UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to ________

 

Commission file number: 000-52530

 

Omni Bio Pharmaceutical, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

	Colorado		20-8097969
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification No.)

 

181 W. Boardwalk Drive, Suite 202, Fort Collins, CO 80525

(Address of principal executive offices, including zip code)

 

(970) 237-5178

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ]			Accelerated filer [ ]
Non-accelerated filer [ ]	(Do not check if a smaller reporting company)		Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

 

The number of shares outstanding of the registrant’s common stock as of August 8, 2014 was 38,856,638.

 

 

OMNI BIO PHARMACEUTICAL, INC. & SUBSIDIARY

 

TABLE OF CONTENTS

 

                                            

 

PART I: FINANCIAL INFORMATION		Page
Item 1.	Financial Statements.
	Consolidated Balance Sheets – June 30, 2014 and March 31, 2014 (unaudited)	3
	Condensed Consolidated Statements of Operations – For the three months ended June 30, 2014 and 2013 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity – For the three months ended June 30, 2014 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows – For the three months ended June 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12
Item 4.	Controls and Procedures.	17

 

PART II: OTHER INFORMATION
Item 1.	Legal Proceedings.	17
Items 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
Item 6.	Exhibits.	19
SIGNATURES		20

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

OMNI BIO PHARMACEUTICAL, INC. & SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS		June 30, 2014				March 31, 2014
Current assets:
Cash and cash equivalents		$	651,755			$	271,427
Other current assets			141,805				32,201
Total current assets			793,560				303,628
Debt issuance costs, net			103,577				129,859
Intangible assets, net			62,266				63,494
TOTAL ASSETS		$	959,403			$	496,981
LIABILITIES & STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	736			$	8,701
Accrued liabilities			52,827				87,637
Notes payable – related parties, net of discounts of $691,590 and $-0-, respectively			308,410				-
Accrued interest, including $11,178 and $-0-, respectively, for related parties			11,178				-
Derivative liabilities – related parties			100,140				-
Total current liabilities			473,291				96,338
Notes payable – related parties, net of discounts of $186,042 and $358,043, respectively			913,958				741,957
Notes payable, net of discounts of $208,661 and $150,693, respectively			253,839				281,767
Accrued interest, including $205,151 and $67,726, respectively, for related parties			300,133				261,177
Total liabilities			1,941,221				1,381,239
Commitments and Contingencies (Notes 1 and 3)
Stockholders’ deficit:
Preferred stock, $0.10 par value, 5,000,000 shares authorized, -0- shares issued and outstanding			-				-
Common stock, $0.001 par value; 200,000,000 shares authorized; 38,856,638 and 38,656,638 shares issued and outstanding			38,856				38,656
Additional paid-in capital			46,344,620				45,608,679
Accumulated deficit			(47,365,294	)			(46,531,593	)
Total stockholders’ deficit			(981,818	)			(884,258	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	959,403			$	496,981

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

OMNI BIO PHARMACEUTICAL, INC. & SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

		For the Three Months Ended June 30,
		2014				2013
Operating expenses:
General and administrative (including share-based compensation of $74,368 and $203,341, respectively)		$	312,984			$	503,188
Research and development			220,338				27,838
Total operating expenses			533,322				531,026
Loss from operations			(533,322	)			(531,026	)
Non-operating income (expenses):
Change in estimated fair value of derivative liabilities – related parties			(8,898	)			(12,245	)
Change in estimated fair value of derivative liabilities			-				(5,221	)
Amortization of debt discount and debt issuance costs			(63,821	)			(50,889	)
Amortization of debt discount – related parties			(177,709	)			(40,496	)
Interest income (expense), net			(22,526	)			(13,752	)
Interest expense – related parties			(27,425	)			(27,425	)
Total non-operating income (expenses)			(300,379	)			(150,028	)
Net loss		$	(833,701	)		$	(681,054	)
Basic and diluted net loss per share		$	(0.02	)		$	(0.02	)
Weighted average shares outstanding – basic and diluted			38,856,638				34,117,016

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

OMNI BIO PHARMACEUTICAL, INC. & SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

 

		Preferred Stock								Common Stock								Additional Paid-in Capital				Deficit Accumulated				Total Stockholders’ (Deficit)
		Shares				Amount				Shares				Amount
Balances at March 31, 2014			-			$	-				38,656,638			$	38,656			$	45,608,679			$	(46,531,593	)		$	(884,258	)
Common stock issued in exchange for services											200,000				200				52,800								53,000
Debt discount on convertible note sold to a related party in private placement offering																			671,523								671,523
Share-based compensation																			11,618								11,618
Net loss																							(833,701	)			(833,701	)
Balances at June 30, 2014			-			$	-				38,856,638			$	38,856			$	46,344,620			$	(47,365,294	)		$	(981,818	)

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

OMNI BIO PHARMACEUTICAL, INC. & SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(833,701	)		$	(681,054	)
Adjustments used to reconcile net loss to net cash used in operating activities:
Change in estimated fair value of derivative liabilities – related parties			8,898				12,245
Change in estimated fair value of derivative liabilities							5,221
Share-based compensation			64,617				203,341
Amortization of debt discount and debt issuance costs			63,821				50,889
Amortization of debt discount – related parties			177,709				40,496
Depreciation and amortization			1,229				1,229
Changes in operating assets and liabilities:
Other current assets			(109,604	)			(86,342	)
Accounts payable			(7,965	)			(31,515	)
Accrued liabilities			(34,810	)			1,165
Accrued interest, related parties			(44,848	)
Accrued interest			94,982				41,449
Net cash used in operating activities			(619,672	)			(442,876	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of convertible notes – related parties			1,000,000				-
Net proceeds from the sale of common stock			-				1,361,398
Net cash provided by financing activities			1,000,000				1,361,398
Net increase in cash and cash equivalents			380,328				918,522
Cash and cash equivalents at beginning of period			271,427				343,279
Cash and cash equivalents at end of period		$	651,755			$	1,261,801

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion feature of senior secured promissory notes reclassified from liability to equity at estimated fair value		$	(63,821	)		$	-0-
Conversion feature of senior secured promissory notes reclassified from liability to equity at estimated fair value, related parties			(177,709	)			-0-

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NOTE 1 – OVERVIEW AND BASIS OF PRESENTATION

 

Overview

 

We are a biopharmaceutical company that was formed to explore new methods of use of alpha-1 antitrypsin (“AAT”), also referred to as “plasma-derived AAT” (“p-AAT”). p-AAT is purified from human blood and has been found to have significant anti-inflammatory, immunomodulatory and tissue protective effects in numerous animal models of human disease. In 2012, we began to fund the research and development of several synthetic recombinant proteins involving the fusion of AAT and an Fc component of immunoglobulin (“Fc-AAT”).

 

The focus of our research and development efforts is now on advancing our first recombinant molecule (“Fc-AAT 2”) into clinical trials. We believe the successful characterization and development of a recombinant Fc-AAT fusion molecule would afford us with a patentable composition of matter that could be introduced into the current p-AAT market as well as for a wide variety of clinical indications, including but not limited, to Type 1 diabetes, graft vs host disease (GvHD) following bone marrow transplantation and chronic gout.

 

We are considering several options for the initial clinical trials of Fc-AAT 2 with Type 1 diabetes and GvHD currently being among the most likely. To facilitate this effort, in April 2014 we announced the execution of a multi-phase contract manufacturing services agreement with Gallus BioPharmaceuticals LLC (“Gallus”) under which certain cell line optimization and process development work are contemplated for our Fc-AAT 2 molecule. The ultimate goal is to have Gallus manufacture material for use in preclinical toxicology studies and early trials in humans.

 

We hold a license to an issued method of use patent for the treatment of diabetes using p-AAT with a privately-held company, Bio Holding, Inc. In addition, we hold licenses with the Regents of the University of Colorado (“RUC”) for method of use patents and patent applications (“Use Patents”) covering the use of p-AAT in the following indications: cellular transplantation and graft rejection, radiation protection, certain bacterial and viral diseases, myocardial remodeling and inflammatory bowel disease. We also hold licenses with RUC for patent applications covering composition of matter for various Fc-AAT constructs.

 

In November 2013, we received a Notice of Allowance from the United States Patent and Trademark Office (“USPTO”) for a patent for the composition of matter of Fc-AAT 2. The claims contained in this Notice of Allowance cover full-length AAT nucleic acid constructs that encode polypeptide components of the Fc-AAT 2 molecule as well as other AAT fusion polypeptides. Similar patent applications covering Fc-AAT 2 remain under review in Europe and Canada. If Fc-AAT 2 is successful in being brought to market, we expect that we would have market exclusivity for a minimum of 12 years from the time of introduction in the U.S. and 10 years in Europe. We believe we are the only company with a fusion protein construct of the p-AAT molecule in active development.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements are comprised of Omni Bio Pharmaceutical, Inc. and its wholly-owned subsidiary, Omni Bio Operating, Inc., and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation in accordance with US GAAP. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year. These unaudited consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 (the “2014 Form 10-K”). The balances as of March 31, 2014 are derived from our audited consolidated financial statements.

 

 

Except as the context otherwise requires, the terms “Company,” “Omni,” “we,” “our” or “us” means Omni Bio Pharmaceutical, Inc. and its wholly-owned subsidiary, Omni Bio Operating, Inc. (“Omni Bio”).

 

Going Concern

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplate our continuation as a going concern, whereby the realization of assets and liquidation of liabilities are in the ordinary course of business. We are currently in the development stage as we have not realized any revenue since inception. To date, our business efforts have been largely dedicated to pursuing additional capital to fund Sponsored Research Agreements (“SRAs”), the initial funding of BioMimetix Pharmaceutical, Inc., an equity investee (“BioMimetix”), prosecution of patent applications, a human clinical trial to evaluate the therapeutic effects of p-AAT in the treatment of Type 1 diabetics, and preclinical drug development activities for advancement of our recombinant Fc-AAT 2 molecule.

 

We have incurred net losses since inception, and as of June 30, 2014, had cash and cash equivalents of $651,755 and an accumulated deficit of $47.4 million, which included non-cash charges of approximately $35.6 million. These conditions raise substantial doubt as to our ability to continue as a going concern. These financial statements 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.

 

In April 2014, we secured additional “Convertible Note” financing under a private placement offering (the “2014 Private Placement”) with Bohemian Investments LLC (“Bohemian”), an affiliate of BOCO Investments LLC (“BOCO”), a significant shareholder and affiliate of the Company, that enables the Company to borrow up to $2,000,000 through April 24, 2015 and enables like funding of up to $1,000,000 from other sources. We have borrowed $1,000,000 from Bohemian as of June 30, 2014.

 

Recently Issued Accounting Standard Updates

 

We have reviewed other FASB’s Accounting Standard Updates through the filing date of this report and have concluded that none will have a material impact on our future consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-10, which amended Accounting Standards Codification (ASC) Topic 915 Development Stage Entities. The amendment eliminates certain financial reporting requirements surrounding development stage entities, including an amendment to the variable interest entities guidance in ASC Topic 810, Consolidation. The amendment removes the definition of a development stage entity from the ASC, thereby removing the financial reporting distinction between development stage entities and other entities from U.S. GAAP. Consequently, the amendment eliminates the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.

 

This amendment is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company has made the election to early adopt this amendment effective June 30, 2014 and, as a result, the Company is no longer presenting or disclosing the information previously required under Topic 915. The early adoption was made to reduce data maintenance by removing all incremental financial reporting requirements for development stage entities. The adoption of this amendment alters the disclosure requirements of the Company, but it does not have any material impact on the Company’s financial position or results of operations for the current or any prior reporting periods.

 

 

NOTE 2 – FINANCING TRANSACTIONS

 

In April 2014, we secured additional “Convertible Note” financing under the 2014 Private Placement with Bohemian , a significant shareholder and affiliate of the Company, that enables the Company to borrow up to $2,000,000 through April 15, 2015 and enables like funding of up to $1,000,000 from other sources. The financing is in the form of a one-year note convertible into common stock of the Company at the lower of $0.20 per share or 65% of the stock price offered in connection with a public offering of the Company’s common stock. As of June 30, 2014, we have borrowed $1,000,000 from Bohemian and we have $1 million remaining to be borrowed under the note.

 

As additional consideration for the note, we issued 3,000,000 warrants to purchase the Company’s common stock to BOCO at an exercise price of $0.01 per share with an April 15, 2015 expiration date and 1,000,000 warrants to Bohemian at an exercise price of $0.25 per share with an April 15, 2019 expiration date. We also extended the term of three existing warrant agreements with BOCO to December 31, 2019 and reset the exercise price on such warrants to $0.25 per share from prior exercise prices of $0.50 to $1.50. All new and revised warrants have anti-dilution provisions which would be triggered if the Company subdivides its outstanding common stock shares by recapitalization, reclassification or split-up, or if the Company declares a stock dividend or distributes common stock shares to its shareholders.

 

We concluded that the conversion feature of the Convertible Notes (the “Conversion Feature”) met the criteria of an embedded derivative and should be bifurcated from the Convertible Notes (host contract) and accounted for as a derivative liability and calculated at fair value. We estimated the fair value of the Conversion Feature on the date of issuance using the Black-Scholes pricing model. The difference between the value assigned to the Convertible Notes and the estimated fair value of the Conversion Feature was assigned to the Convertible Notes. The amount assigned to the Conversion Feature was recorded as a derivative liability with a corresponding debit to debt discount. This discount is amortized over the life of the Convertible Notes. We also concluded that the attached two sets of warrants that were issued to BOCO and a related party subsidiary of BOCO were “detachable” from the Convertible Notes. The warrant costs are to be included in debt discount and amortized over the life of the Convertible Note which is one year from the date of the first draw. The estimated fair value of the new warrants was calculated using the Black-Scholes pricing model based on the following assumptions: closing stock price on the date of the first draw from the Convertible Note, exercise prices as stated above, expected term of the warrants is one to five years, volatility of 160.03% and a risk-free interest rate of 1.64%. The incremental fair value of the warrant modifications were all recorded as a debt discount. The total amount recorded as a debt discount as a result of this transaction was $691,590 during the quarter ended June 30, 2014.

 

Future debt maturities

The future maturities on all of the Company's convertible notes, including those from its 2012 financing, for the succeeding five years are as follows:

 

Year Ended March 31,
2015		$	-
2016			2,873,811
2017			-
2018			-
2019			-
Total		$	2,873,811

 

 

NOTE 3 – CONTRACTUAL COMMITMENTS

 

On January 1, 2014, we entered into an Amendment to Employment Agreement (the “Amendment”), pursuant to which the employment agreement between the Company and Bruce Schneider, our Chief Executive Officer, was amended to (i) extend the term of the employment agreement by one year, (ii) defer $5,000 per month of Dr. Schneider’s base salary until the Company raises additional financing of at least $1.5 million, and (iii) to formalize the anti-dilution feature related to certain warrants previously granted to Dr. Schneider by the Company. During the last three months of fiscal 2014, the Company recorded deferred salary for Dr. Schneider in the amount of $15,000. As of June 30, 2014, all deferred salary due to Dr. Schneider has been paid.

 

 

In April 2014, we announced the execution of a multi-phase contract manufacturing services agreement with Gallus BioPharmaceuticals LLC (“Gallus”) under which certain cell line optimization and process development work are contemplated for our Fc-AAT 2 molecule. The ultimate goal is to have Gallus manufacture material for use in preclinical toxicology studies and early trials in humans. It is anticipated that the first phase of these activities will be performed over a 7 to 8 month period at a cost of up to $700,000. As of June 30, 2014, we have recorded $165,000 expense associated with the Gallus contract manufacturing services agreement.

 

Effective April 1, 2014, the Company signed a consulting agreement with Dr. Charles Dinarello, our Chief Scientific Officer The term of the Consulting Agreement is twelve months (12) or as long as a Statement of Work (SOW) is in effect and has not been completed, and may be terminated by either party upon 90 days’ written notice. In consideration for his services under the SOW, he will earn 25,000 warrants per month beginning April 1, 2014 for as long as the contract is in force. The warrants will be granted and issued in 150,000 increments on a semiannual basis starting October 1, 2014. The exercise price of the warrants will equal the fair market value of the Company’s closing stock price at the time of issue. The Consulting Agreement also contains customary confidentiality provisions. As of June 30, 2014, we have accrued $11,618 of share-based compensation expense for 75,000 warrants. The accrued share-based compensation expense recorded for these warrants will be adjusted based on the fair market value of the Company’s common stock on September 30, 2014. The description of the consulting agreement set forth above is qualified in its entirety by reference to a copy of such agreement filed as an exhibit to this report.

 

On April 17, 2014, the Company entered into a Financial Advisory and Consulting agreement with Dawson James Securities. Dawson James will provide financial advisory services as outlined in the agreement. This agreement is in effect for twelve months unless modified. On April 17, 2014, we issued 200,000 of the Company’s $0.001 par value common stock in payment of a nonrefundable retainer. Based on the market value of the Company’s common stock on April 17, 2014 of $0.265 per share, we recorded a shared-based compensation expense of $53,000. An additional 100,000 shares of common stock will be issued six months from the April 17, 2014 effective date. As of June 30, 2014, we recorded an accrual of $9,750 consulting expense associated with the 100,000 shares.

 

 

NOTE 4 – NET LOSS PER SHARE

 

Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period presented. In addition to common shares outstanding, any shares issuable for little or no cash consideration are considered outstanding shares as of the beginning of a reporting period and are included in the calculation of the weighted-average number of common shares.

 

Diluted earnings (loss) per share is computed using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares. Potentially dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For all periods presented in the consolidated financial statements, all potentially dilutive securities have been excluded from the diluted share calculations as they were anti-dilutive as a result of the net losses incurred for the respective periods. Accordingly, basic shares equal diluted shares for all periods presented.

 

As of June 30, 2014, potentially dilutive securities included approximately 26.7 million common stock purchase warrants and 2.6 million shares issuable from conversion of the Convertible Note issued in 2014 and those previously issued in 2012. As of June 30, 2013, potentially dilutive securities included approximately 22.5 million common stock purchase warrants and 6.7 million shares issuable from conversion of the convertible notes issued in 2012.

 

 

NOTE 5 – SHARE-BASED COMPENSATION

 

From inception, we have not had an employee stock option plan, but have issued stock purchase warrants on a discretionary basis to employees, directors and outside consultants. The fair value of each warrant award is estimated on the date of grant using the Black-Scholes pricing model. Historically, the expected life of a warrant has been equal to its contractual term, as all of the warrants granted have underlying shares that are not registered and have additional trading restrictions. Further, for warrants granted to directors and officers, vested warrants are not forfeited in the circumstance of departure from the Company. Expected volatility is estimated based on a review of the Company’s historical stock price volatility. The risk-free interest rate is based on the yield on the grant measurement date of a traded zero-coupon U.S. Treasury bond, as reported by the U.S. Federal Reserve, with a term equal to the expected term of the respective warrant.

 

Effective April 1, 2014, the Company signed a consulting agreement with Dr. Charles Dinarello, our Chief Scientific Officer The term of the Consulting Agreement is twelve months (12) or as long as a Statement of Work (SOW) is in effect and has not been completed, and may be terminated by either party upon 90 days’ written notice. In consideration for his services under the SOW, he will earn 25,000 warrants per month beginning April 1, 2014 for as long as the contract is in force. The warrants will be granted and issued in 150,000 increments on a semiannual basis starting October 1, 2014. The exercise price of the warrants will equal the fair market value of the Company’s closing stock price at the time of issue. The Consulting Agreement also contains customary confidentiality provisions. As of June 30, 2014, we have accrued $11,618 of share-based compensation expense for 75,000 warrants. The accrued share-based compensation expense recorded for these warrants will be adjusted based on the fair market value of the Company’s common stock on September 30, 2014.

 

On April 17, 2014, the Company entered into a Financial Advisory and Consulting agreement with Dawson James Securities. Dawson James will provide financial advisory services as outlined in the agreement. This agreement is in effect for twelve months unless modified. On April 17, 2014, we issued 200,000 of the Company’s common stock in payment of a nonrefundable retainer. Based on the market value of the Company’s common stock on April 17, 2014 of $0.265, we recorded a shared-based compensation expense of $53,000. An additional 100,000 shares of common stock will be issued six months from the April 17, 2014 effective date. As of June 30, 2014, we recorded an accrual of $9,750 consulting expense associated with the 100,000 shares.

 

The weighted-average grant date fair value of warrants granted during the three months ended June 30, 2014 and 2013 was $-0- and $0.23 per share, respectively.

 

Share-based compensation related to warrants and restricted stock units recorded for the three months ended June 30, 2014 and 2013 was as follows:

 

		2014				2013
Employees and directors		$	-			$	174,155
Outside consultants			74,368				29,186
		$	74,368			$	203,341

 

As of June 30, 2014, all share-based arrangements were vested and there is no unrecognized compensation cost.

 

 

A summary of activity related to warrants issued to employees, directors and consultants under share-based compensation agreements for the three months ended June 30, 2014 is as follows:

 

 

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Outstanding at March 31, 2014			9,529,678			$	0.89
Granted			-			$	-
Exercised			-				-
Forfeited/expired/cancelled			-			$	-
Outstanding at June 30, 2014			9,529,678			$	0.89				4.2			$	-
Vested and exercisable at June 30, 2014			9,529,678			$	0.89				4.2			$	-

 

 

A summary of investor warrant activity for the three months ended June 30, 2014 is as follows:

 

		Number of Warrants
Outstanding and exercisable at March 31, 2014			13,143,458
Granted			4,000,000
Exercised			-
Forfeited/expired			-
Outstanding, vested and exercisable at June 30, 2014			17,143,458

  

 

 

 

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, strategies, results of operations and cash flows 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 raise funds for our operations; our ability to successfully develop products and services that are commercially successful; 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; 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 2014 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 formed to explore new methods of use of alpha-1 antitrypsin (“AAT”). AAT is a naturally occurring protein that is essential for normal liver and lung function and has historically been purified from human blood (“p-AAT”) to treat patients suffering from emphysema due to AAT-deficiency. Marketed forms of p-AAT have demonstrated an excellent safety record in over 25 years of use. Recent research has shown that AAT has profound anti-inflammatory, immunomodulatory and tissue protective effects in various animal models suggestive of use in the treatment of a variety of important medical conditions.

 

We hold licenses for method of use issued patent claims for the use of p-AAT in the treatment of diabetes, certain bacterial and viral diseases and cellular transplantation and graft rejection, which include reducing the risk of a non-organ transplant rejection, reducing the risk of developing graft versus host disease (“GvHD”) and for treating GvHD in patients who have received a cornea, bone marrow, stem cell or pancreatic islet cell transplant. In addition, we hold licenses for method of use patent application claims for the use of p-AAT in the treatment of radiation protection and myocardial remodeling. Our goal is to sublicense these patents and patent applications to various p-AAT manufacturers, of which there are four. The timing of such sublicensing is likely to be dependent upon the generation of robust clinical data sufficient to warrant label claims to the existing package inserts for the currently marketed p-AAT products. 

 

In 2011, we began funding research and development of a synthetic form of AAT (“Fc-AAT”). We believe the successful characterization and development of a recombinant Fc-AAT fusion molecule would afford us with a patentable composition of matter that could be introduced into the current p-AAT market as well as for a wide variety of clinical indications, including but not limited, to Type 1 diabetes, graft vs host disease following bone marrow transplantation and chronic gout. The currently manufactured versions of p-AAT require weekly IV dosing in a doctor’s office or infusion clinic and cost in excess of $100,000 per year. We believe our recombinant form of AAT will provide significant advantages over p-AAT in terms of duration of action, cost to manufacture, purity and selling price. Most importantly, our recombinant form of AAT has been shown to be 40-50x more potent than p-AAT in animal models of gout, inflammatory bowel disease and myocardial infarction suggesting the potential for simple subcutaneous dosing.

 

We are considering several options for the initial clinical trials of Fc-AAT 2 with Type 1 diabetes and GvHD currently being among the most likely. To facilitate this effort, in April 2014 we announced the execution of a multi-phase contract manufacturing services agreement with Gallus BioPharmaceuticals LLC (“Gallus”) under which certain cell line optimization and process development work are contemplated for our Fc-AAT 2 molecule. The ultimate goal is to have Gallus manufacture material for use in preclinical toxicology studies and early trials in humans.

 

In November 2013, we received a Notice of Allowance from the USPTO for a patent for the composition of matter of Fc-AAT 2. The claims contained in this Notice of Allowance cover full-length AAT nucleic acid constructs that encode polypeptide components of the Fc-AAT 2 molecule as well as other AAT fusion polypeptides. Similar patent applications covering Fc-AAT 2 remain under review in Europe and Canada. Patent applications for a series of follow-on Fc-AAT constructs are also pending on a worldwide basis. We believe we are the only company with a fusion protein construct of the p-AAT molecule in active development. Earlier attempts by others to make stand-alone recombinant versions of the molecule have not been successful. While we believe our fusion protein approach is viable, there is no assurance that we will be successful or be able to obtain the funding needed to develop such a molecule.

 

Potential indications for our Fc-AAT 2 molecule and our estimates of peak annual sales volumes in the combined U.S. and European markets are:

 

	●	Type 1 diabetes (early onset) – $1 billion+
	●	Complications due to bone marrow transplantation (GvHD) - $500 million+
	●	Gout (treatment refractory)- $1 billion+

 

These revenues could be realized by Omni if it were solely responsible for commercialization; alternatively, Omni could potentially receive a portion of such revenues in the form of royalties if Fc-AAT was commercialized by a third party. Other significant markets could include rheumatoid arthritis, chronic obstructive pulmonary disease (“COPD”) and cardiac remodeling.

 

 

Significant Trends, Uncertainties and Challenges

 

We believe that the significant trends, uncertainties and challenges that directly or indirectly affect our financial performance and results of operations include, but are not limited to:

 

●

Our ability to raise sufficient capital to fund our operations and future research and development of Fc-AAT 2;

●

The continued expected growth in the biopharmaceutical sector;

●

Our ability to obtain and protect patents covered under our license agreements;

●

Our ability to file and receive additional patent applications for new Fc-AAT compounds that we may discover;

●

Our ability to file for an IND with the FDA;

●

Our ability to devote our resources to therapies that are the most likely to result in commercialization;

●

Our ability to shepherd potential therapies through the FDA approval process; and

●

Our ability to compete against companies in our industry with greater resources.

 

 

Results of Operations – For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

 

The following discussion relates to our operations for the three months ended June 30, 2014 (the “June 2014 quarter”) as compared to the three months ended June 30, 2013 (the “June 2013 quarter”).

 

General and administrative expenses - General and administrative expenses for the June 2014 quarter were $312,984, which included $74,368 of share-based compensation, as compared to $503,189 for the June 2013 quarter, which included $203,341 of share-based compensation. As we have disclosed in prior filings, management views the exclusion of share-based compensation from general and administrative expense 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 for the June 2014 quarter were $238,616 as compared to $299,848 for the June 2013 quarter, a decrease of $61,231, or approximately 20%. This decrease was primarily due to lower expenses in the June 2013 quarter in certain expense categories, most notably CSO consulting of $30,000; officer salaries and related taxes of $31,000; public relations of $14,000 and travel of $10,000, partially offset by increases in accounting and audit fees of $10,000; and legal fees of $15,000.

 

Research and development expenses – Research and development expenses for the June 2014 quarter were $220,338 as compared to $27,838 for the June 2013 quarter. This increase was primarily due to the execution of a multi-phase contract manufacturing services agreement with Gallus BioPharmaceuticals LLC (“Gallus”) under which certain cell line optimization and process development work are contemplated for our Fc-AAT 2 molecule. We recorded $220,338 of research and development expense in the quarter ended June 30, 2014, an increase of 192,500 over the June 2013 quarter.

 

Non-operating income (expenses) – Net non-operating expenses for the June 2014 quarter were $300,379 as compared to $150,028 for the June 2013 quarter, an increase of $150,351 that was associated with the Convertible Notes. The total increase in expenses was related to amortization of debt discounts and debt issuance costs, interest expense and the net changes in the estimated fair values of the associated derivative liabilities.

 

 

Liquidity and Capital Resources 

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with US GAAP, which contemplate our continuation as a going concern, whereby the realization of assets and liquidation of liabilities are in the ordinary course of business. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2014, 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 outstanding and currently anticipated contractual commitments for research and development efforts. As of June 30, 2014, we remain a development stage company and our focus continues to be on raising capital to fund current operations and research and development efforts on Fc-AAT. As of June 30, 2014, we had a deficit accumulated from inception of $47.4 million, which included total non-cash charges from inception of approximately $36.7 million. These conditions raise substantial doubt as to our ability to continue as a going concern. These unaudited consolidated financial statements 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.

 

Prior Financings

 

We continue to amortize prior debt discounts and interest related to prior financings. As of June 30, 2014, we recorded non cash transactions related to the amortization of debt discounts of $56,323 and $56,549 of related debt discounts. In addition we recorded total accrued interest of $38,956 for the three months ended June 30, 2014.

 

 

April 2014 Financing

 

In April 2014, we secured additional financing under a private placement offering (the “2014 Private Placement”) with Bohemian Investments LLC (“Bohemian”), an affiliate of BOCO Investments LLC (“BOCO”), a significant shareholder and affiliate of the Company, that enables the Company to borrow up to $2,000,000 through April 15, 2015 and enables like funding of up to $1,000,000 from other sources. The financing is in the form of a one-year note convertible into common stock of the Company at the lower of $0.20 per share or 65% of the stock price offered in connection with a public offering of the Company’s common stock. As additional consideration for the note, we issued 3,000,000 warrants to purchase the Company’s common stock to BOCO at an exercise price of $0.01 per share with an April 15, 2015 expiration date and 1,000,000 warrants to Bohemian at an exercise price of $0.25 per share with an April 15, 2019 expiration date. We also extended three existing warrant agreements with BOCO to December 31, 2019 and reset the exercise price on such warrants to $0.25 per share from prior exercise prices of $0.50-1.50. All new and revised warrants have anti-dilution provisions which would be triggered if the Company subdivides its outstanding common stock shares by recapitalization, reclassification or split-up, or if the Company declares a stock dividend or distributes common stock shares to its shareholders.

 

As of June 30, 2014, we have borrowed $1,000,000 and have recorded $11,178 of accrued related party interest. In addition we have recorded non cash transactions related to the amortization of debt discounts for related parties of $177,709. The remaining funds borrowed to date will be used to pay the Company’s monthly administrative expenses and fund ongoing research and development efforts, most notably those associated with the Gallus manufacturing and services agreement. To date, we have no commitments for additional financing beyond that provided by the Bohemian note.

 

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 June 30, 2014 and 2013 were $651,755 and $271,427, respectively.

  

 

Cash Flows from Operating Activities

 

For the June 2014 quarter, net cash used in operations was $619,672. The primary uses of cash from operations were $238,616 of general and administrative expenses. There were $74,368 expenses recorded for share-based compensation. Other uses of cash included research and development expenses of $220,338; an increase in prepaid expenses of $109,604, primarily related to the payment of the full premium on the Company’s director and officer liability insurance policy; and a reduction in accounts payable and accrued liabilities of $42,775 as a result of paying-off certain year-end obligations associated with our public filings and the accrual for the Dinarello warrants that will be granted and issued on October 1, 2014. Partially offsetting these uses of cash from operations were the non-cash items associated with the Convertible Notes and stock based compensation.

 

For the June 2013 quarter, net cash used in operating activities was $442,876. The primary uses of cash from operations were general and administrative expenses, excluding share-based compensation, which totaled $299,848, research and development expenses of $27,838, and a decrease in accounts payable and accrued liabilities of $30,350. Partially offsetting was an increase in prepaid expenses of $86,342, and non-cash expenses totaling $354,870 of which $150,300 was associated with the Convertible Notes and $203,341 for stock based compensation.

 

Cash Flows from Financing Activities

 

For the June 2014 quarter, we had net cash provided by financing activities of $1,000,000. This was related to the convertible note with BOCO described above. As of the quarter ended June 30, 2014, we have $1,000,000 remaining to draw on the note and have a cash balance of $651,755. For the June 2013 quarter, we generated $1,361,398 of cash from the sale of common stock through our 2013 Private Placement. This amount was net of offering costs of approximately $179,000.

 

Current Cash Commitments

 

We expect that our cash on hand and subsequent financing plan will allow us to fund our operations and limited research and development initiatives into the fourth quarter of the fiscal year ending March 31, 2015 based on current operating levels and currently budgeted research and development projects. However, we will need additional capital raising to continue the full preclinical development and early clinical development of our Fc-AAT program. Funding of the Fc-AAT program is anticipated to require additional capital in the range of $10 million through phase 1 trials currently targeted to take place in 2016. There is no assurance that we will be successful in raising additional capital on acceptable terms or at all. Failure to obtain additional capital may have a material adverse impact on our ability to continue our research and development efforts and fund our operating expenses beyond March 31, 2015, and such failure would likely cause us to cease operations and not continue as a going concern.

 

It is estimated that the first phase of the Gallus agreement will result in $700,000 in spending. This effort is the principal expense being funded by proceeds of the Bohemian note. The Bohemian note is due on April 24, 2015. If the full borrowing of $2 million is made by then and the note is not converted, it is estimated that the Company would owe Bohemian $2.1-2.2 million which is otherwise secured by certain assets of the Company.

 

We intend to approach other pharmaceutical or life science companies for funding a portion of our Fc-AAT program, and potentially funding initial human studies if we are successful in obtaining an IND. Such a partnership(s) or strategic investment would potentially reduce our need to raise external capital. There is no guarantee that we will be successful in creating or maintaining a strategic partner for our Fc-AAT program or that we would obtain adequate or any funding from such a relationship.

 

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 2014 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.

 

 

In June 2014, the FASB issued ASU No. 2014-10, which amended Accounting Standards Codification (ASC) Topic 915 Development Stage Entities. The amendment eliminates certain financial reporting requirements surrounding development stage entities, including an amendment to the variable interest entities guidance in ASC Topic 810, Consolidation. The amendment removes the definition of a development stage entity from the ASC, thereby removing the financial reporting distinction between development stage entities and other entities from U.S. GAAP. Consequently, the amendment eliminates the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.

 

This amendment is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company has made the election to early adopt this amendment effective June 30, 2014 and, as a result, the Company is no longer presenting or disclosing the information previously required under Topic 915. The early adoption was made to reduce data maintenance by removing all incremental financial reporting requirements for development stage entities. The adoption of this amendment alters the disclosure requirements of the Company, but it does not have any material impact on the Company’s financial position or results of operations for the current or any prior reporting periods.

 

 

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive and Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive and Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2014, and our Chief Executive and Financial Officer concluded that our disclosure controls and procedures were effective as of that date.

 

Change in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting during the quarter ended June 30, 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION.

 

 

Item 1. Legal Proceedings.

 

We are not a party to any material legal proceedings nor is our property the subject of any material legal proceedings.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On April 1, 2014 we signed a 12 month consulting agreement with Dr. Charles Dinarello. He will accrue 25,000 warrants per month as long as the contract is in force. On a semiannual basis, the warrants will be granted and issued at the Company’s common stock price at the time of issue.

 

On April 17, 2014 the Company entered into a Financial Advisory and Consulting agreement with Dawson James Securities. On that day we issued 200,000 of the Company’s common stock in payment of a nonrefundable retainer. An additional 100,000 shares of common stock will be issued six months from the April 17, 2014 effective date.

 

 

Item 6. Exhibits.

 

EXHIBIT #		DESCRIPTION
3.1		Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 filed on March 2, 2007).
3.2		Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 5, 2010).
3.3		Articles of Amendment for Across America Financial Services, Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on June 2, 2009)
10.1		Loan and Warrant Purchase Agreement, dated April 24, 2014, between Bohemian Investments, LLC and Omni Bio Pharmaceutical, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2014).
10.2		Warrant dated April 23, 2014 issued to Bohemian Investments, LLC (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 25, 2014).
10.3		Warrant dated April 23, 2014 issued to BOCO Investments, LLC (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 25, 2014).
10.4		Development and Manufacturing Services Agreement, dated April 24, 2014, between Gallus BioPharmaceuticals, Inc. and Omni Bio Pharmaceutical, Inc.
10.5		Consulting Agreement with Charles Dinarello, dated April 1, 2014.
31.1		Certification of Chief Executive and Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive and Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.INS		XBRL Instance Document**
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	OMNI BIO PHARMACEUTICAL, INC.
August 13, 2014	By: /s/ Bruce E. Schneider
		Bruce E. Schneider
		Chief Executive and Financial Officer
		(Principal Executive Officer)

                                                                        

 

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