AI
Tuesday, November 21, 2006 5:51:04 PM
Form 10QSB for COBALIS CORP
20-Nov-2006
Quarterly Report
Item 2. Management's Discussion and Analysis or Plan of Operations
This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may", "shall", "could", "expect", "estimate", "anticipate", "predict", "probable", "possible", "should", "continue", or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily valuation of patent costs and stock-based compensation. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.
OVERVIEW
As discussed above, we were incorporated in 1997 and on July 6, 2004 changed our name to Cobalis Corp., having previously used the BioGentech Corp. In 2003, we acquired our operational subsidiary, BioGentech Incorporated,(BioGentec). To distinguish between parent and subsidiary, a slight spelling difference was utilized. BioGentec, a private Nevada corporation, was incorporated on November 21, 2000 according to the laws of Nevada, under the name St Petka, Inc. On May 4, 2001, St. Petka, Inc. changed its name to BioGentec Incorporated. On July 2, 2003, BioGentec was merged into Togs for Tykes Acquisition Corp., a wholly owned subsidiary formed for the purpose of acquiring BioGentec. As allowed under SFAS 141, "Business Combinations" ("SFAS 141"), we designated a date of convenience of the closing for accounting purposes as June 30, 2003. Under the terms of the merger agreement, all of BioGentec's outstanding common stock (19,732,705 shares of $0.001 par value stock) was exchanged for 19,732,705 shares newly issued shares of $0.001 par value stock of Cobalis Corp. common stock. This transaction was consummated with the filing of the Articles of Merger with the State of Nevada on July 2, 2003. BioGentec shareholders then effectively controlled approximately 95% of the issued and outstanding common stock of Cobalis. Since the shareholders of BioGentec obtained control of Cobalis, according to SFAS 141, this acquisition was treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation as a going concern. We incurred a net loss of $5,348,854 for the six months ended September 30, 2006 and as of September 30, 2006; we had a working capital deficit of $5,842,234 and a stockholder deficit of $5,798,370. In addition, as of September 30, 2006, we have not developed a substantial source of revenue. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The 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 necessary should we be unable to continue as a going concern.
We are currently attempting to raise additional debt and equity financing for operating purposes. We require substantial capital to pursue our operating strategy, which includes commercialization of our products, and we currently have limited cash for operations. Until we can obtain revenues sufficient to fund working capital needs and additional research and development costs necessary to obtain the regulatory approvals for commercialization, we will be dependent upon external sources of financing.
We believe that actions presently being taken to revise our operating and financial requirements provide the opportunity for us to continue as a going concern. There can be no assurances that sufficient financing will be available on terms acceptable to us, or at all. If we are unable to obtain such financing, we will be forced to scale back operations, which could have an adverse effect on our financial condition and results of operations.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily valuation of patent costs and stock-based compensation. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.
Patent Cost Valuation. The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the weighted-average probability method outlined in SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect our net operating results.
Stock-based Compensation. We adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, we accounted for our stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.
Estimate of Litigation-based Liability. We are a defendant in certain claims and litigation in the ordinary course of business. We accrue liabilities relating to these lawsuits on a case-by-case basis. We generally accrue attorney fees and interest in addition to the liability being sought. Liabilities are adjusted on a regular basis as new information becomes available. We consult with our attorneys to determine the viability of an expected outcome. The actual amount paid to settle a case could differ materially from the amount accrued.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $66,120 and prepaid expenses and other current assets of $32,991at September 30, 2006. Our total current assets at September 30, 2006 were $99,111. We also had the following long term assets:
$4,427 in property and equipment, net; $1,239 in net website development costs; $647,791 represented by net value of our patents; and $12,546 in deposits. Our total assets as of September 30, 2006 were $765,114.
Our total current liabilities were $5,941,345 at September 30, 2006, which was represented by accounts payable of $437,105; accrued expenses of $536,192; accrued clinical trials costs of $1,004,032; accrued legal settlements of $1,725,000; accrued salaries of $1,096,711; promissory notes of $46,813; notes payable of $495,492 and convertible notes payable of $600,000.
In June 2005, we converted a total of $205,174 of amounts due for clinical trials into nine promissory notes that accrued interest at a rate of 10% per annum and were due on December 27, 2005. During the three months ended March 31, 2006 and June 30, 2006, respectively, we converted $131,042 and $27,319 of these promissory notes plus accrued interest into 105,250 and 27,200 shares of our common stock. At September 30, 2006, $46,813 of these notes was still outstanding.
We also had $179,639 represented by a senior debenture, making our total liabilities $6,120,984, and a convertible preferred stock liability of $442,500. Our liabilities exceeded our assets by $5,355,870.
On July 18, 2006, we entered into an Accord and Satisfaction Agreement ("Agreement") with several related party creditors, arranging to settle debt of $5,194,553 including interest accrued through June 30, 2006, in exchange for the issuance of 3,995,809 shares of our $.001 par value common stock. This debt was incurred in the form of related party advances and services rendered to the company over recent months. The conversion rate was $1.30 per share, representing a premium on the market price of our closing share price on Monday, July 17, 2006 of $1.00 per share.
The related parties that are owed funds include Radul Radovich, our Chairman of the Board of Directors, and several entities owned and controlled by Mr. Radovich. The amounts owed were as follows: Mr. Radovich was owed $952,611 principal along with interest of $127,509, for a total of $1,084,120, which is to be converted to 833,938 restricted shares of our common stock; St. Petka Trust, a majority shareholder of the company, and of which Mr. Radovich is the beneficiary and trustor, was owed $1,585,500 principal, along with interest of $211,335, for a total of $1,796,835, which is to be converted to 1,382,180 restricted shares of our common stock; R and R Holdings, Inc. a Nevada corporation owned by Mr. Radovich, was owed $471,507 principal, along with interest of $62,848, for a total of $534,355, which is to be converted to 411,042 restricted shares of our common stock; Silver Mountain Promotions, Inc., a Nevada corporation, owned by Mr. Radovich, was owed $922,103 principal, along with interest of $122,909, for a total of $1,045,012, which is to be converted to 803,855 restricted shares of our common stock; R R Development, Inc., a California corporation, owned by Mr. Radovich, was owed $170,000 principal, along with interest of $51,838, for a total of $221,838, which is to be converted to restricted 170,644 shares of our common stock. In addition, Mr. Radovich was owed $512,392 for consulting fees, pursuant to a consulting contract with the company. This amount is to be converted to 394,147 restricted shares of our common stock. Subsequent to the period covered by this report, we issued these shares on October 17, 2006.
We have financed our operations primarily through cash generated from related party debt financing as well as issuing a convertible debenture.
Our net cash used by investing activities was $48,124 for the six months ended September 30, 2006 compared to $0 for the six months ended September 30, 2005. The increase of $48,124 is primarily due to a reduction in related party advances offset by an increase in the sale of notes payable and common stock.
Our net cash provided by financing activities was $740,000 for the six months ended September 30, 2006 compared to net cash provided by financing activities of $1,093,933 for the six months ended September 30, 2005. The decrease of $353,933 is primarily due to a reduction in related party advances offset by an increase in the sale of notes payable and common stock.
In June 2005, we entered into a loan agreement with Tejeda and Tejeda, Inc. in the amount of $100,000. The loan is due in one year. The note is personally guaranteed by Mr. Radul Radovich, the chairman of our board of directors, and Mr. Chas Radovich, our President, Secretary and one of our directors. When the loan is due, the holder of the note has the option to convert the loan into shares of our common stock at $0.50 per share or at a price equal to a 25% discount to the closing bid price on the day of conversion at maturity. In July 2006, the holder of the note elected to convert the note to 200,000 shares of our common stock. We recognized an additional expense of $91,583 related to the conversion of this note and accrued interest into shares of common stock.
In October 2005, we issued a senior debenture to the Brad Chisick Trust for $250,000 that accrues interest at 10% per annum, and is due in two years. We also issued the holder of this debenture a warrant to purchase 500,000 shares of our common stock at $1.75 per share.
During the three months ended June 30, 2006, we issued 111,416 shares of our common stock that were registered on or about May 11, 2006 on Form S-8 as payment for certain accounts payable, past due salaries to certain related parties and amounts due to consultants.
In July 2006, we issued notes payable in the aggregate amount of $250,000 to three investors. The notes bear interest at 5% per month and were due on September 14, 2006. We exercised its option to extend the due date to October 14, 2006 and issued to the investors a total of 25,000 warrants. These notes currently have not bee repaid.
In August 2006, the Company issued a note payable to MDC Enterprises Ltd. in the amount of $250,000 that accrues interest at 40% per annum and is due on December 29, 2006. In addition, the Company also issued to MDC Enterprises Ltd. a warrant to purchase 150,000 shares of the Company's common stock for $0.75 per shares.
In September 2006, the Company issued a note payable in the amount of $50,000 to an investor. The note bears interest at 10% per annum and is payable upon demand.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues and Cost of Sales. We had no significant revenues for the three months ended September 30, 2006 and September 30, 2005 as we are undertaking a Phase III clinical trial in order to obtain FDA approval of PreHistinTM as an over the counter drug. Our net sales were $0, as were our cost of sales and gross loss for the three months ended September 30, 2006, as compared net sales of $0 as were our cost of sales and gross loss for the three months ended September 30, 2005.
Operating Expenses. Our operating expenses for the three months ended September 30, 2006 were $3,646,162 compared to $810,501 for the three months ended September 30, 2005. For both periods, we incurred expenses for two major purposes: i) ongoing development of our PreHistinTM product and related product management and ii) general management and fund raising efforts. For the three months ended September 30, 2006, this amount was represented by $14,515 in depreciation and amortization; $650,769 in professional fees; $918,330 in salary and wages; $37,203 in rent expense; $1,273,555 in marketing and research; $461,684 in stock option expense; and $290,106 in other operating expenses. This is compared to the three months ended September 30, 2005, where we had $21,401 in depreciation and amortization; $447,182 in professional fees; $95,653 in salary and wages; $34,487 in rent expense; $29,043 in marketing and research; and $182,735 in other operating expenses. Our operating expenses increased during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 principally as a result of an increase in salaries and wages due to the additions of two executives, an increase in marketing and research due to our Phase III clinical trials and an increase in stock option expense related to the adoption of SFAS No. 123R. A significant portion of the professional fees were paid by issuing shares of our stock. The value of these services was based on the market value of our stock at the measurement date.
Interest expense and financing costs for the three months ended September 30, 2006 were $100,340 compared to $225,635 for the three months ended September 30, 2005. The decrease is due to no non-registration penalties being accrued during the three months ended September 30, 2006 as compared to penalties of $96,000 during the three months ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in the value of the detachable warrants issued in connection with the convertible note payable and convertible preferred stock. Due to the decrease of our stock price, the fair value of these warrants has decreased resulting in the decrease of the warrant liability.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2005
Revenues and Cost of Sales. We had no significant revenues for the six months ended September 30, 2006 and September 30, 2005 as we are undertaking a Phase III clinical trial in order to obtain FDA approval of PreHistinTM as an over the counter drug. Our net sales were $0, as were our cost of sales and gross loss for the six months ended September 30, 2006, as compared net sales of $0 as were our cost of sales and gross loss for the six months ended September 30, 2005.
Operating Expenses. Our operating expenses for the six months ended September 30, 2006 were $5,116,719 compared to $1,595,714 for the six months ended September 30, 2005. For both periods, we incurred expenses for two major purposes: i) ongoing development of our PreHistinTM product and related product management and ii) general management and fund raising efforts. For the six months ended September 30, 2006, this amount was represented by $31,277 in depreciation and amortization; $1,567,674 in professional fees; $1,103,632 in salary and wages; $100,279 in rent expense; $1,299,364 in marketing and research; $590,592 in stock option expense; and $423,901 in other operating expenses. This is compared to the six months ended September 30, 2005, where we had $46,283 in depreciation and amortization; $958,360 in professional fees; $178,220 in salary and wages; $68,923 in rent expense; $55,316 in marketing and research; and $288,612 in other operating expenses. Our operating expenses increased during the six months ended September 30, 2006 as compared to the six months ended September 30, 2005 principally as a result of an increase in professional fees, which include payments for accounting, legal and shareholder relations and amortization of the value of warrants issued to consultants over the terms of the related consulting agreements, an increase in salaries and wages due to the additions of two executives, an increase in marketing and research due to our Phase III clinical trials and an increase in stock option expense related to the adoption of SFAS No. 123R. A significant portion of the professional fees were paid by issuing shares of our stock. The value of these services was based on the market value of our stock at the measurement date.
Interest expense and financing costs for the six months ended September 30, 2006 were $232,135 compared to $408,367 for the six months ended September 30, 2005. The decrease is due to no non-registration penalties being accrued during the six months ended September 30, 2006 as compared to penalties of $192,000 during the six months ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in the value of the detachable warrants issued in connection with the convertible note payable and convertible preferred stock. Due to the decrease of our stock price, the fair value of these warrants has decreased resulting in the decrease of the warrant liability.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.
Over the next 12 months, we plan to continue moving forward with the completion of the Phase III clinical trials of our allergy prevention product, PreHistinTM, followed by submission of a new drug application ("NDA") to the FDA for marketing approval of PreHistinTM as an over the counter ("OTC") allergy medication. Once the NDA is filed, we hope to receive approval from the FDA enabling our marketing launch in the United States of the product or licensing to a potential pharmaceutical partner. We estimate the cost to complete the Phase III clinical trials and the submission of the NDA to the FDA for marketing approval will be approximately $5,000,000.
In addition to seeking approval from the FDA for the primary indication of seasonal allergic rhinitis (hay fever) for PreHistinTM, we may conduct additional studies to validate the viability of approval for supplemental indications and alternative delivery mechanisms. The tests will be a combination of clinical trials and laboratory analyses.
As of September 30, 2006, we had cash and equivalents of $66,120. To fully execute our business plan for the next 12 months, we will need to raise additional funds in order to complete the Phase III clinical trials, submit the PreHistinTM application to the United States FDA, and execute a licensing agreement or otherwise launch the PreHistinTM product. There is no assurance that these funds will be raised.
In October 2005, we reported results of an initial six-week 714 patient Phase III trial designed to study various PreHistinTM dose regimens for reducing seasonal allergy symptoms when compared to placebo. As reported, the statistical analysis utilized a modified intent to treat and an ANOVA (ANalysis Of VAriation) model to determine the treatment effects for the four arm study and certain assumptions used were not specified in the statistical analysis plan (SAP). Although the data resulting from the prior Phase III clinical trial demonstrated that patients who were administered PreHistinTM showed a statistically significant reduction of allergy symptoms when the modified analysis was applied, the data most likely will be viewed by the FDA as supportive data and not as pivotal Phase III results required to secure approval.
In June 2006, we announced that we intend to initiate two identical, Phase III clinical trials of our anti-allergy medication PreHistinTM in patients with seasonal allergic rhinitis. The randomized, double blind, placebo-controlled studies are intended to assess the efficacy, overall safety and tolerability of our flagship drug PreHistinTM to prevent the onset and reduce the severity of allergy symptoms.
The new study design calls for two simultaneously conducted Phase III clinical trials, each comprised of one placebo arm and one active arm receiving 3.3 mg of sublingual PreHistinTM administered twice daily for the six weeks of the study. In July 2006, we conducted the double blind, placebo-controlled trials will be conducted at 23 sites throughout the United States during the Ragweed allergy season. The trials utilized electronic diary records to assess improvement in the severity of nasal allergy symptoms. A total of 1,550 patients were randomized into the twin studies to receive either placebo or PreHistinTM for three weeks prior to the onset of the allergy season, and for an additional three weeks into the season. The patients' diaries and studies were completed on October 6, 2006.
We estimate these costs to be approximately $5,000,000 over the coming year. We will need to raise funds to execute studies for the further development of the . . .
20-Nov-2006
Quarterly Report
Item 2. Management's Discussion and Analysis or Plan of Operations
This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may", "shall", "could", "expect", "estimate", "anticipate", "predict", "probable", "possible", "should", "continue", or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily valuation of patent costs and stock-based compensation. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.
OVERVIEW
As discussed above, we were incorporated in 1997 and on July 6, 2004 changed our name to Cobalis Corp., having previously used the BioGentech Corp. In 2003, we acquired our operational subsidiary, BioGentech Incorporated,(BioGentec). To distinguish between parent and subsidiary, a slight spelling difference was utilized. BioGentec, a private Nevada corporation, was incorporated on November 21, 2000 according to the laws of Nevada, under the name St Petka, Inc. On May 4, 2001, St. Petka, Inc. changed its name to BioGentec Incorporated. On July 2, 2003, BioGentec was merged into Togs for Tykes Acquisition Corp., a wholly owned subsidiary formed for the purpose of acquiring BioGentec. As allowed under SFAS 141, "Business Combinations" ("SFAS 141"), we designated a date of convenience of the closing for accounting purposes as June 30, 2003. Under the terms of the merger agreement, all of BioGentec's outstanding common stock (19,732,705 shares of $0.001 par value stock) was exchanged for 19,732,705 shares newly issued shares of $0.001 par value stock of Cobalis Corp. common stock. This transaction was consummated with the filing of the Articles of Merger with the State of Nevada on July 2, 2003. BioGentec shareholders then effectively controlled approximately 95% of the issued and outstanding common stock of Cobalis. Since the shareholders of BioGentec obtained control of Cobalis, according to SFAS 141, this acquisition was treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation as a going concern. We incurred a net loss of $5,348,854 for the six months ended September 30, 2006 and as of September 30, 2006; we had a working capital deficit of $5,842,234 and a stockholder deficit of $5,798,370. In addition, as of September 30, 2006, we have not developed a substantial source of revenue. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The 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 necessary should we be unable to continue as a going concern.
We are currently attempting to raise additional debt and equity financing for operating purposes. We require substantial capital to pursue our operating strategy, which includes commercialization of our products, and we currently have limited cash for operations. Until we can obtain revenues sufficient to fund working capital needs and additional research and development costs necessary to obtain the regulatory approvals for commercialization, we will be dependent upon external sources of financing.
We believe that actions presently being taken to revise our operating and financial requirements provide the opportunity for us to continue as a going concern. There can be no assurances that sufficient financing will be available on terms acceptable to us, or at all. If we are unable to obtain such financing, we will be forced to scale back operations, which could have an adverse effect on our financial condition and results of operations.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily valuation of patent costs and stock-based compensation. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.
Patent Cost Valuation. The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the weighted-average probability method outlined in SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect our net operating results.
Stock-based Compensation. We adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, we accounted for our stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.
Estimate of Litigation-based Liability. We are a defendant in certain claims and litigation in the ordinary course of business. We accrue liabilities relating to these lawsuits on a case-by-case basis. We generally accrue attorney fees and interest in addition to the liability being sought. Liabilities are adjusted on a regular basis as new information becomes available. We consult with our attorneys to determine the viability of an expected outcome. The actual amount paid to settle a case could differ materially from the amount accrued.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $66,120 and prepaid expenses and other current assets of $32,991at September 30, 2006. Our total current assets at September 30, 2006 were $99,111. We also had the following long term assets:
$4,427 in property and equipment, net; $1,239 in net website development costs; $647,791 represented by net value of our patents; and $12,546 in deposits. Our total assets as of September 30, 2006 were $765,114.
Our total current liabilities were $5,941,345 at September 30, 2006, which was represented by accounts payable of $437,105; accrued expenses of $536,192; accrued clinical trials costs of $1,004,032; accrued legal settlements of $1,725,000; accrued salaries of $1,096,711; promissory notes of $46,813; notes payable of $495,492 and convertible notes payable of $600,000.
In June 2005, we converted a total of $205,174 of amounts due for clinical trials into nine promissory notes that accrued interest at a rate of 10% per annum and were due on December 27, 2005. During the three months ended March 31, 2006 and June 30, 2006, respectively, we converted $131,042 and $27,319 of these promissory notes plus accrued interest into 105,250 and 27,200 shares of our common stock. At September 30, 2006, $46,813 of these notes was still outstanding.
We also had $179,639 represented by a senior debenture, making our total liabilities $6,120,984, and a convertible preferred stock liability of $442,500. Our liabilities exceeded our assets by $5,355,870.
On July 18, 2006, we entered into an Accord and Satisfaction Agreement ("Agreement") with several related party creditors, arranging to settle debt of $5,194,553 including interest accrued through June 30, 2006, in exchange for the issuance of 3,995,809 shares of our $.001 par value common stock. This debt was incurred in the form of related party advances and services rendered to the company over recent months. The conversion rate was $1.30 per share, representing a premium on the market price of our closing share price on Monday, July 17, 2006 of $1.00 per share.
The related parties that are owed funds include Radul Radovich, our Chairman of the Board of Directors, and several entities owned and controlled by Mr. Radovich. The amounts owed were as follows: Mr. Radovich was owed $952,611 principal along with interest of $127,509, for a total of $1,084,120, which is to be converted to 833,938 restricted shares of our common stock; St. Petka Trust, a majority shareholder of the company, and of which Mr. Radovich is the beneficiary and trustor, was owed $1,585,500 principal, along with interest of $211,335, for a total of $1,796,835, which is to be converted to 1,382,180 restricted shares of our common stock; R and R Holdings, Inc. a Nevada corporation owned by Mr. Radovich, was owed $471,507 principal, along with interest of $62,848, for a total of $534,355, which is to be converted to 411,042 restricted shares of our common stock; Silver Mountain Promotions, Inc., a Nevada corporation, owned by Mr. Radovich, was owed $922,103 principal, along with interest of $122,909, for a total of $1,045,012, which is to be converted to 803,855 restricted shares of our common stock; R R Development, Inc., a California corporation, owned by Mr. Radovich, was owed $170,000 principal, along with interest of $51,838, for a total of $221,838, which is to be converted to restricted 170,644 shares of our common stock. In addition, Mr. Radovich was owed $512,392 for consulting fees, pursuant to a consulting contract with the company. This amount is to be converted to 394,147 restricted shares of our common stock. Subsequent to the period covered by this report, we issued these shares on October 17, 2006.
We have financed our operations primarily through cash generated from related party debt financing as well as issuing a convertible debenture.
Our net cash used by investing activities was $48,124 for the six months ended September 30, 2006 compared to $0 for the six months ended September 30, 2005. The increase of $48,124 is primarily due to a reduction in related party advances offset by an increase in the sale of notes payable and common stock.
Our net cash provided by financing activities was $740,000 for the six months ended September 30, 2006 compared to net cash provided by financing activities of $1,093,933 for the six months ended September 30, 2005. The decrease of $353,933 is primarily due to a reduction in related party advances offset by an increase in the sale of notes payable and common stock.
In June 2005, we entered into a loan agreement with Tejeda and Tejeda, Inc. in the amount of $100,000. The loan is due in one year. The note is personally guaranteed by Mr. Radul Radovich, the chairman of our board of directors, and Mr. Chas Radovich, our President, Secretary and one of our directors. When the loan is due, the holder of the note has the option to convert the loan into shares of our common stock at $0.50 per share or at a price equal to a 25% discount to the closing bid price on the day of conversion at maturity. In July 2006, the holder of the note elected to convert the note to 200,000 shares of our common stock. We recognized an additional expense of $91,583 related to the conversion of this note and accrued interest into shares of common stock.
In October 2005, we issued a senior debenture to the Brad Chisick Trust for $250,000 that accrues interest at 10% per annum, and is due in two years. We also issued the holder of this debenture a warrant to purchase 500,000 shares of our common stock at $1.75 per share.
During the three months ended June 30, 2006, we issued 111,416 shares of our common stock that were registered on or about May 11, 2006 on Form S-8 as payment for certain accounts payable, past due salaries to certain related parties and amounts due to consultants.
In July 2006, we issued notes payable in the aggregate amount of $250,000 to three investors. The notes bear interest at 5% per month and were due on September 14, 2006. We exercised its option to extend the due date to October 14, 2006 and issued to the investors a total of 25,000 warrants. These notes currently have not bee repaid.
In August 2006, the Company issued a note payable to MDC Enterprises Ltd. in the amount of $250,000 that accrues interest at 40% per annum and is due on December 29, 2006. In addition, the Company also issued to MDC Enterprises Ltd. a warrant to purchase 150,000 shares of the Company's common stock for $0.75 per shares.
In September 2006, the Company issued a note payable in the amount of $50,000 to an investor. The note bears interest at 10% per annum and is payable upon demand.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues and Cost of Sales. We had no significant revenues for the three months ended September 30, 2006 and September 30, 2005 as we are undertaking a Phase III clinical trial in order to obtain FDA approval of PreHistinTM as an over the counter drug. Our net sales were $0, as were our cost of sales and gross loss for the three months ended September 30, 2006, as compared net sales of $0 as were our cost of sales and gross loss for the three months ended September 30, 2005.
Operating Expenses. Our operating expenses for the three months ended September 30, 2006 were $3,646,162 compared to $810,501 for the three months ended September 30, 2005. For both periods, we incurred expenses for two major purposes: i) ongoing development of our PreHistinTM product and related product management and ii) general management and fund raising efforts. For the three months ended September 30, 2006, this amount was represented by $14,515 in depreciation and amortization; $650,769 in professional fees; $918,330 in salary and wages; $37,203 in rent expense; $1,273,555 in marketing and research; $461,684 in stock option expense; and $290,106 in other operating expenses. This is compared to the three months ended September 30, 2005, where we had $21,401 in depreciation and amortization; $447,182 in professional fees; $95,653 in salary and wages; $34,487 in rent expense; $29,043 in marketing and research; and $182,735 in other operating expenses. Our operating expenses increased during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 principally as a result of an increase in salaries and wages due to the additions of two executives, an increase in marketing and research due to our Phase III clinical trials and an increase in stock option expense related to the adoption of SFAS No. 123R. A significant portion of the professional fees were paid by issuing shares of our stock. The value of these services was based on the market value of our stock at the measurement date.
Interest expense and financing costs for the three months ended September 30, 2006 were $100,340 compared to $225,635 for the three months ended September 30, 2005. The decrease is due to no non-registration penalties being accrued during the three months ended September 30, 2006 as compared to penalties of $96,000 during the three months ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in the value of the detachable warrants issued in connection with the convertible note payable and convertible preferred stock. Due to the decrease of our stock price, the fair value of these warrants has decreased resulting in the decrease of the warrant liability.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2005
Revenues and Cost of Sales. We had no significant revenues for the six months ended September 30, 2006 and September 30, 2005 as we are undertaking a Phase III clinical trial in order to obtain FDA approval of PreHistinTM as an over the counter drug. Our net sales were $0, as were our cost of sales and gross loss for the six months ended September 30, 2006, as compared net sales of $0 as were our cost of sales and gross loss for the six months ended September 30, 2005.
Operating Expenses. Our operating expenses for the six months ended September 30, 2006 were $5,116,719 compared to $1,595,714 for the six months ended September 30, 2005. For both periods, we incurred expenses for two major purposes: i) ongoing development of our PreHistinTM product and related product management and ii) general management and fund raising efforts. For the six months ended September 30, 2006, this amount was represented by $31,277 in depreciation and amortization; $1,567,674 in professional fees; $1,103,632 in salary and wages; $100,279 in rent expense; $1,299,364 in marketing and research; $590,592 in stock option expense; and $423,901 in other operating expenses. This is compared to the six months ended September 30, 2005, where we had $46,283 in depreciation and amortization; $958,360 in professional fees; $178,220 in salary and wages; $68,923 in rent expense; $55,316 in marketing and research; and $288,612 in other operating expenses. Our operating expenses increased during the six months ended September 30, 2006 as compared to the six months ended September 30, 2005 principally as a result of an increase in professional fees, which include payments for accounting, legal and shareholder relations and amortization of the value of warrants issued to consultants over the terms of the related consulting agreements, an increase in salaries and wages due to the additions of two executives, an increase in marketing and research due to our Phase III clinical trials and an increase in stock option expense related to the adoption of SFAS No. 123R. A significant portion of the professional fees were paid by issuing shares of our stock. The value of these services was based on the market value of our stock at the measurement date.
Interest expense and financing costs for the six months ended September 30, 2006 were $232,135 compared to $408,367 for the six months ended September 30, 2005. The decrease is due to no non-registration penalties being accrued during the six months ended September 30, 2006 as compared to penalties of $192,000 during the six months ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in the value of the detachable warrants issued in connection with the convertible note payable and convertible preferred stock. Due to the decrease of our stock price, the fair value of these warrants has decreased resulting in the decrease of the warrant liability.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.
Over the next 12 months, we plan to continue moving forward with the completion of the Phase III clinical trials of our allergy prevention product, PreHistinTM, followed by submission of a new drug application ("NDA") to the FDA for marketing approval of PreHistinTM as an over the counter ("OTC") allergy medication. Once the NDA is filed, we hope to receive approval from the FDA enabling our marketing launch in the United States of the product or licensing to a potential pharmaceutical partner. We estimate the cost to complete the Phase III clinical trials and the submission of the NDA to the FDA for marketing approval will be approximately $5,000,000.
In addition to seeking approval from the FDA for the primary indication of seasonal allergic rhinitis (hay fever) for PreHistinTM, we may conduct additional studies to validate the viability of approval for supplemental indications and alternative delivery mechanisms. The tests will be a combination of clinical trials and laboratory analyses.
As of September 30, 2006, we had cash and equivalents of $66,120. To fully execute our business plan for the next 12 months, we will need to raise additional funds in order to complete the Phase III clinical trials, submit the PreHistinTM application to the United States FDA, and execute a licensing agreement or otherwise launch the PreHistinTM product. There is no assurance that these funds will be raised.
In October 2005, we reported results of an initial six-week 714 patient Phase III trial designed to study various PreHistinTM dose regimens for reducing seasonal allergy symptoms when compared to placebo. As reported, the statistical analysis utilized a modified intent to treat and an ANOVA (ANalysis Of VAriation) model to determine the treatment effects for the four arm study and certain assumptions used were not specified in the statistical analysis plan (SAP). Although the data resulting from the prior Phase III clinical trial demonstrated that patients who were administered PreHistinTM showed a statistically significant reduction of allergy symptoms when the modified analysis was applied, the data most likely will be viewed by the FDA as supportive data and not as pivotal Phase III results required to secure approval.
In June 2006, we announced that we intend to initiate two identical, Phase III clinical trials of our anti-allergy medication PreHistinTM in patients with seasonal allergic rhinitis. The randomized, double blind, placebo-controlled studies are intended to assess the efficacy, overall safety and tolerability of our flagship drug PreHistinTM to prevent the onset and reduce the severity of allergy symptoms.
The new study design calls for two simultaneously conducted Phase III clinical trials, each comprised of one placebo arm and one active arm receiving 3.3 mg of sublingual PreHistinTM administered twice daily for the six weeks of the study. In July 2006, we conducted the double blind, placebo-controlled trials will be conducted at 23 sites throughout the United States during the Ragweed allergy season. The trials utilized electronic diary records to assess improvement in the severity of nasal allergy symptoms. A total of 1,550 patients were randomized into the twin studies to receive either placebo or PreHistinTM for three weeks prior to the onset of the allergy season, and for an additional three weeks into the season. The patients' diaries and studies were completed on October 6, 2006.
We estimate these costs to be approximately $5,000,000 over the coming year. We will need to raise funds to execute studies for the further development of the . . .
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