to November
25,
2007 and that when La Jolla exercised its option to add $250,000 in principal
to
the convertible debenture that we granted to La Jolla the right to purchase
an
additional 3,750,000 shares of our common stock under the warrant.
Dutchess
Investment Agreement
On
September 28, 2004, we entered into an Investment Agreement with Dutchess
Private Equities Fund, pursuant to which Dutchess has committed to purchase
our
common stock up to an aggregate purchase price of $35 million over a two-year
period. The Dutchess Agreement provides that we from time to time may deliver
a
notice to the Investor that will state the dollar amount of common stock
that we
desire the Investor to purchase. The maximum amount permitted pursuant to
any
such notice is $600,000, and we can give approximately three such notices
per
month. Upon receipt of the notice, Dutchess is obliged to purchase the dollar
amount of common stock set forth in the notice at a purchase price equal
to 96%
of the average of the two lowest closing bid prices of the common stock during
the five trading days after the notice. We are not permitted to provide a
notice
to Dutchess, and Duchess is not obliged to purchase any of our shares, in
the
event that we do not have sufficient authorized shares available for purchase
to
fulfill such commitment. In accordance with the two outstanding notes we
issued
to Dutchess, we are required to use 100% of the proceeds from these puts
as
payment on the notes.
In
order
to use our $35 million funding facility with Dutchess Equity Partners to
fund
our operations and complete future acquisitions, we had to restructure our
capital. During our 2005 annual shareholders meeting, we received shareholder
approval for a reverse stock split. Pursuant to the reverse split, every
20
shares of common stock issued and outstanding on July 12, 2005 was combined
into
one share of our common stock. The number of shares outstanding at July 12,
2005
after this reverse stock split was 63,442,890, and the number of authorized
shares remained at 1,500,000,000. During July 2005, we registered 350,000,000
shares to be used in conjunction with this Dutchess facility. During March
2006,
we expect to file a registration statement to register additional shares
for
this Dutchess facility.
During
2005, we exercised put notices in accordance with our agreement and received
$1,802,651 of cash proceeds, net of $10,109 of cash stock issuance costs
for
which we issued 78,912,356 shares of our common stock to Dutchess. During
2005,
proceeds totaling $1,559,991 from these puts were used to reduce the notes
payable outstanding with Dutchess.
Dutchess
Notes
To
fund
the acquisition of the 18% equity interest in Biofrontera in 2005, we entered
into two notes with Dutchess. On June 30, 2005, we issued to Dutchess a
promissory note in the amount of $1,560,000 for a purchase price of $1,300,000.
This note was paid in full by the end of January 2006.
On
August
1, 2005, we issued to Dutchess a second promissory note in the amount of
$840,000 for a purchase price of $700,000. This note was paid in full by
the end
of February 2006.
In
order
to fund our current operations, we entered into two more notes with Dutchess
during October and December 2005. On October 21, 2005, we issued to Dutchess
a
promissory note in the amount of $1,380,000 for a purchase price of $1,150,000.
The note is due and payable in full on December 31, 2006. Other than the
$230,000 discount inherent in the purchase price, the note is
non-interest-bearing. The note will be repaid using the proceeds of each
put
notice delivered by us to Dutchess under the September 2004 Investment
Agreement.
On
December 22, 2005, we issued to Dutchess a promissory note in the amount
of
$1,380,000 for a purchase price of $1,150,000. The note is due and payable
in
full on December 15, 2006. Other than the $230,000 discount inherent in the
purchase price, the note is non-interest-bearing. The note will be repaid
using
the proceeds of each put notice delivered by us to Dutchess under the September
2004 Investment Agreement.
In
connection with the notes, we paid Dutchess a facility fee of $260,000 and
issued to Dutchess 3,750,000 shares of our common stock and convertible
debentures totaling $660,000. We also paid approximately $167,000 of fees
to
Athena.
Capital
Expenditures
During
2006, we anticipate continuing to develop the required infrastructure to
realize
our 2006 operational growth plan, including acquiring or leasing property,
equipment and other operating assets.
We
are
actively seeking to acquire or lease a new building that has 5,000 to 10,000
square feet with additional expansion potential. We estimate that lease costs
will be between $15 and $25 per square foot. This does not include leasehold
improvements or other associated costs such as utilities, taxes and maintenance.
The initial build out of 7,000 square feet is estimated at approximately
$780,000, which includes laboratory, office and warehouse space. Additional
costs for equipment, furniture and fixtures are estimated at approximately
$257,000. Timing of the incurrence of the expense will depend upon the length
of
time required to find the appropriate facility.
In
addition, we anticipate that new laboratory and computer equipment will be
purchased during 2006. Computer purchases for programming, modeling and business
use are estimated at approximately $100,000 and scientific and business programs
and software at approximately $50,000. Capital expenditures for laboratory
equipment are estimated at approximately $250,000 during 2006.
It
is our
intent, during 2006, to increase our marketing and sales personnel. Current
plans are to add up to two personnel in these areas. As cash flow permits,
we
plan on increasing our research staff through the addition of up to two post
doctors. The post doctors would be responsible for internal research projects
that will be directed by our Chief Scientific Officer. In addition, we are
considering increasing our programming staff in order to expedite our research
projects. Costs associated with the hiring process would include normal
expenditures including advertising costs and possible search fees from outside
consultants. For higher-level positions, additional interviews, sign on bonuses
and relocation expenses may also be incurred. Although this is our current
personnel hiring plan, conditions and other unforeseen factors could impact
the
decision making process and as a result plans may change.
2006
Commitments
Our
significant cash commitments for 2006 and future years include:
| · |
Payments
of approximately $2,150,000 under the Beth Israel License
Agreement.
|
| · |
Payments
of approximately $176,096 under our collaborative research agreement
with
Beth Israel.
|
| · |
Payments
of approximately $3,350,000 and annual payments of $250,000
under our
License Agreement with Harvard Medical
School.
|
| · |
Payments
of approximately $300,000 under our Research Sponsorship
Agreement with
Massachusetts College of Pharmacy and Health
Sciences.
|
| · |
Payments
of approximately $300,000 under our consulting agreement with
Dr. Arthur
Sytkowski.
|
| · |
Payments
of approximately $375,000 under our License Agreement with Dr.
Mark
Froimowitz.
|
Our
ability to make these payments is dependent upon our continued ability
to raise
capital under our Investment Agreement with
Dutchess.
OFF-BALANCE
SHEET ARRANGEMENTS
CRITICAL
ACCOUNTING POLICIES AND RESULTS OF OPERATIONS
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that have a significant impact on the results we
report in our financial statements. Some of our accounting policies require
us
to make difficult and subjective judgments, often as a result of the need
to
make estimates of matters that are inherently uncertain. Actual results may
differ from these estimates under different assumptions or conditions. Below,
we
discuss this further, as well as the estimates and judgments involved.
Asset
Impairment
We
review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset exceeds its fair value and
may
not be recoverable. In performing the review for recoverability, we estimate
the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset,
an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Management estimates the fair value and the estimated future cash flows
expected. Any changes in these estimates could impact whether there was
impairment and the amount of the impairment. Since we are in the development
stage, we do not have much history to determine our estimated cash flows.
If we
do not meet our targeted cash flows for our services and if the estimated
disposition of the equipment is lower, this could result in a write-down
of our
equipment. Our equipment is very specialized equipment related to genomics
research, and there probably will not be a large demand for our used equipment.
The amount of our net fixed assets is the amount of the maximum risk if our
assumptions were not correct. Each year the assets will have higher depreciation
and the maximum risk will decrease correspondingly.
Allocation
of Research and Development Costs
Prior
to
2004, our research and development costs were derived by allocating certain
costs based on total labor effort. The percentage of total labor effort expended
on research and development was an estimate by management. During 2004, we
refined our process of allocating costs by identifying and directly expensing
certain costs related to research and development and allocating certain
other
costs based on total labor effort that is estimated by management and employees.
With some of these costs, a percentage of a total purchase order price is
allocated to research and development. Also during 2004, we implemented a
time
card process that gives us a more refined estimate of certain employees'
time.
During 2005, as raw materials became significant, we began recording inventory
for our raw materials. As the raw materials are used, they are charged to
research and development expense based upon actual usage for research and
development. We continue to refine our process of identifying time associated
with research and development. These refinements to estimates could increase
or
decrease our income statement expense categories of research and development,
cost of sales and selling, general and administrative. Over time we believe
this
change in allocating costs will result in a lower allocation of administrative
costs to research and development. Also, as we hire employees, the department
in
which the employee is hired will have a direct impact on the allocation of
administrative costs to research and development. For example if a person
is
hired in research and development, the allocation to research and development
for other administrative costs will increase because labor effort percentage
for
research and development will have increased. If a person is hired in
administration, the allocation to research and development for other
administrative costs will decrease because the labor effort percentage for
research and development will have decreased. Changes to these estimates
could
have a significant impact on the accrual and related compensation expense
and/or
deferred compensation.
Valuation
of Intangible Assets
Our
intangible assets are reviewed annually for impairment or more frequently
if
impairment indicators arise. This annual impairment test is performed in
the
last quarter of each fiscal year. The impairment test requires a comparison
of
the fair value of the Company to the amount of intangible assets recorded.
If
this comparison reflects impairment, then the loss would be measured as the
excess of recorded intangible asset amount over its implied fair value. Although
management believes that the estimates and assumptions used are reasonable,
actual results could differ.
Estimation
of Fair Market Value
We
use
the Black Scholes Option Model to determine fair market value in certain
instances (i.e. to value warrants and the intrinsic value of the convertible
debt and non-detachable warrants).
The
Black Scholes Option Model requires estimated assumptions in its computation.
We
estimate the assumptions used in each calculation based upon the transaction
term and what we believe most appropriately reflects the transaction. If
different estimates of the assumptions were used, it could result in different
fair market value amounts being calculated. Additionally, various methods
can be
used to determine the fair market value of the warrant. If a different model
were used besides the Black Scholes Option Model, it could result in different
fair market value amounts being calculated.
Derivatives
We
have
reviewed our contracts and financial instruments to determine what derivatives
and embedded derivatives we may have. We have then reviewed these derivatives
and embedded derivatives to determine if they should be recorded as equity
or a
derivative liability valued at fair value. Judgment is used to apply the
criteria of Statement of Financial Accounting Standards No. 133 and Emerging
Issues Task Force 00-19 to the derivatives. Also judgment and estimates are
required to determine the fair value of the derivative liabilities. Although
management believes that the estimates and assumptions used are reasonable,
actual results may differ from these estimates under different assumptions
or
conditions.
Item 7.
Financial Statements.