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OMBP > SEC Filings for OMBP > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for OMNI BIO PHARMACEUTICAL, INC.

Form 10-Q for OMNI BIO PHARMACEUTICAL, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD LOOKING STATEMENTS

The following discussion contains forward-looking statements regarding us, our business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation: our ability to successfully develop products and services that are commercially successful; the ability of BioMimetix (an equity investee) to successfully develop new products and services for new markets; the impact of competition on our business, changes in law or regulatory requirements that adversely affect our ability to market our products; the cost and success of our research and development efforts; delays in the introduction of our products or services into the market; our ability to protect the intellectual property we license; our ability to secure adequate financing for our operations; and our failure to keep pace with our competitors. For additional factors that may affect the validity of our forward-looking statements, see the risk factors set forth in Part I. Item 1A "Risk Factors" of our 2012 Form 10-K.

When used in this report, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and other reports filed with the Securities and Exchange Commission ("SEC") that attempt to advise interested parties of the risks and factors that may affect our business.

Overview

We are a biopharmaceutical company that was initially formed to explore new methods of use of an FDA-approved drug, Alpha 1-antitrypsin ("AAT") also referred to as "plasma-derived AAT." AAT is purified from human blood and is widely believed to be the body's most powerful anti-inflammatory protein. AAT has a greater than 20-year safety record as an approved treatment for emphysema in AAT-deficient patients. Our initial strategy was based on licensing "methods of use" patents and patent applications that cover new indications for AAT and commercializing these with existing AAT manufacturers. Our initial, targeted markets were infectious diseases, including biohazards, but in 2009 we changed our focus to auto-immune and inflammatory diseases such as Type 1 diabetes (also known as "juvenile diabetes").

We are the licensee of patents and patent applications related to methods of use for plasma-derived AAT. We currently hold three licenses with RUC in the areas of treatments for: diabetes, graft rejection/ cellular transplantation, bacterial disorders and viral disorders. We also hold a fourth license to an issued patent for the treatment of diabetes with a privately-held company, Bio Holding, Inc. To date, our business efforts have been largely dedicated in pursuing additional capital in order to fund SRAs related to evaluating the therapeutic effects of plasma-derived AAT on bacterial disorders, viral disorders and diabetes, and developing several synthetic fusion proteins involving Fc-AAT, and funding a human clinical trial using plasma-derived AAT to evaluate its therapeutic effects in the treatment of Type 1 diabetics.

In the second half of 2011, we began to look at novel alternatives to create Fc-AAT and filed provisional patent applications for compositions, methods and uses for Fc-AAT. We believe the successful characterization and development of Fc-AAT would afford us with a patentable composition that could be introduced into new markets. In addition, if we are successful, we believe Fc-AAT would be less costly and require less time to manufacture than plasma-derived AAT, and preliminary studies indicate that it has higher potency in preliminary laboratory tests as compared to plasma-derived AAT.


Currently, we are evaluating various forms of Fc-AAT and will likely select one for further development. Subject to raising sufficient capital, we intend to proceed with scale-up synthesis and safety and toxicity studies. If successful in these efforts, we would file with the FDA for an "Investigational New Drug" ("IND"). Pursuit of an IND will require substantial additional capital. If we choose to proceed with human clinical trials to test Fc-AAT and pursue a "New Drug Application" ("NDA") pathway, substantial additional capital would be required, and we would most likely look to partner with a large pharmaceutical company for funding and management of the human clinical trial process. An approved NDA for Fc-AAT could then be licensed to a large pharmaceutical company or directly marketed by us. We would envision hiring or engaging additional experienced and qualified professionals to help guide Fc-AAT through the IND process, into human clinical applications and the NDA process.

On September 26, 2012, we executed an exclusive license agreement (the "Fc-AAT License") with RUC for one international patent application and four United States provisional patent applications (the "Fc-AAT Patent Applications") that focus on AAT fusion molecules and methods of use of these molecules. As consideration for the Fc-AAT License, we were obligated to pay a license fee plus certain patent prosecution costs in the amount of $31,174, which were paid in October 2012. In addition, we are obligated to fund all patent prosecution costs for the Fc-AAT Patent Applications and pay an annual minimum royalty of $15,000, due on September 30, 2013 and on September 30 of each year thereafter.

We also hold a license from RUC to a patent application for an "earlier version" of Fc-AAT. We can make no assurances that a patent will be issued for the earlier version of Fc-AAT or for any of our Fc-AAT Patent Applications.

Results of Operations - For the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

The following discussion relates to our operations for the three months ended September 30, 2012 (the "September 2012 quarter") as compared to the three months ended September 30, 2011 (the "September 2011 quarter").

General and administrative expenses - General and administrative expenses for the September 2012 quarter were $1,104,308, which included $860,728 of share-based compensation, as compared to $1,271,348 in the September 2011 quarter, which included $919,803 of share-based compensation. As we have disclosed in prior filings, management views general and administrative expenses exclusive of share-based compensation as an important non-GAAP measure. As a development stage company, we believe that excluding the impact of share-based compensation better reflects the recurring economic characteristics of our business to shareholders and potential investors. Accordingly, excluding share-based compensation, general and administrative expenses in the September 2012 quarter were $243,580 as compared to $351,545 for the September 2011 quarter, a decrease of $107,965, or approximately 31%. This decrease was primarily due to lower expenses in the September 2012 quarter in certain expense categories, most notably officer salaries of approximately $52,000 and legal expenses of approximately $48,000.

Research and development expenses - Research and development expenses for the September 2012 quarter were $127,500 as compared to $63,743 in the September 2011 quarter. This increase was primarily the result of the expenses incurred under the Fc-AAT SRA, which was extended effective July 3, 2012 and required a $105,000 payment for work performed through September 30, 2012. All research and development expense for the September 2012 quarter was comprised of work in the development of a new Fc-AAT compound. For the September 2011 quarter, all research and development expense was comprised of costs incurred in a clinical trial in Type 1 diabetes.

Non-operating income (expenses) - Net non-operating expenses for the September 2012 quarter were $98,389 as compared to $475,917 for the September 2011 quarter, a decrease of $377,528. This decrease was primarily due to a decrease of $197,870 in the equity loss from BioMimetix, which had a net loss of $655,317 for the September 2012 quarter versus a net loss of $1,195,902 for the September 2011 quarter; the change in the estimated fair value of a derivative liability of $119,368, which was recognized as non-operating other income for the September 2012 quarter; and a decrease of $140,959 in a charge for a modification of an investor warrant that was recorded for the September 2011 quarter. During the September 2012 quarter, we had increases in interest expense and debt discount amortization expense, in the aggregate amount of $80,197, related to the Convertible Notes that were issued in May and June 2012 as part of the 2012 Private Placement.


Results of Operations - For the Six Months Ended September 30, 2012 Compared to the Six Months Ended September 30, 2011

The following discussion relates to our operations for the six months ended September 30, 2012 (the "September 2012 period") as compared to the six months ended September 30, 2011 (the "September 2011 period").

General and administrative expenses - General and administrative expenses for the September 2012 period were $2,224,748, which included $1,737,035 of share-based compensation, as compared to $2,587,548 in the September 2011 period, which included $1,839,606 of share-based compensation. As described above, management views general and administrative expenses exclusive of share-based compensation as an important non-GAAP measure. Excluding share-based compensation, general and administrative expenses in the September 2012 period were $487,713 as compared to $747,942 for the September 2012 period, a decrease of $260,229, or approximately 35%. This decrease was primarily due to lower expenses in the September 2012 period in certain expense categories, most notably officer salaries of approximately $86,000; legal expenses of approximately $94,000; minimum royalties due under a license agreement of $50,000, of which $25,000 was originally due as of June 30, 2011 and subsequently discharged as of June 30, 2012; and financing costs of $21,000 incurred during the September 2011 period from an aborted financing transaction.

Research and development expenses - Research and development expenses for the September 2012 period were $149,778 as compared to $255,875 in the September 2011 period. This decrease was primarily the result of the termination of an SRA in the area of viral disorders effective July 2011, which resulted in a charge for all amounts due under a settlement agreement of approximately $114,000 recorded during the September 2011 period.

Non-operating income (expenses) - Net non-operating expenses for the September 2012 period were $87,291 as compared to $475,239 for the September 2011 period, a decrease of $387,948. This decrease was primarily due to the change in the estimated fair value of a derivative liability of $176,706, which was recognized as non-operating other income for the September 2012 period; a gain on sale of an equity interest in a related party of $184,021 and a decrease of $140,959 in a charge for a modification of an investor warrant that was recorded for the September 2011 period. During the September 2012 period, we had increases in interest expense and debt discount amortization expense, in the aggregate amount of $101,511, related to the Convertible Notes that were issued in May and June 2012 as part of the 2012 Private Placement.

Liquidity and Capital Resources

Our unaudited consolidated financial statements as presented in this report have been prepared in conformity with US GAAP, which contemplate our continuation as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2012, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The "going concern" qualification resulted from, among other things, our development-stage status, no revenue recognized since inception, our net losses since inception and the current and expected contractual commitments due under research and development work for Fc-AAT. As of September 30, 2012, we remain a development stage company and our focus continues to be on raising capital to fund current operations and research and development efforts. As of September 30, 2012, we had a deficit accumulated from inception of approximately $39.0 million, which included total non-cash charges from inception of approximately $30.6 million. These conditions raise substantial doubt as to our ability to continue as a going concern. Our unaudited consolidated financial statements contained in this report do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be different should we be unable to continue as a going concern.


May and June 2012 Financings

In May 2012, under a share repurchase agreement with BioMimetix, BioMimetix repurchased 62,500 of its shares from us for cash of $500,000, or $8.00 per share.

In May 2012, we commenced the sale of Units in the 2012 Private Placement at a purchase price of $1.00 per Unit. Each Unit was comprised of a Convertible Note with a principal amount of $1.00 that is convertible into one share of our Common Stock at a price of $1.00 per share, and a 2012 Warrant to purchase one share of Common Stock that is exercisable at $1.50 per share through May 24, 2017. In May and June 2012, we conducted four closings under the 2012 Private Placement for the sale of an aggregate of 1,062,500 Units for an aggregate subscription price of $1,062,500. After deducting offering expenses, we raised net cash proceeds of approximately $912,000. The 2012 Private Placement offering period terminated on July 31, 2012.

The Convertible Notes have a three-year term from the date of issuance and are convertible any time during this term at the option of the Note Holder. The Convertible Notes bear interest at an annual rate of 10%, payable in shares of Common Stock at the rate of $1.00 per share on the earlier of their conversion date or maturity date. We may prepay the Convertible Notes in cash and accrued interest in shares of Common Stock at any time upon 20 days' written notice. If at any time within 18 months following the Final Closing of the 2012 Private Placement, we raise New Financing in excess of $1.0 million at a price that is lower than the Conversion Price, the Conversion Price will be reset to the lower price. Excluded from New Financing are cash proceeds raised from the exercise of our currently outstanding investor warrants that were sold on March 31, 2009, which are exercisable at $0.50 per share, the sale of any of our assets, and the issuance of securities to our employees and directors as equity compensation. The Convertible Notes are secured by 95,625 shares of BioMimetix Stock, which we own. For each dollar invested, the Convertible Notes are collateralized by 0.09 shares of BioMimetix Stock (the "Collateral Shares"). The Collateral Shares are the sole and only recourse upon a default by us of our obligations under the Convertible Notes and the actual value of the Collateral Shares may be less than the principal amount of the Convertible Notes.

GVC Capital, a related party, served as the placement agent for the 2012 Private Placement and was paid a due diligence fee of $25,000 plus a 10% cash commission of the gross proceeds raised. In addition, we were obligated to sell for a nominal fee to GVC for services rendered, as the placement agent, the PA Warrants to purchase 10% of the total securities sold in the 2012 Private Placement. One half of the PA Warrants are exercisable at $1.00 per share and one half are exercisable at $1.50 per share. We issued 106,250 PA Warrants exercisable at $1.00 per share and 106,250 PA Warrants exercisable at $1.50 per share. The PA Warrants will expire on June 26, 2017 and carry a cashless exercise provision. Two of our directors are Senior Managing Partners in GVC Capital.

October 2012 Financing

On October 31, 2012 (the "Effective Date"), we completed a financing (the "October 2012 Financing") and executed a Senior Secured Convertible Promissory Note (the "Note") with BOCO Investments, LLC ("BOCO"), a significant shareholder and affiliate of Omni for cash in the amount of $600,000, which is convertible into shares of our common stock at a price of $1.00 per share (the "Conversion Price"). As additional consideration, we issued to BOCO a warrant to purchase 600,000 shares of our common stock (the "Warrant"), which is exercisable at $1.50 per share through October 31, 2017. After deducting offering expenses, net cash proceeds to us from the Note totaled approximately $535,000. The net proceeds of the Note will be used for general working capital purposes and research and development projects.

The Note has a three-year term and is due October 31, 2015, and is convertible at any time during this term at the option of BOCO. The Note bears interest at an annual rate of 10%, payable, in the sole discretion of Omni, in cash or in shares of our common stock at the rate of $1.00 per share, or a combination of both, on the earlier of the conversion date or the maturity date. We may prepay the Note, in whole or in part, at any time upon 20 days' written notice. If at any time within 12 months following the Effective Date we raise additional capital ("New Financing") in excess of $1.0 million at a price per share that is lower than the Conversion Price (the "Subsequent Conversion Price"), the Conversion Price will be reset to the Subsequent Conversion Price. Excluded from New Financing is funding raised from the exercise of our currently outstanding investor warrants that were sold on March 31, 2009, which are exercisable at $0.50 per share, the sale of any of our assets and issuance of securities to our employees and directors as equity compensation. The Note is secured by a pledge of 54,000 shares of BioMimetix Common Stock, owned by us. The outstanding balance of any amount owing under this Note, which is not paid when due under the terms of this Note, shall bear interest at the rate of 15% per annum.


GVC Capital served as the placement agent for the October 2012 Financing and was paid a 10% commission of the gross proceeds raised. In addition, we were obligated to sell for a nominal fee to GVC for services rendered, as the placement agent, warrants (the "October 2012 Warrants") to purchase 10% of the total securities sold in the October 2012 Financing. One half of the October 2012 Warrants are exercisable at $1.00 per share and one half are exercisable at $1.50 per share, which resulted in the issuance of 60,000 October 2012 Warrants exercisable at $1.00 per share and 60,000 October 2012 Warrants exercisable at $1.50 per share. The October 2012 Warrants expire on October 31, 2017 and carry a cashless exercise provision.

Cash and Cash Equivalents

We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents at September 30, 2012, March 31, 2012 and September 30, 2011 were approximately $681,000, $133,000 and $939,000, respectively.

Cash Flows from Operating Activities

For the September 2012 period, net cash used in operating activities was $864,631. The primary uses of cash from operations were general and administrative expenses, excluding share-based compensation, which totaled $487,713, research and development expenses of $149,778, the final payment of $100,000 under the settlement agreement for an SRA related to viral disorders and an increase in other current assets and a decrease in accounts payable in the aggregate of $117,000 based on the timing of payments as of the end of the September 2011 period.

For the September 2011 period, net cash used in operating activities was $807,127. The primary uses of cash from operations were general and administrative expenses, excluding share-based compensation, which totaled $747,942 and research and development expenses of $255,875. For this same period, the primary source of cash from operations was an increase in the accrual recorded as of June 30, 2011 in the amount of $140,223 related to the termination of an SRA for viral disorders.

Cash Flows from Investing Activities

For the September 2012 period, we generated $500,000 of cash from investing activities from the sale of 62,500 shares of BioMimetix Stock to BioMimetix. For the September 2011 period, we used $2.0 million of cash from investing activities for the purchase of an equity investment in BioMimetix.

Cash Flows from Financing Activities

For the September 2012 period, we generated $912,220 of net cash from financing activities from the 2012 Private Placement. This amount was net of offering costs of approximately $150,000. For the September 2011 period, we generated $3,443,870 of net cash from financing activities from a private placement equity offering. This amount was net of offering costs of approximately $354,000.

Anticipated Cash Commitments

We expect our cash and cash equivalents on hand as of September 30, 2012 plus the cash raised from the recent financing in October 2012 will allow us to operate through the first quarter of calendar year 2013 based on current operating levels and anticipated research and development commitments. We will need to raise additional capital to carry out our business plan and to operate beyond that period. Failure to obtain additional capital will have a material adverse impact on our ability to continue to operate as a going concern. There can be no assurance that additional capital will be available to us on acceptable terms or at all.


Critical Accounting Policies

We prepare our financial statements in accordance with US GAAP. Our significant accounting policies are disclosed in Note 2 to our consolidated financial statements contained in our 2012 Form 10-K. The accounting policies most fundamental to the understanding of our financial statements are our use of estimates, including the computation of share-based compensation; research and development cost; capitalization of license agreements and impairment analysis of long-term assets; and the valuation, classification and recording of debt and equity transactions, including those that include stock purchase warrants and derivatives.

The accounting for the 2012 Private Placement involved the valuation of the Convertible Notes and the 2012 Warrants based on fair values as calculated using estimates of relative fair values, which included valuations using the Black-Scholes model. We concluded that the Conversion Feature of the Convertible Notes met the definition of a derivative liability that is required to be revalued at the end of each reporting period. The initial valuation, classification and subsequent accounting of these transactions required significant estimates and judgment by management.

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