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IBIO > SEC Filings for IBIO > Form 10-K on 30-Sep-2013All Recent SEC Filings

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Form 10-K for IBIO, INC.


30-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read together with our financial statements and the notes thereto and other information included elsewhere in this Annual Report on Form 10-K.

Forward-Looking Information and Factors That May Affect Future Results

The following discussion contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in the following discussion, other than statements that are purely historical, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "potential," "anticipates," "plans," or "intends" or the negative thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are based upon management's present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future and are subject to known and unknown risks and uncertainties that could cause actual results, events or developments to be materially different from those indicated in such forward-looking statements, including the risks and uncertainties set forth in Item 1A - Risk Factors. These risks and uncertainties should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no assurance can be given that the future results covered by the forward-looking statements will be achieved.

Overview

We are a biotechnology company focused on commercializing our proprietary platform technologies: the iBioLaunch™ platform for vaccines and therapeutic proteins, and the iBioModulator™ platform for vaccine enhancement. We plan on developing and commercializing select product candidates derived from the iBioLaunch platform, which is a proprietary, transformative technology for development and production of biologics using transient gene expression in hydroponically grown, unmodified green plants. The iBioModulator platform is complementary to the iBioLaunch platform and is designed to significantly improve vaccine products with both higher potency and greater duration of effect.

The iBioModulator platform can be used with any recombinant expression technology for vaccine development and production. We believe our technology offers advantages that are not available with conventional manufacturing systems. These anticipated advantages may include the ability to manufacture therapeutic proteins that are difficult or impossible to produce with conventional methods, reduced production time, and lower capital and operating costs. iBio was established in August 2008 as the result of a spin-off from Integrated BioPharma, Inc. We operate in one business segment under the direction of our Executive Chairman, and our operations and assets reside exclusively in the United States.

Our near-term focus is to realize two key objectives: (1) the establishment of additional business arrangements pursuant to which commercial, government and not-for-profit licensees will utilize our platform technology in connection with the production and development of products for both therapeutic and vaccine uses; and (2) the further advancement of product candidates selected for clinical development. These objectives are a part of our strategy to commercialize the proprietary technology we have developed and validated.

Our strategy to engage in partnering and out-licensing of our technology preserves the opportunity for iBio to share in the successful development and commercialization of product candidates while conserving our own capital and financial resources as licensees undertake to conduct and fund the development and commercialization of the product candidates derived under our platform. In addition to financial resources we may receive, we believe that successful development by licensees of product candidates derived from the iBio platforms will further validate our technology, increase awareness of the advantages that may be realized by its use and promote broader adoption of our transformative technology.

The advancement of product candidates which have been derived from the iBioLaunch platform is also a key element of our strategy. We believe that selecting and developing products which individually have substantial commercial value and are representative of classes of pharmaceuticals that can be successfully produced using the iBioLaunch technology will allow us to maximize the near and longer term value of our technology. To realize this result, we believe that we should seek to advance designated product candidates through the preclinical stage required for submission of Investigational New Drug Applications and, in some instances, early stage clinical development.

Results of Operations

Revenue

Revenue for the years ended June 30, 2013 and 2012 was approximately $1.0 million and $1.3 million, respectively. The revenue was the result of research and development services provided to FioCruz by Fraunhofer, as iBio's contractor, to assist in implementing the Company's technology for a planned Phase I clinical trial of a yellow fever vaccine, pursuant to an agreement entered into in January 2011. There was no license revenue for the years ended June 30, 2013 and 2012.

Research and Development Expenses

Research and development expenses for the year ended June 30, 2013 were approximately $3.4 million versus approximately $5.0 million for the year ended June 30, 2012, a decline of approximately $1.6 million, or 31%. Approximately $1.1 million of the decline was attributable to the completion by Fraunhofer of two research projects in the prior year while there were no projects of similar size and cost undertaken in the current year. In addition, the prior year results included two months of expense totaling approximately $0.3 million related to the April 2012 semi-annual $1 million TTA payment. For the current year, there was no expense recorded against the April 2013 payment due, as no work was performed by Fraunhofer to earn such payment. As of June 30, 2013, the $1 million liability for the contractually obligated April 2013 payment was recognized on the Company's balance sheet in accrued expenses with an offsetting debit to prepaid expenses. The Company and Fraunhofer have been involved in an on-going dialogue to restructure the nature of the relationship and the contractual obligations between the parties. That process reached its conclusion in September 2013 with the ratification of the Settlement Agreement by the Boards of Directors of the parties discussed in detail in Contractual Obligations below.

General and Administrative Expenses

General and administrative expenses for the year ended June 30, 2013 were approximately $4.2 million versus approximately $5.6 million for the year ended June 30, 2012, a decline of approximately $1.4 million, or 25%. The $1.4 million decline was almost entirely related to lower share-based compensation expense in the current year, as older options with a higher grant date fair value vested in the prior year while more recently issued options vesting in the current year had a lower grant date fair value. In addition, the prior year general and administrative expenses included an option modification charge of approximately $0.6 million. While consulting and investor relations expenses declined by approximately $0.3 million in the current year versus the prior year, this was offset by higher personnel-related costs in the current year as full-time employees were added to perform these and other activities on behalf of the Company.

Other Income (Expense)

Total other income for the year ended June 30, 2013 was approximately $0.5 million versus approximately $3.7 million of income for the year ended June 30, 2012, a decline of approximately $3.2 million, or 87%. This was almost entirely due to the year-over-year change in the fair value of the warrant derivative liability, which must be marked to market each reporting period with changes charged to other income or expense as appropriate. This liability has continued to decline as the fair value of the warrant derivative liability has fallen dramatically over the past two years, finally reaching no value as of June 30, 2013. The August 2008 options containing the anti-dilution provision that is the source of this derivative liability expired in August 2013. In addition, interest expense increased slightly in the current year versus the prior year as the balance due to Fraunhofer under the TTA continued to rise.

Liquidity and Capital Resources

Net Cash Used in Operating Activities

For the years ended June 30, 2013 and 2012, we incurred net losses of approximately $6.2 million and $5.7 million, respectively. After adjustments for non-cash items and changes in operating assets and liabilities, the net cash used in operating activities for the years ended June 30, 2013 and 2012 was approximately $4.8 million and $6.0 million, respectively. The decline of approximately $1.2 million of cash used in operating activities was primarily due to lower cash expenditures on research and development activities in the current year versus the prior year resulting from the completion of two projects.

Net Cash Used in Investing Activities

For each of the years ended June 30, 2013 and 2012, net cash used in investing activities was approximately $0.2 million. Cash used in investing activities was primarily attributable to additions to intangible assets.

Net Cash Provided by Financing Activities

For the years ended June 30, 2013 and 2012, net cash provided by financing activities was approximately $3.8 million and $9.0 million, respectively. The Company completed equity offerings in April 2013 and January 2012 and these amounts represent the proceeds of those offerings net of the related expenses.

Funding Requirements

We have incurred significant losses and negative cash flows from operations since our spinoff from Integrated BioPharma, Inc. in August 2008. As of June 30, 2013, our accumulated deficit was approximately $37.5 million, and we used approximately $4.8 million and $6.0 million of cash for operating activities for the years ended June 30, 2013 and 2012, respectively. As of June 30, 2013, cash on hand of approximately $4.4 million, considering the effects of the Settlement Agreement completed in September 2013, is expected to support the Company's activities through the third quarter of the fiscal year ending June 30, 2014. We have historically financed our activities through the sale of common stock and warrants.

On April 26, 2013, we, under our effective Registration Statement on Form S-3, raised approximately $3.8 million in net proceeds by issuing 8,925,000 shares of common stock and warrants to purchase up to 3,570,000 shares of common stock. The common stock and warrants were sold together as Units, with each Unit consisting of one share of common stock and 0.40 of one warrant to purchase one share of common stock. The public offering price of each Unit was $0.48. The warrants have an exercise price of $0.53 per share, are immediately exercisable and will expire on the third anniversary of the date of issuance.

We plan to fund our future business operations using cash on hand, through proceeds from the sale of additional equity or other securities and through proceeds realized in connection with license and collaboration arrangements. The history of significant losses, the negative cash flow from operations, the limited cash resources currently on hand and our dependence on our ability - about which there can be no certainty - to obtain additional financing to fund our operations after the current cash resources are exhausted raises substantial doubt about our ability to continue as a going concern.

Pursuant to rules promulgated by the Securities and Exchange Commission that are applicable to iBio and other reporting companies that have a public float (the market value of securities held by non-affiliates) of less than $75 million, under our effective Registration Statement on Form S-3, we may not during any 12 month period offer securities that have a market value greater than 1/3 of the public float. The closing prices of our common stock during the 60 day period prior to each offering, the number of shares of common stock then held by non-affiliates and prior offers and sales of shares of common stock registered under the Registration Statement on Form S-3 during a 12-month period prior to the date of offering are factors in calculating the aggregate offering proceeds that may be realized. The April 26, 2013 equity offering has effectively eliminated the capacity currently available under our effective Registration Statement on Form S-3. As a result, unless either, or both, our stock price and/or the number of shares of our common stock held by non-affiliates increases substantially, it is anticipated that we will be unable to complete additional offerings of securities under our effective Registration Statement on Form S-3 prior to April 2014.

To the extent we seek to sell additional equity securities prior to April 2014, we may be required to effect such offers and sales pursuant to private placements or registration under a Registration Statement on Form S-1. We cannot be certain that such funding will be available on favorable terms, or available at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. If we are unable to raise funds when required or on favorable terms, we may have to: a) significantly delay, scale back, or discontinue the product application and/or commercialization of our proprietary technologies; b) seek collaborators for our technology and product candidates on terms that are less favorable than might otherwise be available; c) relinquish or otherwise dispose of rights to technologies, product candidates, or products that we would otherwise seek to develop or commercialize; or d) possibly cease operations.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually limited purposes. As of June 30, 2013, we were not involved in any SPE transactions.

Contractual Obligations

Our most significant contractual obligation is the TTA with Fraunhofer. In September 2013, we and Fraunhofer completed the Settlement Agreement, which is intended to better align the mutual interests of iBio and Fraunhofer and which has the following effects:

· Our liabilities to Fraunhofer in the amount of approximately $2.9 million as of June 30, 2013 were released and terminated;

· The term of the TTA has been extended by one year and will now expire on December 31, 2015;

· Our obligation under the TTA, prior to the Settlement Agreement, to make three $1 million payments to Fraunhofer in April 2013, November 2013, and April 2014 ("Guaranteed Annual Payments") was terminated and replaced with an obligation to engage Fraunhofer to perform at least $3 million of research and development work as directed by iBio prior to December 31, 2015. We believe that our right to select and direct specific projects will improve the efficiency of our product development activities and that the extension of the period over which this commitment must be fulfilled will enhance our ability to manage our cash outflow;

· We terminated and released Fraunhofer from the obligation to make further financial contributions toward the enhancement, improvement and expansion of our technology in an amount at least equal to the Guaranteed Annual Payments, because we believe our technology development phase is completed and now are focusing on product development. In addition, we terminated and released Fraunhofer from the obligation to further reimburse us for certain past and future patent-related expenses;

· Our obligation to remit to Fraunhofer minimum annual royalty payments in the amount of $200,000 was terminated. Instead we will be obligated to remit royalties to Fraunhofer only on technology license revenues that we actually receive and on revenues from actual sales by us of products derived from our technology until the later of November 2023 or until such time as the aggregate royalty payments total at least $4 million;

· The rate at which we will be obligated to pay royalties to Fraunhofer on iBioLaunch and iBioModulator license revenues we receive was reduced from 15% to 10%; and

· Any and all other claims of each party to any other amounts due at June 30, 2013 were mutually released.

The pro forma effects of the Settlement Agreement as if it were reflected on our condensed balance sheet as of June 30, 2013 are as follows (in thousands):

                                                 Actual             Pro forma
                                              June 30, 2013       June 30, 2013
                                                (Audited)          (Unaudited)
Assets
Current assets:
Cash                                         $         4,414     $         4,414
Accounts receivable - trade                            1,007               1,007
Prepaid expenses and other current assets              1,214                 214
Total current assets                                   6,635               5,635

Fixed assets, net                                          6                   6
Intangible assets, net                                 2,713               2,713
Total assets                                 $         9,354     $         8,354

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                             $         2,401     $         1,238
Accrued expenses                                       1,885                 185
Warrant derivative liability                               -                   -
Total liabilities                                      4,286               1,423

Commitments and contingencies

Stockholders' equity:
Preferred stock                                            -                   -
Common stock                                              57                  57
Additional paid-in capital                            42,547              42,547
Accumulated deficit                                  (37,536 )           (35,673 )
Total stockholders' equity                             5,068               6,931
Total liabilities and stockholders' equity   $         9,354     $         8,354

The pro forma effects of the Settlement Agreement as if it were reflected on our condensed statement of operations for the fiscal year ended June 30, 2013 are as follows (in thousands):

                                                               For the Fiscal Years Ended
                                                                        June 30,
                                                               Actual             Pro forma
                                                                2013                2013
                                                              (Audited)          (Unaudited)

Revenues                                                    $       1,007       $       1,007

Operating expenses:
Research and development                                            3,431               2,390
General and administrative                                          4,243               3,543
Total operating expenses                                            7,674               5,933

Operating loss                                                     (6,667 )            (4,926 )

Other income (expense):
Interest income                                                         9                   9
Interest expense                                                      (90 )                32
Royalty income                                                         34                  34
Change in fair value of warrant derivative liability                  520                 520
Other                                                                  (4 )                (4 )

Net loss                                                    $      (6,198 )     $      (4,335 )

Additionally, we and Fraunhofer have entered into research and development service agreements with respect to two projects, specifically the further development of the recombinant form of C1 esterase inhibitor we are currently internally advancing through preclinical IND enabling studies and additional development services in connection with the transfer of our technology to FioCruz, which represent approximately $1.8 million of the $3 million commitment described above. Based on the timelines established between the parties upon signing of the agreements, this work is expected to be completed by late 2014.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of a company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our financial statements are presented in accordance with accounting principles that are generally accepted in the U.S. ("U.S. GAAP"). All applicable U.S. GAAP accounting standards effective as of June 30, 2013 have been taken into consideration in preparing the financial statements. The preparation financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our financial statements.

We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an ongoing basis and make changes when necessary. Actual results could differ from our estimates.

Intangible Assets

The Company accounts for intangible assets at their historical cost and records amortization utilizing the straight-line method based upon their estimated useful lives. Patents are amortized over a period of ten years and other intellectual property is amortized over a period from 18 to 23 years. The Company reviews the carrying value of its intangible assets for impairment whenever events or changes in business circumstances indicate the carrying amount of such assets may not be fully recoverable. Evaluating for impairment requires judgment, and recoverability is assessed by comparing the projected undiscounted net cash flows of the assets over the remaining useful life to the carrying amount. Impairments, if any, are based on the excess of the carrying amount over the fair value of the assets. There were no impairment charges for the year ended June 30, 2013. For the year ended June 30, 2012, the Company recorded an impairment charge of approximately $0.1 million which is included in general and administrative expenses in the accompanying Statements of Operations.

Derivative Instruments

The Company does not use derivative instruments in its ordinary course of business. Some of the Company's outstanding warrants contain an anti-dilution provision which qualifies as an embedded derivative and must be accounted for separately as a derivative liability. This liability is recognized on the balance sheet at fair value each reporting period, and changes in the fair value are charged to other income or expense, as appropriate, and reflected in the current period earnings.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

Research and Development Costs

All research and development costs are expensed as incurred. These expenses consist primarily of payments to third-party contractual service providers and internal personnel costs.

Share-based Compensation

The Company recognizes the cost of all share-based payment transactions at fair value. Compensation cost, measured by the fair value of the equity instruments issued, adjusted for estimated forfeitures, is recognized in the financial statements as the respective awards are earned over the performance period. The Company uses historical data to estimate forfeiture rates.

The impact that share-based payment awards will have on the Company's results of operations is a function of the number of shares awarded, the trading price of the Company's stock at the date of grant or modification, and the vesting schedule. Furthermore, the application of the Black-Scholes option pricing model employs weighted-average assumptions for expected volatility of the Company's stock, expected term until exercise of the options, the risk-free interest rate, and dividends, if any, to determine fair value. Expected volatility is based on historical volatility of the Company's common stock; the expected term until exercise represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company's historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company has not paid any dividends since its inception and does not anticipate paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect of a change in tax rates or laws on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date of the rate change. A valuation allowance is established to reduce the deferred tax assets to the amounts that are more likely than not to be realized from operations.

Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related to unrecognized tax benefits would be recognized as income tax expense. The Company does not have any accrued interest or penalties associated with unrecognized tax benefits, nor was any significant interest expense recognized during the years ended June 30, 2013 and 2012.

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