Notes to the Financial Statements
September 30, 2007 (Unaudited)
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2007 and 2006 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2006 audited financial statements. The results of operations for the periods ended September 30, 2007 are not necessarily indicative of the operating results for the full year.
NOTE 2 - STOCKHOLDERS' EQUITY
Common stock
In May 2005 the Company initiated the Regulation S offering of 10,000,000 shares with an aggregate offering price of $5,000,000. During the nine month period ended September 30, 2007 the Company issued 1,246,557 shares of Regulation S common stock in the European market for proceeds of $171,325.
On March 21, 2007 the Company issued 185,000 units for $185,000. Each unit consisted of one common share and a warrant to purchase one-half share.
On April 23, 2007 the Company issued 27,750 shares of common stock for services valued at $55,500.
On June 19, 2007, the Company issued 100,000 shares of common stock for $100,000.
Warrants for Purchase of Common Stock
In March 2007, in conjunction with the unregistered sale of commons shares, the Company issued warrants to purchase additional shares of common stock. The warrants give the holder the right to purchase an additional 92,500 shares of stock at an exercise price of $1.50 per share. The warrants are exercisable anytime within twelve months after the grant date at which point they expire. A summary of activity follows:
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, January 1, 2007
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
92,500
|
|
|
|
1.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2007
|
|
|
92,500
|
|
|
$
|
1.50
|
|
Exercisable, September 30, 2007
|
|
|
92,500
|
|
|
$
|
1.50
|
|
8
HOLMES BIOPHARMA, INC. AND SUBSIDIARY
Notes to the Financial Statements
September 30, 2007 (Unaudited)
In accordance with SFAS 123 (revised 2004),
Share-Based Payment,
$39,139 has been charged to the statement of operations for the period ended September 30, 2007.
The fair value of the warrant grant was established at the date of the grant using the Black-Scholes pricing model, with the following weighted average assumptions:
|
|
|
|
|
|
|
2007
|
Risk-free interest rate
|
|
|
4.89
|
%
|
Dividend yield
|
|
|
0
|
%
|
Volatility
|
|
|
99
|
%
|
Average expected term (years to exercise date)
|
|
|
1
|
|
|
|
|
|
|
Stock warrants outstanding and exercisable under this agreement as of September 30, 2007 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise
Price
|
|
|
Outstanding
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Exercisable
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
1.50
|
|
|
|
92,500
|
|
|
$
|
1.50
|
|
|
|
1.00
|
|
|
|
92,500
|
|
|
$
|
1.50
|
|
Net loss per common share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." The weighted-average number of common shares outstanding during each period is used to compute basic loss per share. Diluted loss per share is computed using the weighted averaged number of shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Outstanding stock warrants of 92,500 have not been considered in the fully diluted loss per share calculation at September 30, 2007 due to the anti-dilutive effect. There were no common stock equivalents outstanding at September 30, 2006.
|
|
|
BASIC AND DILUTED EARNINGS PER SHARE
|
September 30,
|
September 30,
|
|
2007
|
2006
|
Income (Loss) Numerator
|
$ (1,427,734)
|
$ (2,170,735)
|
Shares (Denominator)
|
47,505,685
|
40,279,909
|
Per Share Amount
|
$ (0.03)
|
$ ( 0.05)
|
9
HOLMES BIOPHARMA, INC. AND SUBSIDIARY
Notes to the Financial Statements
September 30, 2007 (Unaudited)
NOTE 3 - NOTE PAYABLE
On June 18, 2007, the Company executed a promissory note payable to a third party in the principal sum of $100,000 USD, with interest of seven percent (7%) per annum. The principal and interest are due on or before June 17, 2008.
10
In this report references to Holmes Biopharma, we, us, and our refer to Holmes Biopharma, Inc.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as may, will, expect, believe, anticipate, estimate, project, or continue or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Executive Overview
Holmes Biopharma is a holding company operating through its majority-owned subsidiary, Qualia Clinical Services Inc., a clinical research organization (Qualia). Qualia offers services to support global research and development of biotechnology, pharmaceutical and medical device companies. It operates clinical research facilities in Omaha, Nebraska; Toronto, Canada and Kiev, Ukraine. Qualias business plan is to become a strategic partner of pharmaceutical clients rather than just a service vendor.
During the third quarter of 2007 we have continued our focus on the development of Qualias clinical drug research and development business. In August 2007 we announced that Qualia has established an operational Phase I clinic in Kiev, Ukraine. This facility gives Qualia a presence in Eastern Europe where its clinical trial infrastructure, suitable patient populations and medical expertise will afford Qualia a tremendous growth opportunity. In September 2007 Qualia expanded its Phase I facility located in Omaha, Nebraska an additional 10,000 square feet. As a result of this expansion that facility now has over 33,000 total square footage.
For the nine month period ended September 30, 2007 (the 2007 nine month period) we recorded consolidated revenues of $5,078,983 compared to $18,340 for the nine month period ended September 30, 2006 (the 2006 nine month period). The second quarter of 2007 was a turning point when we recorded consolidated revenues of $1,628,600 and we have increased consolidated revenues to $3,013,658 for the three month period ended September 30, 2007 (the 2007 third quarter). The increase in revenues resulted in net income of $95,539 for the 2007 third quarter.
Our challenge for the next twelve months will be to continue Qualias revenue growth and obtain additional funding for Qualias continued operations.
Liquidity and Capital Resources
Historically, we have relied on sales of our common stock as a source of funding, but as of September 30, 2007 we recorded significant consolidated revenues. Our independent accounting firm expressed doubt that we can continue as a going concern because Qualia, which is the source of our revenues, has only recently started its clinical operations. All risks inherent to a new enterprise are inherent to Qualias operations. Although Qualia has increased its revenues, the revenues are not at a level to support continued growth of Qualia. Our management anticipates that we will continue to rely on loans and equity financings to fund Qualias business plan.
During 2006 and 2007 we have relied on financing in the form of equity and debt for additional working capital to continue Qualias clinical drug research business. In May 2005 we initiated a Regulation S offering of 10,000,000 shares with an aggregate offering price of $5,000,000. Regulation S provides for the offers and sales of restricted securities outside of the United States. These securities are not registered under the Securities Act of 1933 and cannot be offered or sold in the United States unless registered under the Securities Act or an exemption from
11
registration is available. During the 2007 nine month period we realized net proceeds of $171,325 from the sale of 1,246,557 shares of Regulation S stock. We also relied on a convertible debenture agreement with Adlan Foundation for additional financing of $1,000,000, discussed below. We cannot assure you that we will be successful in raising the funds needed to support our cash requirements and if we are unable to obtain necessary funding through sales of our common stock, we may be forced to delay the further development of Qualias clinical drug research and development business.
During the 2007 nine month period we relied on revenues, proceeds of $456,325 from the sale of stock, a loan of $100,000 and advances of $20,206 from a revolving bank line of credit to fund our operations. We intend to use our cash for our operations and for advances to Qualia for further development of its operations.
We have outstanding warrants that may provide additional funding. On March 21, 2007, we sold 185,000 units to for $185,000. Each unit consisted of one common share and a warrant to purchase an additional one-half share, or a total of 92,500 shares. The warrants have an exercise price of $1.50 per share and are exercisable for a term of twelve months. If the holder elects to exercise the warrants, we may realize gross proceeds of $138,750. However, the holder of the warrants has total discretion as to when, or if, the warrants are exercised.
As a public reporting company, we have the right within the parameters of current federal and state security laws and the rules and regulations of the SEC and the NASD to make additional public offerings in strict compliance with all applicable laws and regulations. This is seen as a long-term plan to be undertaken if our growth warrants the need for additional capital, and if this need outweighs the dilution to our stockholders that would result from raising this additional capital.
Commitments and Contingent Liabilities
At September 30, 2007, we had consolidated total liabilities of $2,257,374 which included accounts payable of $1,175,445, a note payable to a third party of $100,000, deferred revenue of $67,092 and accrued expenses of $1,997. The accounts payable are primarily related to costs associated with the expansion of Qualias operations. The note payable is related to a promissory note executed on June 18, 2007, payable to Abernathy, Mendelson & Associates Inc. The principal sum of the note is $100,000 USD, with interest of seven percent (7%) per annum. The principal and interest are due on or before June 17, 2008.
Deferred revenue calculations materially affect our financial results. A portion of a contract fee is paid at the time a trial is initiated. These advances are deferred and recognized as revenue as services are performed or products are delivered. This requires deferring the immediate recognition of those funds and creating a deferred revenue liability account.
On August 10, 2006, we entered into a convertible debenture agreement with Adlan Foundation that provided us with a cash loan of $1,000,000. We paid a fee of $323,750 consisting of $125,000 cash and 125,000 shares of common stock valued at $198,750. The convertible debenture bears no interest and the term of the loan ended November 7, 2007. Under the terms of the convertible debenture agreement, the debenture holder, Lomnicky Finance Ltd, provided written notice during the term of the agreement to exercise its right to convert the loan amount into common stock at the price of $1.00 per share. On November 7, 2007, our board of directors authorized the issuance of 1,000,000 shares to the debenture holder.
Off-balance Sheet Arrangements
None.
Results of Operations
The following discussions are based on the consolidated financial statements of Holmes Biopharma and Qualia. The following chart summarizes our consolidated financial statements for the three and nine month periods ended September 30, 2007 and 2006, and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part I, Item 1, above. The 2006 year has been restated to reflect the 1 to 3 forward common stock split effected July 21, 2006.
12
|
|
|
|
|
SUMMARY OF OPERATING RESULTS
|
|
Nine month period
ended September 30
|
Three month period
ended September 30
|
|
2007
|
2006
|
2007
|
2006
|
Revenues
|
$ 5,078,983
|
$ 18,340
|
$ 3,013,658
|
$ -
|
Cost of revenues
|
1,367,933
|
-
|
866,784
|
-
|
Gross profit
|
3,711,050
|
18,340
|
2,146,874
|
-
|
General, selling and administrative expenses
|
4,557,315
|
2,190,905
|
1,861,605
|
1,569,758
|
Operating income (loss)
|
(846,265)
|
(2,172,565)
|
285,269
|
(1,569,758)
|
Net income (loss) before minority interest
|
(1,427,734)
|
(2,170,735)
|
92,539
|
(1,570,278)
|
Income (loss) of subsidiary
|
-
|
-
|
-
|
-
|
Net loss
|
(1,427,734)
|
(2,170,735)
|
92,539
|
(1,570,278)
|
Net loss per share
|
$ (0.03)
|
$ (0.05)
|
$ 0.00
|
$ (0.04)
|
Management anticipates that consolidated revenues will increase based upon the contracts that Qualia has in place; however, there is no assurance that Qualia will maintain profitablility. Revenue is recognized when services are performed. Contracts can range in duration from a few months to two years, and generally take the form of fee-for-service or fixed-price arrangements. In the case of fee-for-service contracts, revenue is recognized as services are performed based upon hours worked or samples tested. For long-term fixed-price service contracts, revenue is recognized as services are performed, with performance generally assessed using output measures, such as units-of-work performed to date as compared to the total units-of-work contracted. In some cases, a portion of the contract fee is paid at the time the trial is initiated. These advances are deferred and recognized as revenue as services are performed or products are delivered, as discussed above. Additional payments may be made based upon the achievement of performance-based milestones over the contract duration.
General, selling and administrative expenses increased significantly for the 2007 nine month period compared to the 2006 nine month period due to growth of Qualias operations. Increases in Qualias employees, along with increased insurance costs, advertising and marketing and travel expenses resulted in increased overall operating expenses. Management anticipates that these expenses will continue to increase in the short term.
In addition to expenses related to operations, we recorded interest expense of $580,984 for the 2007 nine month period and $197,157 for the 2007 third quarter primarily related to the interest expense of the convertible debenture agreement with Adlan Foundation.
Despite significant increases in revenues that have resulted in a net income for the 2007 third quarter, our consolidated operating expenses for the 2007 nine month period have resulted in a net loss and a net loss per share for that period. While we are making progress, we cannot guarantee you that we will remain profitable in the short term and anticipate that we will post net losses for the year end.
13
Factors Affecting Future Performance
Operating costs for clinical research are relatively fixed, but variations of the timing of contracts may lead to fluctuation in quarterly operating results.
Qualias quarterly operating results may fluctuate as a result of factors such as implementing or completing particular clinical trials, and termination of clinical trials. Since a high percentage of Qualias operating costs are relatively fixed while revenue recognition is subject to fluctuation, minor variations in the timing of contracts or the progress of trials may cause significant variations in quarterly operating results. Therefore, results of one quarter are not necessarily indicative of results for the next quarter.
Clinical research involves a risk of liability for personal injury or death to patients from adverse reactions to the study drug.
Qualia monitors the testing of new drugs on human volunteers pursuant to study protocols in clinical trials. Clinical research involves a risk of liability for personal injury or death to patients from adverse reactions to the study drug, many of whom may be seriously ill and are at great risk of further illness or death as a result of factors other than their participation in a trial. As a result, Qualia could be held liable for bodily injury, death, pain and suffering, loss of consortium, other personal injury claims and medical expenses arising from a clinical trial. However, Qualia believes that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements, including the role of institutional review boards and the need to obtain each patient's informed consent. To reduce its potential liability, Qualia seeks to obtain indemnity provisions in its contracts with clients. These indemnities generally do not, however, protect the company against certain of its own actions such as those involving negligence or misconduct. Also, these indemnities are contractual arrangements that are subject to negotiation with individual clients, and the terms and scope of such indemnities vary from client to client and from trial to trial.
Qualia is dependent upon the ability of third parties to fund research and development.
As a provider of preclinical and clinical research services to pharmaceutical, biotechnology and medical device clients, Qualias ability to win new outsourced contracts from the pharmaceutical industry is dependent upon the rate of research and development expenditure by that industry. This in turn can be influenced by a variety of factors, including mergers within the pharmaceutical industry, the availability of capital to the biotechnology industry, and by the impact of government reimbursement rates for Medicare and Medicaid programs. Consequently, the success of the company to grow and win new outsourced contracts is highly dependent upon the ability of the pharmaceutical and biotechnology industries to continue to spend on research and development at rates close to or at historical levels.
Clinical trial contracts may be terminated at any time, which may result in reduced revenues.
Qualias clients generally have the right to terminate a contract at any time during a clinical trial, potentially causing periods of excess capacity and reductions in net service revenue and net income. Trials may be terminated for various reasons, including unexpected or undesired results, inadequate patient enrollment or investigator recruitment, production problems resulting in shortages of the drug, adverse patient reactions to the drug or the client's decision to de-emphasize a particular trial. At this initial phase of Qualias operations, the termination of any one trial would have a material adverse impact on the company. The loss of a large trial or the simultaneous loss of multiple trials could result in unplanned periods of excess capacity and adversely affect Qualias future revenue and profitability. In most instances, if a contract is terminated, Qualia is entitled to receive revenue earned to date as well as, at times, a termination fee. However, because the company's contracts are predominately fixed price contracts, Qualia bears the risk of cost overruns.
The health care industry is subject to changing political, economic and regulatory influences that may affect the pharmaceutical and biotechnology industries.
In recent years, several comprehensive health care reform proposals were introduced in the United States Congress. The intent of the proposals was, generally, to expand health care coverage for the uninsured and reduce the growth
14
of total health care expenditures. While none of the proposals were adopted, the United States Congress may again address health care reform. In addition, foreign governments may also undertake health care reforms in their respective countries. Implementation of government health care reform may adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could decrease the business opportunities available to Qualia. Qualia is unable to predict the likelihood of such or similar legislation being enacted into law or the effect such legislation would have on its operations.