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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 333-34765
Ixion Biotechnology, Inc..
(Exact Name of Small Business Issuer as Specified in Its Charter)
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Delaware 59-3174033
(State of incorporation) (I.R.S. Employer Identification No.)
13709 Progress Blvd., Box 13
Alachua, FL 32615
(Address of principal executive offices)
Registrant's telephone number: 904-418-1428
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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 []
The number of shares of the registrant's common stock, par value $0.01 per
share, outstanding as of August 11, 2000 was 6,788,996.
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Ixion Biotechnology, Inc
Index to Form 10QSB
Part 1 - Financial Information Page
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet - June 30, 2000...............................3
Condensed Statements of Operations - Three Months and Six Months Ended
June 30, 2000 and 1999 and for the period March 25, 1993
(Date of Inception) through June 30, 2000.............................4
Condensed Statements of Cash Flows - Six Months Ended June 30, 2000 and
1999 and for the period March 25, 1993
(Date of Inception) through June 30, 2000.............................6
Notes to Condensed Financial Statements...............................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations or Plan of Operation.......................9
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.............................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signatures....................................................................22
Exhibit Index.................................................................22
2
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheet
June 30, 2000
Unaudited
Assets
Current Assets:
Cash and cash equivalents $ 192,292
Restricted Cash 48,000
Accounts receivable 9
Prepaid expenses 6,834
Other current assets 500
-----------------
Total current assets 247,635
-----------------
Property and Equipment, net 131,540
-----------------
Other Assets:
Patents and patents pending, net 393,652
Other 7,539
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Total other assets 401,191
-----------------
Total Assets $ 780,366
=================
Liabilities and Capital Deficiency
Current Liabilities:
Accounts payable $ 57,058
Bridge loans payable to officers 312,400
Current portion of notes payable 56,817
Accrued expenses 119,720
Deferred rent - current 1,612
Interest payable 48,352
-----------------
Total current liabilities 595,959
-----------------
Long-Term Liabilities:
Notes payable 722,783
Liability under research agreement 42,317
Deferred rent, including accrued interest 24,949
Deferred fees and salaries, including accrued interest 1,027,796
-----------------
Total long-term liabilities 1,817,845
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Total liabilities 2,413,804
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Capital Deficiency:
Common stock, $.01 par value; authorized 20,000,000, is
outstanding 3,102,964 shares at June 30 32,158
Common stock warrants outstanding 35,494
Additional paid-in capital 3,084,117
Deficit accumulated during the development stage (4,593,115)
Less unearned compensation (192,092)
-----------------
Total capital deficiency (1,633,438)
-----------------
Total Liabilities and Capital Deficiency $ 780,366
=================
See accompanying notes to condensed financial statements
3
Statements of Operations
Three Months Ended
June 30,
2000 1999
----------- ------------
Unaudited
Revenues:
Income from research grants $ 83,214 $ 0
Interest income 2,762 915
Other income 0 250
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Total revenues 85,976 1,165
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Expenses:
Operating, general and administrative 128,259 88,085
Research and development 202,738 129,514
Interest 46,035 37,559
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Total expenses 377,032 255,158
----------- ------------
Net Loss. $ (291,056) $ (253,993)
=========== ============
Basic and Diluted Net Loss per Share $ (0.09) $ (0.10)
=========== ============
Weighted Average Common Shares 3,160,482 2,514,014
=========== ============
See accompanying notes to condensed financial statements
4
Statement of Operations
For the Period
March 25, 1993
(Date of
inception)
Six Months Ended through
June 30, June 30,
2000 1999 2000
----------- ------------ -----------
Unaudited Unaudited
Revenues:
Income under research agreement $ 2,450 $ 0 $ 305,284
Income from research grants 127,139 0 290,442
Interest income 3,631 963 29,184
Other income 0 695 18,834
----------- ------------ -----------
Total revenues 133,220 1,658 643,744
----------- ------------ -----------
Expenses:
Operating, general and administrative 237,616 178,819 2,153,523
Research and development 381,853 238,166 2,517,919
Interest 87,478 74,729 565,417
----------- ------------ -----------
Total expenses 706,947 491,714 5,236,859
----------- ------------ -----------
Net Loss $ (573,727) $ (490,056) $(4,593,115)
=========== ============ ===========
Basic and Diluted Net Loss per Share $ (0.19) $ (0.19)
=========== ============
Weighted Average Common Shares 3,075,077 2,514,001
=========== ============
See accompanying notes to condensed financial statements
5
Statements of Cash Flows
For the Period
March 25, 1993
Six Months (Date of inception)
Ended June 30, through
2000 1999 June 30, 2000
------------ ------------- --------------
Unaudited Unaudited
Cash Flows from Operating Activities:
Net loss $ (573,727) $ (236,032) $ (4,593,115)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 14,982 5,200 83,150
Amortization 3,766 774 16,636
Write-off of abandoned patents 0 0 13,045
Amortization of debt discount 28,584 14,292 219,144
Stock warrants issued under license agreement - - 20,465
Stock, options/warrants issued for consulting
services 3,081 - 35,081
Stock compensation 50,010 40,725 566,311
Decrease (increase) in prepaid expenses and other
current assets (2,490) (641) (7,159)
Decrease (increase) in accounts receivable 28,002 - (9)
Increase (decrease) in liability under research
agreement - - 42,317
Increase (decrease) in accounts payable and
accrued expenses (16,487) 11,049 190,263
Increase in deferred fees and salaries 83,754 64,580 1,001,244
Increase in deferred rent 2,818 13,783 26,560
Increase in interest payable 8,911 6,590 68,731
------------ ------------ -------------
Net cash used in operating activities (368,796) (79,680) (2,317,336)
------------ ------------ -------------
Cash Flows from Investing Activities:
Purchase of property and equipment (34,569) - (160,040)
Organization Costs - - (436)
Transfer to restricted cash (48,000) - (48,000)
Payments for patents and patents pending (19,306) (113) (407,172)
------------ ------------ -------------
Net cash used in investing activities (101,875) (113) (615,648)
------------ ------------ -------------
Cash Flows from Financing Activities:
Loans from officers - 90,000 445,307
Proceeds from issuance of note payable 48,000 - 48,000
Proceeds from issuance of convertible notes
payable - - 1,087,270
Proceeds from issuance of common stock 603,200 1,000 1,735,100
Principal reductions in notes payable (4,408) (4,897) (43,451)
Payment of deferred offering costs (6,190) (4,821) (135,870)
Payment of loan costs - - (11,080)
------------ ------------ -------------
Net cash provided by (used in)
financing activities 640,602 81,282 3,125,276
------------ ------------ -------------
Net Increase (Decrease) In Cash and Cash Equivalents 169,931 1,490 240,292
Cash and Cash Equivalents at Beginning of Period 22,361 18,633 -
------------ ------------ -------------
Cash, Cash Equivalents and Restricted Cast at
End of Period $ 240,292 $ 20,123 $ 240,292
============ ============ =============
See accompanying notes to condensed financial statements
6
Notes to Condensed Financial Statements
Six Month Period Ended June 30, 1999
1. Basis Of Presentation:
The accompanying unaudited condensed financial statements for the six
months ended June 30, 2000 and 1999, respectively, and for the period March
25, 1993 (date of inception) through June 30, 2000, have been prepared in
accordance with generally accepted accounting principles for interim
financial statements. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These interim financial statements should be
read in conjunction with the December 31, 1999 financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999. In the opinion of the Company, the
accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary to
present fairly the Company's financial position, results of operations, and
cash flows for the periods presented. The results of operations for the
interim period ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
2. Notes Payable:
On June 23, 2000, the company borrowed $48,000 on a Commercial Fixed Rate
Promissory Note at 7.83% and collateralized by a $48,000 CD earning 5.83%.
The note requires five interest-only payments, and a final payment of the
unpaid principal balance plus accrued interest on December 23, 2000. There
is no prepayment penalty.
3. Income Taxes:
The components of the Company's net deferred tax asset and the tax effects
of the primary temporary differences giving rise to the Company's deferred
tax asset are as follows as of June 30, 2000:
Deferred compensation $ (406,000)
Net operating loss carryforward 1,817,000
-----------
Deferred tax asset 1,411,000
Valuation allowance $(1,411,000)
-----------
Net deferred tax asset $ 0
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4. Stock Options:
On January 1, 2000, the Company granted ten-year options under the 1994
Stock Option Plan to purchase 8,000 shares of Common Stock at an exercise
price of $4.00 per share. Stock options are exercisable only when vested.
Options vest at the rate of 20% per year and are exercisable generally
within ten years after date of grant.
On April 1, 2000, the Company granted options to purchase 86,900 shares of
Common Stock at an exercise price of $4.00 per share, conditioned on an
agreement to shorten the term of existing options with an exercise price of
$10.00 per share. This transaction is discussed further under note 7.
5. Stockholder's Equity
The Company has sold 150,000 shares and received gross proceeds of $600,000
through June 30, 2000 in the public offering that commenced December 10,
1997 and terminated on March 31, 2000. Offering costs of $135,870 have been
offset against the proceeds of the offering through the termination date of
the offering,
7
March 31, 2000.
Through June 30, 2000, Q-Med, A.B. has been issued a total of 562,500
shares of restricted common stock for $1,125,000 as part of the on-going
transaction with Q-Med.
Because the Company does not yet have revenues from operations, we will be
required to obtain additional funds through equity or debt financing,
strategic alliances with corporate partners, research grants or through
other sources.
The Company's ability to continue as a going concern depends upon obtaining
additional financing; however, there can be no assurance that the Company
will be successful in obtaining the required financing.
6. Related Party Transactions
The Chairman/Chief Executive Officer and President of the Company each
entered into a revolving agreement to extend the Company bridge loans.
Interest on bridge loans is at 8%, but can be reset annually, at the
election of either party, to prime rate in effect on January 1 of any given
year, plus 3%. In March, the officers purchased 25,650 shares of common
stock in the public offering at the public offering price of $4.00 per
share. In payment, the officers cancelled $102,600 in principal amount of
the bridge loans. This transaction was treated as a repayment of debt and
subsequent equity investment, having no income effect. At June 30, 2000,
$312,400 was outstanding under these agreements and was due on demand.
These officers have no commitment to lend additional funds in the future.
See note 7.
7. Subsequent Events
On July 14, 2000 Qvestor, LLC ("Qvestor"), a Delaware subsidiary of Q-Med
AB (publ) exercised the option granted in September 1999 to acquire
3,337,500 of the Company's common stock for cash of $6,675,000 and certain
other consideration pursuant to a stock purchase agreement. At closing,
Qvestor paid cash of $3,321,697 and Q-Med agreed to a world-wide,
non-exclusive, royalty free license of its hyaluronic acid technology for
use with the Company's islet technology. The balance of the $6,675,000 cash
portion of the purchase price will be paid not later than July 14, 2001. On
July 14, 2000, Q-Med already owned 562,500 shares of the Company's common
stock, which, together with the Qvestor purchase, brings the Q-Med group's
total common stock ownership to 3,900,000, or approximately 59% of the
Company's outstanding shares.
At the closing in connection with the stock purchase agreement, $1,028,763
in deferred fees and salaries due to officers and employees were satisfied
through the issuance of 236,192 shares of restricted common stock and the
payment of $84,000 in cash. 62,289 shares vest immediately; 50% of the
balance vest after one year, and 1/12 of 50% vest monthly thereafter. Also
at the closing, $358,957 in bridge loans and accrued interest were re-paid
to the officers. Following this repayment, no bridge loans remain
outstanding.
On July 14, 2000, under the Board Retainer Plan, the Audit and Benefits
Committee awarded 17,000 shares of restricted common stock to members of
the board of directors and members of the Scientific Advisory Board and
7,800 shares to officers and employees. Also, the Audit and Benefits
Committee granted options to purchase 12,500 shares at an exercise price of
$4.00 per share to employees under the 1994 Stock Option Plan. The
Committee also declared a discretionary bonus for 1999-2000 payable to
consultants and employees of $92,000.
On April 1, 2000, options to purchase 86,900 shares at $4.00 per share were
issued to then holders of options with exercise prices greater than $4.00
per share. Acceptance of the new options was conditioned on an agreement
that the old options would expire on December 31, 2000. On March 31, 2000,
the Financial Accounting Standards Board (FASB) issued Interpretation No.
44 (FIN 44), an interpretation of APB Opinion
8
No. 25, which included a provision under which the curtailment of the old
options triggered a requirement for "variable award" accounting for these
86,900 options. In light of this new interpretation, the Audit and Benefits
Committee elected to cancel the April 1, 2000 options, and issue, in their
place, 8,690 shares of common stock to the option holders. The Company will
recognize a stock compensation charge for the intrinsic value of the
8,690 shares of common stock on the date they are issued or earned.
On August 8, 2000, the Company signed an amendment to the current lease,
which increases total laboratory and office space by 2,661 square feet;
increases the annual lease by approximately $32,500; and exercises the
first option to extend the lease term for one additional year. Total
improvements required for the new laboratory will total approximately
$10,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations or Plan of Operations.
The following discussion and analysis should be read in conjunction
with the Condensed Financial Statements and the related Notes thereto included
elsewhere in this report. This report contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from the results discussed in the forward-looking statements. These and
additional risk factors are identified in our annual report to the Securities
and Exchange Commission filed on forms 10-KSB and in other SEC filings.
Overview
Ixion is a development stage, biotechnology company. We are in the
development stage because we are devoting substantially all of our efforts to
establishing our business, and our planned principal operations have not
commenced.
Since we were founded in March of 1993, we have principally been doing
research and development, securing patent protection, and raising capital. We
have not received any revenues from the sale of products. We do not expect any
of our drug or device product candidates, which require regulatory approval, to
be commercially available for at least several years; however our nutritional
supplement product, OX-Control(TM), is scheduled for launch in 2001. From
inception through June 30, 2000, we incurred cumulative losses of $4,593,115.
These losses were due primarily to expenditures on research and development,
patent preparation and prosecution, general and administrative activities, and
interest charges.
We expect to continue to incur substantial research and development costs
resulting from
o ongoing research and development programs,
o manufacturing of products for use in clinical trials and preclinical
and clinical testing of our products.
We also expect that general and administrative costs, including
o costs of additional administrative personnel;
o legal and regulatory costs necessary to support preclinical
development and clinical trials, and
o costs associated with the creation of a marketing and sales
organization, if warranted,
will increase in the future, assuming we can finance the increased requirements.
Accordingly, we expect to incur operating losses for the foreseeable future.
9
Our operating expenses will depend on several factors, including the
level of research and development expenses and our success in raising additional
capital. Planned levels of research and development may be maintained without
any additional capital infusion through the end of 2001. Research and
development expenses will depend on the progress and results of our product
development efforts, which we cannot predict. We may sometimes be able to
control the timing of development expenses in part by accelerating or
decelerating preclinical testing and clinical trial activities. As a result of
these factors, we believe that period-to-period comparisons in the future are
not necessarily meaningful
Product Research and Development Plan
Our plan of operation for the remaining year 2000 consists primarily of
research and development and related activities, including:
o further research into the biology of islet and islet stem cell
growth and differentiation, aimed at developing cell lines of
functioning islets for transplantation into diabetic patients;
o further research into identifying and characterizing novel growth
factors associated with islets to discover factors important in
islet cell differentiation and possible regulation of diabetes
and to identify stem cell markers to which we hope to produce
monoclonal antibodies useful in stem cell isolation
o differential gene expression studies on differentiated islet
cells;
o further research into encapsulation materials for transplantation
of islets;
o development of OX-Control(TM), a nutritional supplement product
not requiring regulatory approval;
o further preclinical development of a kit version of our molecular
diagnostic test, the XEntrIx (TM) Oxalobacter formigenes Monitor,
o further preclinical development of our oxalate therapeutic
compound, IxC1-62/47;
o continuing the prosecution and filing of patent applications
o hiring additional employees.
Our actual research and development and related activities may vary
significantly from current plans depending on numerous factors, including
changes in the costs of such activities from current estimates, the results of
our research and development programs, the results of clinical studies, the
timing of regulatory submissions, technological advances, determinations as to
commercial potential, the status of competitive products, and, most important,
our success in raising capital. The focus and direction of our operations will
also be dependent upon the establishment of collaborative arrangements with
other companies, and other factors.
We can not assure you that we will be able to commercialize our
technologies or that profitability will ever be achieved. We expect that our
operating results will fluctuate significantly from quarter to quarter in the
future and will depend on a number of factors, most of which are outside our
control.
Results of Operations
Three Months Ended June 30, 2000 and 1999
===========================================================
Summary of Operations - Three Months Ended June 30,
2000 1999 Percent
change
--------------------------------------
Revenues 85,976 1,165 7,280%
Expenses 377,032 255,158 50%
--------- ---------
Net Loss (291,056) (253,993) 17%
-------- --------
===========================================================
10
Total revenues increased from $1,165 in the second quarter of 1999 to
$85,976 in the second quarter of 2000 mainly as a result of the following:
o Three active NIH research contracts:
o "Enteric Elimination of Oxalic Acid",
o "Islets from Islet Progenitor/Stem Cells for Implantation",
and
o "Digestion of Food Oxalate"
o An increase in interest income generated from the investment of
increased cash flows.
We expect revenue to continue to increase in 2000 because of
o two NIH grants awarded in 1999
o "Digestion of Food Oxalate" and
o "Islets from Islet Progenitor/Stem Cells for Implantation"
which, together, will provide approximately $85,000 of
income during the remainder of 2000,
o the renewal of the "Islets from Islet Progenitor/Stem Cells for
Implantation" NIH grant for an additional $100,000 beginning on
September 1, 2000,
o another NIH grant, entitled "M3 Receptor: Diagnostic Marker for
Sjogren's Syndrome," with payments to begin on August 1, 2000,
for $100,000,
o further activity under the research support agreements,
o increased interest income from investments of excess cash
generated from increased cash flows.
================================================================================
Comparison of G&A Expenses - 2nd Qtr 2000 vs. 2nd Qtr 1999
[GRAPHIC OMITTED - DATA POINTS ARE AS FOLLOWS:]
2nd Qtr 2nd Qtr
1999 2000
as of as of Percent
6/30/99 6/30/00 Change
------- ------- --------
Payroll & Related $ 32,225 $ 51,831 60.84%
Professional 7,905 17,482 121.15%
Office & computer supplies 4,298 9,831 128.73%
Advertising 1,605 3,889 142.27%
Director's Fees 6,000 8,600 43.33%
Deprec & Amort 2,986 3,943 32.05%
Rent & Utilities 2,995 3,774 26.04%
Travel, Meals & Ent. 7,465 4,551 -39.03%
Other G&A 22,084 24,358 10.30%
================================================================================
Operating, general, and administrative expenses increased 46% from
$88,085 in the second quarter of 1999 to $128,259 in the second quarter of 2000.
These increased expenses reflect an increase in the scale of operations,
including:
o increased personnel and related payroll expenses,
o increased professional fees, including accounting and legal expenses ,
o increased director's fees,
11
o increased supplies and computer-related expenses,
o increased utilities usage,
o support of increased research activities,
offset somewhat by a reduction in travel, meals and entertainment and other
miscellaneous operating expenses.
We expect our operating, general and administrative expenses to continue to
increase in 2000 as a result of increased research activities resulting in a
need for increased administrative personnel.
================================================================================
Comparison of R&D Expenses - 2nd Qtr 2000 vs. 2nd Qtr 1999
{GRAHPIC OMITTED - DATA POINTS ARE AS FOLLOWS:]
2nd Qtr 2nd Qtr
ended ended Percent
6/30/00 6/30/99 Change
------- ------- --------
Payroll & Related $ 58,773 $ 49,495 18.75%
Consultants 64,986 12,500 419.89%
Supplies & Animal costs 34,736 16,659 108.50%
Rent & Utilities 19,638 17,412 12.79%
Deprec & Amort 9,071 5,985 51.56%
Scientific Advisors 6,000 25,000 -76.00%
R&D-related Interest 4,153 2,491 66.71%
Other R&D 5,381 495 986.76%
================================================================================
Research and development expenditures consist primarily of:
o payroll-related expenses of research and development personnel,
o laboratory and animal supplies,
o laboratory rent and associated utilities,
o depreciation on laboratory equipment,
o development activities,
o payments for sponsored research,
o scientific advisors,
o regulatory consultants fees,
o interest on the purchase of laboratory equipment and deferred
fees and salaries for research personnel,
o amortization of capitalized patent costs.
Research and development expenses increased 57% from $129,514 in the
second quarter of 1999 to $202,738 in the second quarter of 2000. These
increased expenses reflect an increase in the scale of operations, including
o increased laboratory personnel and related payroll expenses,
o increased fees to regulatory consultants,
o increased laboratory-related supplies and expenses,
o increased laboratory rent and associated utilities,
o interest charges on the purchase of lab equipment and on deferred
fees and salaries,
o increased amortization of patents,
12
o increased depreciation on laboratory equipment,
offset somewhat by a reduction in regulatory and preclinical expenses, and
scientific advisors fees. Our research and development expenses will continue to
increase in 2000 due to an increase in the scale of operations as a result of
the receipt of the research grants referred to above, and as a result of the
completion of the Q-Med Transaction, described below.
Interest expense is comprised only of non-R&D-related interest.
R&D-related interest is accounted for as an expense under research and
development. Interest expense increased 23% from $37,559 in the second quarter
of 1999 to $46,035 in the second quarter of 2000 due primarily to interest on
bridge loans from officers, and the compounding of interest on deferred
administrative fees and salaries, including deferred interest, payable to
related parties.
Six Months Ended June 30, 2000 and 1999
================================================================================
Summary of Operations - Six Months Ended June 30,
Percent
2000 1999 Change
------- ------- -------
Revenues 133,220 1,658 7,935%
Expenses 706,947 491,714 45%
------- -------
Net Loss (573,727) (490,056) 18%
------- -------
================================================================================
Total revenues increased from $1,658 in the first half of 1999 to
$133,220 in the first half of 2000 mainly as a result of the following:
o three active NIH research contracts:
o "Enteric Elimination of Oxalic Acid",
o "Islets from Islet Progenitor/Stem Cells for Implantation",
and
o "Digestion of Food Oxalate"
o one research support agreement, with corporate collaborators, and
o an increase in interest income generated from the investment of
increased cash flows.
We expect revenue to continue to increase in 2000 as a result of
o two NIH grants awarded in 1999
o "Digestion of Food Oxalate"
o "Islets from Islet Progenitor/Stem Cells for Implantation"
both of which, together, will provide approximately $85,000
of income during the remainder of 2000,
o the renewal of the "Islets from Islet Progenitor/Stem Cells for
Implantation" NIH grant for an additional $100,000 beginning on
September 1, 2000,
o another NIH grant, entitled "M3 Receptor: Diagnostic Marker for
Sjogren's Syndrome" , with payments to begin on August 1, 2000,
for $100,000,
o further activity under the research support agreements,
o increased interest income from investments of excess cash
generated from increased cash flows.
13
================================================================================
Comparison of G&A Expenses Six Months Ended 06/30/00 vs. 06/30/99
[GRAPHIC OMITTED - DATA POINTS ARE AS FOLLOWS:]
Six Months Six Months
Ended Ended Percent
6/30/00 6/30/99 Change
------- ------- --------
Payroll & Related 102,152 60,853 67.87%
Advertising 8,524 1,301 555.06%
Office & computer supplies 14,334 6,215 130.63%
Deprec & Amort 7,806 4,596 69.84%
Director's Fees 17,200 12,000 43.33%
Rent & Utilities 7,669 5,989 28.05%
Professional 23,460 29,559 -20.63%
Travel, Meals & Ent. 7,704 12,185 -36.78%
Other G&A 48,768 43,865 11.18%
================================================================================
Operating, general, and administrative expenses increased 36% from
$178,819 in the first half of 1999 to $237,616 in the first half of 2000. These
increased expenses reflect an increase in the scale of operations, including:
o increased personnel and related payroll expenses,
o increased directors fees as a result of the addition of Board
members and increased responsibilities of members of the Audit
and Benefits Committee,
o increased advertising and trade show expenses,
o increased supplies and computer-related expenses,
o increased utilities usage,
o support of increased research activities,
offset somewhat by a decrease in professional fees including accounting and
legal expenses, travel, meals and entertainment expenses.
We expect our operating, general and administrative expenses to continue to
increase in 2000 as a result of increased research activities resulting in a
need for increased administrative personnel.
14
================================================================================
Comparison of R&D Expenses 06/30/00 vs. 06/30/99
{GRAPHIC OMITTED - DATA POINTS ARE AS FOLLOWS:}
Percent
6/30/00 6/30/99 Change
------- ------- -------
Payroll & Related 122,282 90,921 34.49%
Consultants 116,205 25,000 364.82%
Supplies & Animal costs 55,142 20,115 174.13%
Rent & Utilities 39,901 35,307 13.01%
Deprec & Amort 17,660 10,349 70.65%
Scientific Advisors 12,000 50,000 -76.00%
R&D-related Interest 8,122 4,853 67.36%
Travel 4,412 1,947 126.60%
Other R&D 6,128 1,929 217.75%
================================================================================
Research and development expenditures consist primarily of:
o payroll-related expenses of research and development personnel,
o laboratory and animal supplies,
o laboratory rent and associated utilities,
o depreciation on laboratory equipment,
o development activities,
o payments for sponsored research,
o scientific advisors fees,
o regulatory consultants fees,
o interest on the purchase of laboratory equipment and deferred
fees and salaries for research personnel,
o amortization of capitalized patent costs.
Research and development expenses increased 61% from $238,166 in the
first half of 1999 to $381,853 in the first half of 2000. These increased
expenses reflect an increase in the scale of operations, including
o increased laboratory personnel and related payroll expenses,
o increased laboratory rent and associated utilities,
o increased regulatory consultant's fees,
o interest charges on the purchase of lab equipment and on deferred
fees and salaries,
o increased laboratory-related supplies and expenses,
o increased amortization of patents,
o increased depreciation on laboratory equipment,
o increased travel by laboratory personnel,
offset somewhat by a reduction in regulatory and preclinical expenses and
scientific advisors fees. Our research and development expenses will continue to
increase in 2000 due to an increase in the scale of operations as a result of
the receipt of the research grants referred to above, and as a result of the
Q-Med transaction described below.
15
Interest expense is comprised only of non-R&D-related interest.
R&D-related interest is accounted for as an expense under research and
development. Interest expense increased 17% from $74,729 in the first half of
1999 to $87,478 in the first half of 2000 due primarily to interest on bridge
loans from officers, and the compounding of interest on deferred administrative
fees and salaries, including deferred interest, payable to related parties.
Liquidity and Capital Resources
The company's capital requirements relate primarily to research and
development activities and working capital requirements. The Company's research
activities and working capital requirements have been influenced mainly by cash
availability. Historically, the company has funded its cash requirements
primarily through equity financing and research grants.
The Company generated approximately $218,000 in cash, an approximate
$216,000 increase over the same period in 1999. Approximately $644,000 was
provided by financing activities, while approximately $54,000 was used for
investing purposes and approximately $372,000 was used for operating activities.
During the first half of 2000, our development activities have been
funded primarily by the proceeds from the offering, research grants and
agreements, and $562,500 invested by Q-Med in exchange for 281,250 shares of
common stock, pursuant to the Q-Med transaction described below. Through July
14, 2000 we have received a total of $3,884,197 in cash investments and
$3,353,303 in the form of a shareholder receivable from Q-Med, A.B. and issued a
total of 3,900,000 shares of common stock pursuant to the Q-Med Transaction
described below.
The Company secured a $48,000 commercial fixed rate promissory note
with SunTrust Bank, at a 7.83% interest rate and collateralized by a six-month
CD for the same amount paying 5.83% interest. The promissory note calls for 5
monthly interest payments and a final payment of the unpaid principal balance
plus accrued interest on December 23, 2000. There is no prepayment penalty.
Our long-term indebtedness consists primarily of deferred fees and
salaries payable to related individuals and unsecured convertible notes. On July
14, 2000 the total $1,028,763 in deferred fees and salaries were converted into
a total of 236,192 shares of restricted common stock and $84,000 in cash. The
shares vest 50% after one year, monthly thereafter, up to 100% after two years.
The Company has sold 150,000 shares and received gross proceeds of
$600,000 through June 30, 2000 in the public offering that commenced December
10, 1997 and terminated on March 31, 2000. Through June 30, 2000, we have paid
offering-related expenses of $135,870 which have been applied against the
proceeds of the public offering. The officers purchased 25,650 shares of common
stock in the public offering at the public offering price of $4.00 per share. In
payment, the officers cancelled $102,600 in principal amount of the bridge
loans.
On June 5, 1999, we were awarded a $100,000 Phase I grant under the
Small Business Technology Transfer Program for research in our oxalate
technology entitled "Enteric Elimination of Oxalic Acid". We began drawing on
these funds in July, 1999. We subcontracted a large portion of the grant to the
University of California, Irvine with 9,046 was available and used during the
six month period ended June 30, 2000. In September 1999 we also received an
award of $200,000 (covering a 23-month period) from the NIH to support our
diabetes research entitled "Islets from Islet Progenitor/Stem Cells for
Implantation". We have subcontracted $25,000 under this grant, but have utilized
approximately $75,000 through July, 2000, leaving $100,000 available to support
diabetes research through August 31, 2001. In February 2000 we received notice
that we had been awarded another $100,000 NIH Phase I grant under the SBIR
program for research in our oxalate technology entitled "Digestion of Food
Oxalate". We began drawing on these funds in February. We have subcontracted
approximately $30,000 to Wake Forest University, but have approximately $66,000
available to support oxalate research at Ixion through February 28, 2001. In
March 2000 we received notice of an additional NIH SBIR award for research
entitled "M3 Receptor: Diagnostic Marker for Sjogren's Syndrome". We will
subcontract $45,000 to the University of Florida,
16
leaving approximately $55,000 to support Ixion research through January 2001.
These funds will be available beginning August 1, 2000. We have other grant
applications pending.
It has not been necessary to borrow additional funds from officers
since the first quarter of 1999. The bridge loans total $358,957 at June 30,
2000, including accrued interest, and are due on demand. As part of the Q-Med
transaction, described below, the full amount was repaid to the officers in cash
on July 14, 2000.
At June 30, 2000, we had $240,292 in cash and cash equivalents. At July
31, 2000 we had $3,006,574 in cash and cash equivalents. Until required for
operations, our policy is to invest any excess cash reserves in bank deposits,
money market funds, certificates of deposit, commercial paper, corporate notes,
U.S. government instruments and other investment-grade quality instruments with
ratings of P1/A1 or Aaa/AAA or above by Moody's Investors' Services ("Moody's")
or Standard & Poor's Corporation ("S&P") respectively, in accordance with the
Company's investment policy.
In connection with a sponsored research agreement with Genetics
Institute, Inc. which was concluded during 1997, some patent-related expenses
were reimbursed by Genetics Institute. We may be contractually obligated to
repay these reimbursed expenses in installments over a 36 month period upon a
notice to or by Genetics Institute to the effect that their option to negotiate
for a license to our technology, contained in the sponsored research agreement
has expired. We have not given nor received such notice, and, accordingly,
reimbursement has not commenced. We have accrued $42,317 as a long-term
liability pending final notice under the agreement.
We expect that annual lease expenses, which include repayment of funds
provided by lessor for tenant improvements and an emergency generator, to be
approximately $104,000 for 2000. We will continue to have a need to purchase
additional laboratory equipment and estimate that we will need to purchase at
least $350,000 of capital laboratory equipment in the coming year.
We have incurred negative cash flows from operations since our
inception. We have spent and expect to continue to spend, substantial funds to
complete our planned product development efforts, commence clinical trials, and
diversify our technology. Our future capital requirements and the adequacy of
available funds will depend on numerous factors, including
o the successful commercialization of Ox-Control(TM) (our
nutritional supplement) the XEntrIx (TM) Oxalobacter formigenes
Monitor (our diagnostic test), and IxC1-62/47 (our lead
therapeutic compound),
o the successful commercialization of our islet replacement therapy
products,
o progress in our product development efforts,
o the magnitude and scope of development efforts,
o progress with preclinical studies and clinical trials,
o the cost of contract manufacturing and research organizations,
o cost of filing, prosecuting, defending, and enforcing patent
claims and other intellectual property rights,
o competing technological and market developments, and
o the development of strategic alliances for the development and
marketing of our products
In the long-term we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources in order to bring our drug and device products
through regulatory approval to commercialization. We do not have any material
committed sources of additional financing, other than that described in the
section below, regarding the Q-Med transaction. The available resources should
make it possible to scale-up our research and development activities through
2001. We cannot assure you that additional funding, consolidation, or alliance,
if necessary, will be available on acceptable terms, if at all. If adequate
funds are not available, we may be required to delay, scale-back, or eliminate
certain aspects of our
17
operations or attempt to obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates, products, or potential markets. If adequate
funds are not available, our business, financial condition, and results of
operations will be materially and adversely affected.
The Q-Med Transaction
On April 16, 1999, we reached an agreement in principle with Q-Med AB,
a biotechnology company based in Uppsala, Sweden, which was amended on
September7, 1999 in which we issued an option to Q-Med to acquire shares of
newly-issued common stock
Pursuant to this agreement the Company sold 3,337,500 shares of its
common stock to Qvestor, LLC ("Qvestor"), a Delaware subsidiary of Q-Med AB
(publ) ("Q-Med"), a Swedish biotech company whose shares are traded on the
Stockholm stock exchange, on July 14, 2000. (Q-Med AB has no affiliation with
Q-Med, Inc., a Nasdaq listed company.). At closing, Qvestor paid cash of
$3,321,697 and provided certain other consideration in exchange for 3,337,500
newly-issued shares of the Company's Common Stock. The balance of the $6,675,000
cash portion of the purchase price will be paid by Qvestor by July 14, 2001.
Prior to this transaction, Q-Med already owned 562,500 shares. Qvestor and Q-Med
purchased approximately 59% of the issued and outstanding shares of common
stock.
Special Note Regarding Forward-Looking Statements
This quarterly report on Form 10-QSB of Ixion Biotechnology, Inc. for
the quarter ended June 30, 2000 contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 194, as amended, which are
intended to be covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such statements
constitute forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements under Part I, Item 2, Management's
Discussion and Analysis or Plan of Operations, contain forward-looking
statements. Where, in any forward-looking statement, Ixion expresses an
expectation or belief as to future results or events, such expectation or belief
is expressed in good faith and believed to have reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished.
Statements in this report regarding the dates on which we anticipate
commencing clinical trials or filing for regulatory approval, constitute
forward-looking statements under the federal securities laws. Such statements
are subject to risks and uncertainties that could cause the actual timing of
such clinical trials or filings to differ materially from those we project. With
respect to such dates, we have made assumptions regarding, among other things,
o the successful and timely completion of preclinical tests,
o the approval of investigational new drug applications for each of
our drug candidates by the FDA,
o the availability of a simplified application way to seek market
clearance from the FDA for our molecular diagnostic test,
o the availability of adequate clinical supplies,
o the absence of delays in patient enrollment, and
o the availability of the capital resources necessary to complete
the preclinical tests and conduct the clinical trials.
Our ability to commence clinical trials or file for regulatory approval
on the dates anticipated is subject to risks. You should not rely on the dates
on which we anticipate filing regulatory approval or commencing clinical trials.
18
Statements regarding our research and development plans also constitute
forward-looking statements. Actual research and development activities may vary
significantly from the current plans depending on numerous factors including
o changes in the costs of such activities from current estimates,
o the results of the programs,
o the results of clinical studies referred to above,
o the timing of regulatory submissions, technological advances,
o determinations as to commercial potential, and
o the status of competitive products.
All of the estimates stated herein are based on the current
expectations of our management team, which may change in the future due to a
large number of potential events, including unanticipated future developments.
The following factors are factors that could cause actual results or
events to differ materially from those anticipated, and include, but are not
limited to:
o general economic, financial and business conditions
o labor difficulties
o competition for customers in the biotechnology and pharmaceutical
industries
o the costs of research and development of chemical compounds and
products
o and changes in and compliance with governmental regulations
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
As of June 30, 2000, a total of 150,000 shares of common stock at an
aggregate price of $600,000 have been sold in the public offering. From the
effective date of the offering to June 30, 2000, $200 in expenses and $3,390 in
commissions have been paid to Unified Management Company as broker and there
have been no finders' fees. Other offering related expenses through June 30,
2000, amounted to $132,988, all of which have been offset against proceeds. No
payments were made to directors, officers, general partners of the Company, or
to their associates in connection with the offering.
Net offering proceeds as of June 30, 2000 amounted to $463,422. The net
proceeds were used entirely to fund the operations of the Company as reflected
in the financial statements included elsewhere in this report.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held on June 9, 2000. The shareholders of the
Company elected the following directors of the Company to serve until the next
annual meeting.
Weaver H. Gaines
David C. Peck
David M. Margulies
Vincent P. Mihalik
Karl-E. Arfors
Bengt Agerup
Thomas P. Stagnaro
The shareholders approved an amendment to the Company's 1994 Stock
Option Plan which increased the total number of shares which may be issued and
outstanding to 500,000 (including 181,400 previously issued). The amended plan
also eliminated the separate reservation for employees and consultants, on the
one hand, and directors and members of the scientific advisory board on the
other.
19
Votes For Votes Against Abstentions
--------- ------------- -----------
2,750,169 1,100 1,800
Finally, the shareholders of the Company ratified the selection of
PricewaterhouseCoopers LLP as independent accountants for its fiscal year ended
December 31, 2000, and the total number of shares cast "For," cast "Against" and
"Abstentions" are set forth below:
Votes For Votes Against Abstentions
--------- ------------- -----------
27523,769 0 300
Item 5. Other Information
As reported previously on form 8-K, in connection with the sale of
common stock to Qvestor, the Company terminated its prior employment agreement
with Weaver H. Gaines and entered into a new employment agreement with him,
employing Mr. Gaines as Chairman of the Board of Directors and Chief Executive
Officer of the Company. The Company also terminated its Deferred Compensation
Plan and issued common stock to the Chairman, the President, the Senior Vice
President and Chief Scientist, and one other employee, and in the case of the
President, $84,000 in cash, in settlement of their deferred accounts which were
long term, unfunded liabilities of the Company. The Company also terminated its
Employment Agreement with David Peck dated August 31, 1994 and the Consulting
Agreement with Mr. Peck dated July 1, 1996. Mr. Peck resigned as President and
Chief Financial Officer, but will remain as a director and was elected Chairman
of the Finance Committee of the board. Finally, Dr. Karl-E. Arfors, a director
since 1998, resigned effective July 1, 2000, and Mr. P.O. Wallstrom, President
of Q-Med, was elected to fill the vacancy. Dr. Arfors became a member of the
Company's Scientific Advisory Board.
Item 6. Exhibits and Reports on Form 8-K
Exhibits marked by asterisk(s) are included with this Report; other exhibits
have been incorporated by reference to other documents filed by us with the SEC.
(a) Exhibits
Exhibit Description Page
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession................................ None
** (2.1) Stock Purchase Agreement, dated July 14, 2000,
between the Qvestor and the Company
(3) Articles of Incorporation.................................None
(4) Instruments defining the Rights of Security Holders.......None
(11) Statement re: Computation of Per Share Earnings...........None
(15) Letter re: Unaudited Interim Financial
Information...............................................None
(18) Letter re: Change in Accounting Principles................None
20
(19) Report Furnished to Security Holders......................None
**(22) Published Report re: Matters Submitted to Vote of
Security Holders
(23) Consents of Experts and Counsel...........................None
(24) Power of Attorney.........................................None
* (27) Financial Data Schedule.....................................24
(99) Additional Exhibits.......................................None
**(99.1) Employment Agreement, dated July 14, 2000, between
Ixion Biotechnology, Inc., and Weaver H. Gaines
**(99.2) Shareholders Agreement, dated July 14, 2000, among
Q-Med, Qvestor, Ammon B. Peck, Weaver H. Gaines, and
the Company
**(99.3) Director's Agreement, dated July 14, 2000, among
Qvestor, Q-Med, and the Company
**(99.4) Voting Trust Agreement, dated July 14, 2000, between
Qvestor and the Company
**(99.5) Side letter, dated July 14, 2000, from Q-Med to
Weaver H. Gaines, Chairman and CEO of the Company
**(99.6) Agreement and Release, dated July 14, 2000, between
Ammon B. Peck and the Company
**(99.7) Agreement and Release, dated July 14, 2000, between
David C. Peck and the Company
**(99.8) Agreement and Release, dated July 14, 2000, between
Weaver H. Gaines and the Company
**(99.9) Agreement and Release, dated July 14, 2000, between
Theodore L. Snow and the Company
**(99.10) Press release dated July 17, 2000
- - ---------------
*Filed herewith
**Filed on Form 8-K for the period ended July 31, 2000.
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 31, 2000 in connection with the exercise of
an option by Qvestor, LLC ("Qvestor"), a Delaware subsidiary of Q-Med AB (publ),
a Swedish biotech company whose shares are traded on the Stockholm stock
exchange, in which an option for a total of 3,337,500 shares was exercised.
21
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Ixion Biotechnology, Inc.
Dated: August 9, 2000 By: /s/ Weaver H. Gaines
----------------------------------
Weaver H. Gaines
Chairman and Chief Executive Officer
Chief Financial Officer
Dated: August 9, 2000 By: /s/ Kimberly A. Ramsey
----------------------------------
Kimberly A. Ramsey
Vice President and Controller
(Principal Accounting Officer)
Exhibit Index
Exhibit Description Page
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.................................None
** (2.1) Stock Purchase Agreement, dated July 14, 2000,
between the Qvestor and the Company
(3) Articles of Incorporation.................................None
(4) Instruments defining the Rights of Security Holders.......None
(11) Statement re: Computation of Per Share Earnings...........None
(15) Letter re: Unaudited Interim Financial Information........None
(18) Letter re: Change in Accounting Principles................None
(19) Report Furnished to Security Holders......................None
** (22) Published Report re: Matters Submitted to Vote of
Security Holders
(23) Consents of Experts and Counsel...........................None
(24) Power of Attorney.........................................None
*(27) Financial Data Schedule.....................................24
22
(99) Additional Exhibits.......................................None
**(99.1) Employment Agreement, dated July 14, 2000, between
Ixion Biotechnology, Inc., and Weaver H. Gaines
**(99.2) Shareholders Agreement, dated July 14, 2000, among
Q-Med, Qvestor, Ammon B. Peck, Weaver H. Gaines, and
the Company
**(99.3) Director's Agreement, dated July 14, 2000, among
Qvestor, Q-Med, and the Company
**(99.4) Voting Trust Agreement, dated July 14, 2000, between
Qvestor and the Company
**(99.5) Side letter, dated July 14, 2000, from Q-Med to
Weaver H. Gaines, Chairman and CEO of the Company
**(99.6) Agreement and Release, dated July 14, 2000, between
Ammon B. Peck and the Company
**(99.7) Agreement and Release, dated July 14, 2000, between
David C. Peck and the Company
**(99.8) Agreement and Release, dated July 14, 2000, between
Weaver H. Gaines and the Company
**(99.9) Agreement and Release, dated July 14, 2000, between
Theodore L. Snow and the Company
**(99.10) Press release dated July 17, 2000
- - ------------
*Filed herewith
**Filed in Form 8-K for the period ended July 31, 2000.
23