UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31,
2007
[ ]
TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For transition period ___ to ____
Commission file number: 000-31129
HOLMES BIOPHARMA, INC.
(Exact name of registrant as specified in
its charter)
|
|
Nevada
(State or other jurisdiction of
incorporation
or organization)
|
88-0412635
(I.R.S.
Employer Identification No.)
|
8655 East
Via De Ventura, Suite G-200, Scottsdale, Arizona
(Address of
principal executive offices)
|
85258
(Zip
Code)
|
Registrants telephone number:
866-694-2803
Securities registered under Section 12(b) of the Exchange
Act: None
Securities registered under Section 12(g) of the Exchange
Act: Common Stock
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [
] No [X]
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) 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 if disclosure of delinquent filers
pursuant to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company:
|
|
Large accelerated filer [
]
Non-accelerated filer
[ ]
|
Accelerated filed [
]
Smaller reporting company
[X]
|
1
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 aggregate market value of shares of the voting and
non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold as of the last business day of
the registrants most recently completed second fiscal quarter was approximately
$29,058,412.
The number of shares outstanding of the registrants
common stock as of April 4, 2008 was 49,060,247.
Documents incorporated by reference: None
TABLE OF CONTENTS
PART I
Item 1.
Business
3
Item 1A. Risk Factors
6
Item 2.
Properties
7
Item 3. Legal
Proceedings
8
Item 4.
Submission of Matters to a Vote of Security Holders
8
PART II
Item 5. Market for Registrants Common
Equity, Related Stockholder Matters
and
Issuer Purchases of Equity Securities
8
Item 6.
Selected Financial Data
10
Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operation
11
Item 8.
Financial Statements and Supplementary Data
13
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
45
Item 9A. Controls and
Procedures
45
Item 9B. Other Information
45
PART III
Item 10. Directors,
Executive Officers and Corporate Governance
46
Item 11. Executive
Compensation
46
Item 12. Security Ownership of Certain Beneficial
Owners and Management
and
Related Stockholder Matters
47
Item 13. Certain
Relationships and Related Transactions, and Director Independence
49
Item 14. Principal
Accountant Fees and Services
49
PART IV
Item 15. Exhibits,
Financial Statement Schedules
50
Signatures
50
2
In this report references
to Holmes Biopharma we, us, and our refer to Holmes Biopharma,
Inc.
NOTE REGARDING PROJECTIONS AND FORWARD
LOOKING STATEMENTS
Except for historical information contained herein, this
report contains express or implied forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange
Act. We may make written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission (SEC), in press releases,
quarterly conference calls or otherwise. Our filings with the SEC may be
accessed at the SEC's Web site, www.sec.gov.
The words "believes," "expects," "anticipates,"
"intends," "forecasts," "project," "plans," "estimates" and similar expressions
identify forward-looking statements. Such statements reflect our current
views with respect to future events and financial performance or operations and
speak only as of the date the statements are made. Forward-looking
statements involve risks and uncertainties and readers are cautioned not to
place undue reliance on forward-looking statements. Our actual results may
differ materially from such statements. Factors that cause or contribute
to such differences include, but are not limited to, those discussed elsewhere
in this report.
PART I
ITEM 1. BUSINESS
Historical Development
Holmes Biopharma, Inc. (Holmes) was incorporated under
the laws of the state of Nevada on December 3,1998 as Holmes Herbs, Inc., to
engage in the distribution of herbal and natural medicine products.
On May 20, 2005, we incorporated a subsidiary, Qualia Clinical
Service Inc., a Nevada corporation (Qualia), for the purpose of developing a
clinical drug research and development business.
On November 30, 2005, Qualia purchased Dr. Sohail
Khattaks business plan for clinical drug research and development in exchange
for 15,000,000 shares of Qualia common stock valued at $15,000. In
December 2005 Dr. Khattak was appointed President and CEO of this subsidiary and
Qualia issued 7,500,000 of its common shares to him for his participation in the
business development of Qualia. Holmes Biopharma was issued 20,000,000
shares of Qualia common stock, resulting in Qualia remaining a majority-owned
subsidiary of Holmes Biopharma.
Effective July 21, 2006, Holmes Herbs, Inc. changed its
name to Holmes Biopharma, Inc. to more accurately reflect our new business
operations in the clinical drug research industry. We also effected a
1-to-3 forward stock split of our common shares on July 21, 2006, increased our
authorized common stock to 100,000,000 and changed our trading symbol to HLMB.
We also have changed the name of our website to
www.holmesbiopharma.com.
Our Business
Holmes is a holding company and Qualia is our
majority-owned subsidiary. We intend to focus our efforts and resources on
the development of Qualia as a contract research organization (CRO).
Qualia Clinical Services, Inc. Business
Qualias mission is to become a leading CRO by providing
integrated and cost effective clinical development services that help the
pharmaceutical industry introduce new drug products. Qualia offers
services to support global research and development of biotechnology,
pharmaceutical and medical device companies. In recent years
pharmaceutical companies have increasingly relied on outside CROs as a means to
lower their costs related to personnel and infrastructure. Management
believes that this trend will continue and increase in coming years.
Qualia intends to become a strategic partner of pharmaceutical clients
rather than just a service vendor.
We rely on the expertise of Sohail Khattak, M.D., to lead
Qualias clinical drug research business. Dr. Khattak has worked on
research, design and supervision of Phase I, II, III and IV trials, organized
first-in man studies, set up
3
bioequivalence,
bioavailability and ADME studies. He has overseen the writing and
implementation of clinical Standard Operating Procedures working with the Food
and Drug Administration. He also has served on the advisory board of
pharmaceutical companies such as Abbot, Novartis, Jansen Ortho and Shire
Pharmaceuticals.
Since January 2006 Qualia has operated a day-use Phase
III and IV clinical research facility in Toronto, Canada. In addition
Qualia has established a comprehensive Data Management Center out of the same
facility. These services provide timely delivery of testing results
to customers. Until the fall of 2007 Qualia had outsourced this activity
to a third party but management determined that this service could provide
another revenue stream for the company. Subsequently, Qualia increased its
staff complement to ten trained professionals dedicated to data management.
This is also a service that can be contracted to other contract research
organizations and large pharmaceutical companies on an outsourced basis, hence
adding considerably to the overall profitability of the company.
In August 2006 Qualia opened a Phase I multi-bed clinical
research facility in Omaha, Nebraska. In October 2006 the Omaha facility
commenced work on its first contract, a Phase I trial for rheumatoid arthritis
patients and during 2006 and 2007 Qualia has conducted 50 clinical projects and
received requests for several follow-up projects with the same sponsors.
In September 2007 Qualia expanded this facility by adding 10,000 square
feet of clinic and administrative space bringing the total square footage to
33,000.
In September 2007 Qualia acquired 100% of Qualia Ukraine
for the purpose of marketing and conducting clinical research trials in Eastern
Europe. Qualia Ukraine was recently awarded its first research contract
and has hired six employees and leases a facility with approximately 1,000
square feet for $7,000 per month.
Clinical Trial
Industry
Management believes that the aging population will
continue to drive the demand for drugs and that the rising medical costs will
create a need for innovation in new drugs and the introduction of more generic
drugs. New pharmaceutical products must undergo extensive testing and
regulatory review to determine their relative safety and effectiveness.
Companies seeking approval for these products are responsible for
performing and analyzing the results of preclinical and multi-phase clinical
trials. Preclinical trials typically last for up to three years and
involve animal testing and laboratory analyses to determine the basic biological
activity and safety of the drug. Upon successful completion of the
preclinical phase, the drug undergoes a series of clinical tests in humans,
including healthy volunteers as well as patients with the targeted disease.
Clinical trials are conducted over a period typically lasting five to
seven years and involve hundreds or thousands of human subjects.
Preclinical and clinical testing must comply with the
requirements of Good Laboratory Practice (GLP), Good Clinical Practice (GCP)
and other standards promulgated by the Food and Drug Administration (FDA) and
other federal and state governmental authorities. GLP regulations mandate
standardized procedures for controlling studies, recording and reporting data
and retaining appropriate records for preclinical testing. GCP stipulates
procedures designed to ensure the quality and integrity of data obtained from
clinical testing and to protect the rights and safety of clinical subjects.
In the United States, a drug sponsor must file an
Investigational New Drug (IND) application with the FDA before the commencement
of human testing of a drug. The IND includes preclinical testing results
and sets forth the sponsor's plans for conducting human clinical trials.
The design of these plans, also referred to as the study protocol, is
critical to the success of the drug development effort because the protocol must
correctly anticipate the data and results that the FDA will require before
approving the drug. In the absence of any comments from the FDA, human
clinical trials may begin 30 days after the IND is filed. Clinical trials
usually start on a small scale to assess safety and then expand to larger trials
to test efficacy. Trials are usually grouped into four phases, with
multiple trials generally conducted within each phase.
PHASE I: Phase I trials are
conducted on healthy volunteers, typically 20 to 80 persons, to develop basic
safety data relating to toxicity, metabolism, absorption and other
pharmacological actions. These trials last an average of six months to one
year.
4
PHASE II:
Phase II trials are conducted on a small number of subjects, typically 100
to 400 patients, who suffer from the drug's targeted disease or condition.
Phase II trials offer the first evidence of clinical efficacy, as well as
additional safety data. These trials last an average of two years.
PHASE III: Phase III trials are
conducted on a significantly larger population of several hundred to several
thousand patients, some of whom suffer from the targeted disease or condition
and some of whom are healthy. Phase III trials are designed to measure
efficacy on a large scale as well as long-term side effects. These trials
involve numerous sites and generally last two to three years.
PHASE IV: As a condition of
granting marketing approval, the FDA may require that a sponsor continue to
conduct additional clinical trials, known as Phase IV trials, to monitor
long-term risks and benefits, study different dosage levels, or evaluate
different safety and efficacy parameters in target patient populations.
With the increasing importance of Phase IV trials has also come increased
complexity in the scope of the trials (i.e., the number of patients tested) and
the manner in which they are conducted (i.e., the number of sites at which
testing is performed). Phase IV trials generally last one to four years.
Principal Services and
Markets
Qualia offers complete services for the design,
placement, performance and management of clinical trial programs, a critical
element in obtaining regulatory approval for drugs and medical devices. It
has the capability to manage every aspect of trials in Phases I through IV,
including design of protocols, operations manuals, identification and
recruitment of trial investigators, initiation of sites, monitoring for strict
adherence to GCP, site visits to ensure compliance with protocol procedures and
proper collection of data, interpretation of trial results and report
preparation. Qualia generally is awarded contracts based, among other
things, upon its response to requests for proposal received from pharmaceutical,
biotechnology and medical device companies.
The outsourcing of preclinical and clinical trials for
pharmaceutical, biotechnology and medical device products is estimated to be
growing at least as much as the rate of growth in global research and
development expenditures by major pharmaceutical companies. The contract
research organization industry is highly fragmented with many small,
limited-service providers as well as in-house research departments, universities
and teaching hospitals, and other contract research organizations, many of which
have substantially greater resources than Holmes and Qualia.
However, we believe Qualia can take advantage of the trend toward
outsourcing clinical trials based upon the quality of its staff and
facilities.
Competition
Qualia primarily competes with pharmaceutical companies'
own in-house research departments, other contract research organizations,
universities and teaching hospitals. Our industry has full-service
contract research organizations with global capacities, several mid-size
contract research organizations and many small, limited-service providers.
In recent years, several large, full-service competitors have emerged,
some of which have substantially greater capital and other resources, are better
known and have more experienced personnel than Qualia. Clients choose a
contract research organization based on several factors, the most important of
which is the quality of the work performed for existing clients.
Principal Suppliers
Tandem Research Labs is a major partner of Qualia and on
an outsourced basis supplies bioanalytical services to Qualia that forms an
intricate component of our complete range of services to our biotechnology
sponsors.
5
Major
Customers
There is no one customer that provides more than 10% of
the companys revenue. However, Qualia has ongoing contracts with no
fewer than 35 sponsors and of the 10 largest pharmaceutical companies in the
world Qualia has secured contracts with a majority of them. Due to
confidentiality, the names of these companies cannot be published into the
public domain.
Government Regulation
The clinical investigation of new pharmaceutical,
biotechnology and medical device products is highly regulated by governmental
agencies. In the United States federal regulations ensure that only those
products that have been proven to be safe and effective are made available to
the public. The FDA has set forth regulations and guidelines that pertain
to applications to initiate trials of products, approval and conduct of studies,
report and record retention, informed consent, applications for the approval of
new products, and post-marketing requirements. Pursuant to FDA
regulations, contract research organizations that assume obligations of a drug
sponsor are required to comply with applicable FDA regulations and are subject
to regulatory action for failure to comply with such regulations. In the
United States, the historical trend has been in the direction of increased
regulation by the FDA. Qualia believes that many pharmaceutical,
biotechnology and medical device companies do not have the staff and/or the
available expertise to comply with all of the regulations and standards, and
this has contributed and will continue to contribute to the growth of the
contract research organization industry. The services provided by Qualia
are ultimately subject to FDA regulation in the United States and comparable
agencies in other countries, although the level of applicable regulation in
other countries is generally less comprehensive than regulations present in the
United States. Qualia is obligated to comply with FDA regulations
governing such activities as selecting qualified investigators, obtaining
required forms from investigators, verifying that patient informed consent is
obtained, monitoring the validity and accuracy of data, verifying drug/device
accountability, and instructing investigators to maintain records and reports.
Qualia must also maintain records for each study for specified periods for
inspection by the study sponsor and the FDA during audits. If such audits
document that Qualia has failed to adequately comply with Federal regulations
and guidelines, it could have a material adverse effect on the company. In
addition, Qualias failure to comply with applicable regulations could possibly
result in termination of ongoing research or the disqualification of data,
either of which could damage Qualias reputation.
Employees
Holmes does not have any employees at this time and
Qualia has 150 employees, 85% of which are full time. Qualias
employees are not presently covered by any collective bargaining agreement.
It has not experienced any work stoppages and believe that its relations
with their employees are good.
ITEM 1A. RISK FACTORS
Factors Affecting Future Performance
Operating costs for clinical research are relatively
fixed, but variations of the timing of contracts may lead to fluctuation in
quarterly operating results.
Qualias quarterly operating results may fluctuate as a
result of factors such as implementing or completing particular clinical trials,
and termination of clinical trials, therefore, results of one quarter are not
necessarily indicative of results for the next quarter. Since a high
percentage of Qualias operating costs are relatively fixed while revenue
recognition is subject to fluctuation, minor variations in the timing of
contracts or the progress of trials may cause significant variations in
quarterly operating results.
Clinical research involves a risk of liability for
personal injury or death to patients from adverse reactions to the study
drug.
Qualia monitors the testing of new drugs on human
volunteers pursuant to study protocols in clinical trials. Clinical
research involves a risk of liability for personal injury or death to patients
from adverse reactions to the study drug,
6
some of whom may be seriously
ill and are at great risk of further illness or death as a result of factors
other than their participation in a trial. Qualia is contractually
indemnified in any and all of these instances by the sponsor of the trial.
Qualia believes that the risk of liability to patients in clinical trials
is mitigated by various regulatory requirements, including the role of
institutional review boards and the need to obtain each patient's informed
consent. To reduce its potential liability, Qualia requires indemnity
provisions in its contracts with clients. These indemnities generally do not,
however, protect the company against certain of its own actions such as those
involving negligence or misconduct. Qualia currently has in place
professional liability insurance coverage should any unfortunate event occur.
Also, these indemnities are contractual arrangements that are subject to
negotiation with individual clients, and the terms and scope of such indemnities
vary from client to client and from trial to trial.
Qualia is dependent upon the ability of third parties
to fund research and development.
As a provider of preclinical and clinical research
services to pharmaceutical, biotechnology and medical device clients, Qualias
ability to win new outsourced contracts from the pharmaceutical industry is
dependent upon the rate of research and development expenditure by that
industry. This in turn can be influenced by a variety of factors, including
mergers within the pharmaceutical industry, the availability of capital to the
biotechnology industry, and, in the United States, by the impact of government
reimbursement rates for Medicare and Medicaid programs. Consequently, the
success of the company to grow and win new outsourced contracts is highly
dependent upon the ability of the pharmaceutical and biotechnology industries to
continue to spend on research and development at rates close to or at historical
levels.
Clinical trial contracts may be terminated at any
time, which may result in reduced revenues.
Qualias clients generally have the right to terminate a
contract at any time during a clinical trial, potentially causing periods of
excess capacity and reductions in net service revenue and net income.
Trials may be terminated for various reasons, including unexpected or
undesired results, inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug, adverse patient
reactions to the drug or the client's decision to de-emphasize a particular
trial. At this initial phase of Qualias operations, the termination of any one
trial would have a material adverse impact on the company. The loss of a
large trial or the simultaneous loss of multiple trials could result in
unplanned periods of excess capacity and adversely affect Qualias future
revenue and profitability. In most instances, if a contract is terminated,
Qualia is entitled to receive revenue earned to date as well as, at times, a
termination fee. However, because the company's contracts are
predominately fixed price contracts, Qualia bears the risk of cost overruns.
The health care industry is subject to changing
political, economic and regulatory influences that may affect the pharmaceutical
and biotechnology industries.
In recent years, several comprehensive health care reform
proposals were introduced in the United States Congress. The intent of the
proposals was, generally, to expand health care coverage for the uninsured and
reduce the growth of total health care expenditures. While none of the
proposals were adopted, the United States Congress may again address health care
reform. In addition, foreign governments may also undertake health care
reforms in their respective countries. Implementation of government health
care reform may adversely affect research and development expenditures by
pharmaceutical and biotechnology companies, which could decrease the business
opportunities available to Qualia. Qualia is unable to predict the
likelihood of such or similar legislation being enacted into law or the effect
such legislation would have on its operations.
ITEM 2. PROPERTIES
Holmes principal office is located in Scottsdale,
Arizona and a secondary location for administration is in Vancouver, British
Columbia, Canada. We pay a total of $1,500 on a month-to-month basis for
this office space.
Qualia leases facilities in Omaha, Nebraska; Toronto,
Ontario; and Kiev, Ukraine. It entered into a five year lease agreement
for a 22,180 square foot facility in Omaha, Nebraska and pays approximately
$13,000 per month for that facility. The lease includes an annual
escalator and no rent for the six month period from March through August 2007
and expires February 28, 2011. Qualia has paid approximately $500,000 for
its own tenant improvements. On
7
August 1, 2007, Qualia entered
into a five year lease agreement that expanded its existing operations in Omaha
to an additional 8,117 square feet in a similar facility directly across the
street from the main clinic. The company negotiated the first six months
free with approximately $3,600 per month plus operating expenses. Qualia
paid its own modest tenant improvement costs that amounted to approximately
$30,000.
Qualia has a five year lease for a 3,000 square foot
facility in Toronto, Ontario, Canada used for its data management business for
approximately $1,660 per month plus operating expenses.
Qualia has a 35 month lease for a clinical facility
located in Kiev, Ukraine with approximately 1,000 square feet for approximately
$7,000 per month.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any proceedings or threatened
proceedings as of the date of this filing.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
We have not submitted a matter to a vote of our security
holders during the fourth quarter of 2007.
PART II
ITEM 5. MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER
MATTERSAND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is listed on the OTC Bulletin Board
under the symbol HLMB. The following table sets forth the range for each
quarterly period during 2007 of the closing high and low bid as reported by Pink
Sheets LLC. The quarterly periods for 2006 reflect the high and low bid
prices of our common stock as reported by the OTC Bulletin Board. On July
31, 2006 we effected a 1-to-3 forward split of our common stock. The
forward stock split is reflected in the quarterly periods ended September 30 and
December 31, 2006. These quotations represent prices between dealers and
may not include retail markups, markdowns, or commissions and may not
necessarily represent actual transactions.
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2007
|
|
2006
|
Fiscal Quarter
Ended
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High
|
Low
|
|
High
|
Low
|
March 31
|
$
1.35
|
$
0.60
|
|
$
5.50
|
$
3.35
|
June 30
|
1.58
|
0.60
|
|
4.50
|
2.05
|
September 30
|
2.05
|
1.41
|
|
1.68
|
0.40
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December 31
|
2.12
|
0.54
|
|
1.40
|
0.51
|
Our shares are subject to Section 15(g) and Rule 15g-9 of
the Securities and Exchange Act, commonly referred to as the penny stock rule.
The rule defines penny stock to be any equity security that has a market
price less than $5.00 per share, subject to certain exceptions. The rule
provides that any equity security is considered to be a penny stock unless that
security is:
$
registered and traded on a national
securities exchange meeting specified criteria set by the SEC;
8
$
issued by a registered investment
company;
$
excluded from the definition on the
basis of price (at least $5.00 per share) or the issuers net tangible assets.
Trading in the penny stocks is subject to additional
sales practice requirements on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors. Accredited
investors, in general, include certain institutional investors and individuals
with assets in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 together with their spouse.
For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of our securities
and must have received the purchasers written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny
stock, the rules require the delivery, prior to the first transaction, of a risk
disclosure document relating to the penny stock. A broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, and current quotations for the security. Finally, monthly
statements must be sent to the purchaser disclosing recent price information for
the penny stocks. Consequently, these rules may restrict the ability of
broker-dealers to trade or maintain a market in our common stock and may affect
the ability of shareholders to sell their shares.
Investor Relations
On January 9, 2008, Holmes engaged Newport Capital
Consultants, Inc. (Newport), a consulting and investment banking firm, to
provide investor relations services for a term of one year. Under the
consulting agreement, Newport will provide a broker relations program to Holmes
and will communicate with brokers and market makers throughout the United States
on behalf of the company. Holmes agreed to pay Newport $5,000 per month
for consulting services, an aggregate of 200,000 shares of common stock to be
issued per quarter, plus options to purchase 1,000,000 common shares pursuant to
an agreed upon schedule. The agreement may be terminated at anytime with a
60-day notice.
Holders
As of April 4, 2008, we had approximately 76 shareholders
of record, which does not include Regulation S shares held in Europe or common
shares held in street accounts of securities brokers.
Dividends
We have not paid cash or stock dividends and have no
present plan to pay any dividends. We intend to retain any earnings to
finance the operation and expansion of our business and the payment of any cash
dividends on our common stock is unlikely. However, our board of directors
may revisit this matter from time to time and may determine our earnings,
financial condition, capital requirements and other factors allow the payment of
dividends.
Recent Sales of Unregistered Securities
On January 9, 2008 we granted options to purchase
1,000,000 common shares to Newport Capital Consultants, Inc. in consideration
for investment relations services. The options have exercise prices
ranging from $0.75 to $3.00 and vesting dates ranging from April 10, 2008
through January 10, 2010. On January 24, 2008 we issued 50,000 shares to
Newport Capital Consultants, Inc. in consideration for investment relations
services valued at approximately $50,000. We relied on an exemption
from registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On January 28, 2008 we issued an aggregate of 15,000
shares to two entities for investor relations services valued at approximately
$15,000. We issued 12,750 shares to Baxter Capital Advisors, Inc. and
2,250 shares to MidSouth Capital. We relied on an exemption from registration
for a private transaction not involving a public distribution provided by
Section 4(2) of the Securities Act.
9
Issuer Purchase of
Securities
None.
ITEM 6. SELECTED FINANCIAL
DATA
The following selected financial data is based on the
consolidated financial statements of Holmes and its 56.5% interest in Qualia.
The following chart summarizes our consolidated financial statements for
the years ended December 31, 2007 and 2006 and should be read in conjunction
with the financial statements, and notes thereto, included with this report at
Part II, Item 8, below. The 2006 year has been restated to reflect
corrections made to the 2006 year (See Note 14 to the financial statements) and
to reflect the forward common stock split effected July 21, 2006.
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Year ended
December 31
|
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2007
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2006
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SUMMARY OF BALANCE
SHEET
|
|
(Restated)
|
Cash
|
$
76,949
|
$
626,444
|
Total current assets
|
1,880,242
|
1,009,470
|
Total assets
|
2,922,130
|
2,060,650
|
Total current
liabilities
|
2,829,202
|
1,075,131
|
Total liabilities
|
2,829,202
|
1,075,131
|
Accumulated deficit
|
(9,767,120)
|
(6,951,488)
|
Total
stockholders equity
|
$
92,928
|
$
985,519
|
|
|
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SUMMARY OF OPERATING
RESULTS
|
|
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Revenues, net
|
$
8,722,845
|
$
441,285
|
Cost of revenues
|
3,006,467
|
61,888
|
Gross profit
|
5,716,378
|
379,397
|
General, selling and
administrative expenses
|
8,103,473
|
3,425,508
|
Net operating loss
|
(2,387,095)
|
(3,046,111)
|
Total nonoperating income
(expense)
|
(428,537)
|
(173,069)
|
Income taxes
|
-
|
-
|
Net loss
|
(2,815,632)
|
(3,219,180)
|
Net loss per share
|
$
(0.06)
|
$
(0.07)
|
10
ITEM 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Executive Overview
During the past two years we have continued to focus on
the development of Qualias clinical drug research and development business.
For the year ended December 31, 2007 (2007) we recorded
consolidated revenues of $8,722,845 compared to $441,285 for the year ended
December 31, 2006 (2006). The second quarter of 2007 was a turning point
when we recorded consolidated revenues of $1,628,600 and we have increased
consolidated revenues during the remainder of 2007.
Our challenge for the next twelve months will be to
continue Qualias revenue growth and to seek additional funding for Qualias
continued operations.
Liquidity and Capital Resources
Prior to 2007 we had relied on sales of our common stock
as a primary source of funding, but during 2007 we recorded significant
consolidated revenues. However, our independent accounting firm expressed
uncertainty that we can continue as a going concern because Qualia, which is the
source of our revenues, has only recently started its clinical operations.
All risks inherent to a new enterprise are inherent to Qualias
operations. Although Qualia has increased its revenues, the revenues are
not at a level to support continued growth of Qualia. Our management
anticipates that we will continue to rely on loans and equity financings in
addition to revenues to fund Qualias business plan.
Our sources of funding during 2007 and 2006 included
revenues, proceeds from the sale of stock, loans and advances. We also
issued common stock for services to avoid using our cash. We intend to use
our cash for our operations and for advances to Qualia for further development
of its operations.
During 2007 we relied on revenues, proceeds of $462,096
from the sale of stock, a loan of $100,000 and advances of $162,500 from a
revolving bank line of credit. A portion of the stock sales were from a
Regulation S offering we initiated in May 2005 in which we offered 10,000,000
shares under Regulation S with an aggregate offering price of $5,000,000.
During 2007 we sold 1,246,557 shares of Regulation S stock for net
proceeds of $177,096 and sold 85,000 common shares for $285,000. To
avoid using our cash in 2007, we issued 127,750 common shares for various
services valued at $262,000.
In 2006 our funding sources included our revenues, net
proceeds of $2,013,698 from the sale 7,116,820 shares of Regulation S stock and
a convertible debenture agreement for financing of $1,000,000, discussed below.
We also issued 588,500 shares for services valued at $934,750 and
paid loan fees with 125,000 common shares valued at $198,750.
We cannot assure you that we will be successful in
raising the funds needed to meet our future cash requirements and if we are
unable to obtain necessary funding through sales of our common stock, we may be
forced to delay the further development of the Qualias clinical drug research
and development business.
As a public reporting company, we have the right within
the parameters of current federal and state security laws and the rules and
regulations of the SEC and the NASD to make additional public offerings in
strict compliance with all applicable laws and regulations. This is seen
as a long-term plan to be undertaken if our growth warrants the need for
additional capital, and if this need outweighs the dilution to our stockholders
that would result from raising this additional capital.
Results of Operations
Our revenues increased significantly in 2007 when
compared to 2006. Management anticipates that consolidated revenues will
continue to increase based upon the contracts that Qualia has in place; however,
there is no assurance that Qualia will maintain profitability. Revenue is
recognized when services are performed. Our pharmaceutical
11
research services revenues are
provided under the terms of long-term contracts that can extend from several
months to several years. Revenues on these contracts are recognized using
the percentage-of-completion method based on a proportional performance basis
using output as a measure of performance. Amounts generally become
billable upon the achievement of certain milestones or in accordance with
predetermined payment schedules. Services performed in advance of billings
are recorded as costs in excess of billings on contracts in progress pursuant to
the contractual terms. In some cases, a portion of the contract fee is
paid at the time the trial is initiated. These advances are reported as deferred
revenue and recognized as revenue as services are performed or products are
delivered. Changes in the scope of work generally result in a
renegotiation of contract terms. Renegotiated amounts are not included in
net revenues until earned and realization is assured.
In the case of fee-for-service contracts, revenue is
recognized as services are performed based upon hours worked or samples tested.
For long-term fixed-price service contracts, revenue is recognized as
services are performed, with performance generally assessed using output
measures, such as units-of-work performed to date as compared to the total
units-of-work contracted. In some cases, a portion of the contract fee is
paid at the time the trial is initiated. These advances are deferred and
recognized as revenue as services are performed or products are delivered, as
discussed above. Additional payments may be made based upon the
achievement of performance-based milestones over the contract duration.
General, selling and administrative expenses increased
significantly for 2007 compared to 2006 due to growth of Qualias operations.
Increases in Qualias employees, along with increased insurance costs,
advertising and marketing and travel expenses resulted in increased overall
operating expenses. Management anticipates that these expenses will
continue to increase in the short term.
In addition to expenses related to operations, we
recorded interest expense of $410,782 for 2007 and $185,894 for 2006 that was
primarily related to the interest expense and beneficial conversion expense of
the convertible debenture agreement with Adlan Foundation.
Despite significant increases in revenues that have
resulted in a net income for 2007, our consolidated operating expenses for 2007
have resulted in a net loss and a net loss per share for that period.
While we are making progress, we cannot guarantee that we will remain
profitable in the short term and anticipate that we will post net losses for the
year end.
Commitments and Contingent Liabilities
Qualia holds monthly leases for four different office
and/or clinic facilities. (See Part I, Item 2 Properties, above) The
future minimum lease payments under the operating leases as of December 31, 2007
are $319,820 for December 31, 2008 and total $1,268,450 through 2012.
At December 31, 2007, our consolidated total current
liabilities included accounts payable of $1,855,109, a note payable to a third
party of $100,000, a bank line of credit debt of $162,500, deferred revenue of
$204,243, accrued expenses of $413,507 and advances from future deposits of
$93,843. The accounts payable are primarily related to costs associated
with the expansion of Qualias operations. The note payable is related to
a promissory note executed on June 18, 2007, payable to Abernathy, Mendelson
& Associates Inc. The principal sum of the note is $100,000 USD, with
interest of seven percent (7%) per annum. The principal and interest are
due on or before June 17, 2008.
During 2007 Qualia entered into a line of credit
arrangement with Wells Fargo Bank with a credit limit of $175,000 and an
interest rate at 1.25% over the Wall Street Journal Prime Rate (The Wall Street
Journal Prime Rate was 7.50% at December 31, 2007). This line of credit is
not collateralized. There was $162,500 outstanding againstthis line of
credit at December 31, 2007.
On August 10, 2006, we entered into a convertible
debenture agreement with Adlan Foundation that provided us with a cash loan of
$1,000,000. We paid a fee of $323,750 consisting of $125,000 cash and
125,000 shares of common stock valued at $198,750. The convertible
debenture bears no interest and the term of the loan ended November 7, 2007.
Under the terms of the convertible debenture agreement, the debenture
holder, Lomnicky Finance Ltd, provided written notice during the term of the
agreement to exercise its right to convert the loan
12
amount into common stock at
the price of $1.00 per share. On November 7, 2007, our board of directors
authorized the issuance of 1,000,000 shares to the debenture holder to convert
this debt.
Off-balance Sheet Arrangements
None.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
HOLMES BIOPHARMA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
INDEX
Reports of Independent
Registered Public Accounting Firm
14
Consolidated Balance Sheets
16
Consolidated Statements of
Operations and Comprehensive Income (Loss)
17
Consolidated Statements of
Stockholders Equity (Deficit)
18
Consolidated Statements of Cash
Flows
19
Notes to Consolidated Financial
Statements
20
13
|
|
C
hisholm
B
ierwolf &
N
ilson, LLC
Certified Public
Accountants
|
Todd D.
Chisholm, Audit Partner
Nephi J.
Bierwolf, Tax Partner
Troy F. Nilson, Audit Partner
|
533 West 2600 South, Suite 25 Bountiful, Utah 84010
Phone: (801) 292-8756 Fax: (801) 292-8809 www.cbncpa.com
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders
Holmes Biopharma, Inc. and
Subsidiary
We have audited the
accompanying consolidated balance sheet of
Holmes Biopharma, Inc. and
Subsidiary
as of December 31, 2007 and the related consolidated statements
of operations, stockholders equity and comprehensive loss and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits
in accordance with the standards of the PCAOB (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. The Company has determined that it is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Holmes Biopharma, Inc. and
Subsidiary
as of December 31, 2007, and the results of its consolidated
operations and its consolidated cash flows for the year ended December 31, 2007,
in conformity with accounting principles generally accepted in the United
States.
The accompanying
consolidated financial statements have been prepared assuming that Holmes
Biopharma, Inc. and Subsidiary will continue as a going concern. As
discussed in Note 2 to the financial statements, Holmes Biopharma, Inc. has had
recurring net losses, negative cash flows from operations and working capital
deficiencies during the periods presented which raises substantial doubt
about the companys ability to continue as a going concern. Managements
plans in regard to these matters are described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf
& Nilson, LLC
Bountiful, Utah
April 2, 2008
_______________________________________________
Member of AICPA,
UACPA & Registered with PCAOB
14
|
|
C
hisholm
B
ierwolf &
N
ilson, LLC
Certified Public
Accountants
|
Todd D.
Chisholm, Audit Partner
Nephi J.
Bierwolf, Tax Partner
Troy F. Nilson, Audit Partner
|
533 West
2600 South, Suite 25 Bountiful, Utah 84010 Phone: (801)
292-8756 Fax: (801) 292-8809 www.cbncpa.com
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders
Holmes Biopharma, Inc. and
Subsidiary
(formerly Holmes Herbs, Inc.)
We have audited the
accompanying consolidated balance sheet of
Holmes Biopharma, Inc. and
Subsidiary
(formerly Holmes Herbs, Inc.)
as of December 31, 2006 and
the related consolidated statements of operations, stockholders equity and
comprehensive loss and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits
in accordance with the standards of the PCAOB (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. The Company has determined that it is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Holmes Biopharma, Inc. and
Subsidiary (formerly Holmes Herbs, Inc.)
as of December 31, 2006, and the
results of its consolidated operations and its consolidated cash flows for the
year ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States.
The accompanying
consolidated financial statements have been prepared assuming that Holmes
Biopharma, Inc. and Subsidiary will continue as a going concern. As
discussed in Note 2 to the financial statements, Holmes Biopharma, Inc. has had
recurring net losses, negative cash flows from operations and working capital
deficiencies during the periods presented which raises substantial doubt
about the companys ability to continue as a going concern. Managements
plans in regard to these matters are described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 14
to the consolidated financial statements, management discovered errors in the
reporting of the Companys accounting for the beneficial conversion feature
related to a convertible note during
2006, accounting for common stock issued for services rendered on behalf
of the Company, and the reclassification of prepaid loan fees in stock to the
equity section of the balance sheet. Accordingly, the consolidated
financial statements as of and for the year
ended December 31, 2006 have been restated to correct the errors.
/s/
Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf
& Nilson, LLC
Bountiful, Utah
February 9, 2007 except for Notes 4, 5, 6 and 14 dated April 2, 2008.
______________________________________________
Member of AICPA,
UACPA & Registered with PCAOB
15
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
DECEMBER
31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
12/31/06
|
|
|
|
|
12/31/07
|
|
(Restated)
|
CURRENT
ASSETS
|
|
|
|
|
Cash
|
|
$
76,949
|
|
$
626,444
|
|
Receivables
|
1,031,813
|
|
347,343
|
|
Costs
and Earnings in Excess of Billings on Contracts in Progress
|
771,480
|
|
30,184
|
|
Prepaid
Expenses
|
-
|
|
5,499
|
|
|
Total
Current Assets
|
1,880,242
|
|
1,009,470
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
Computer
Equipment
|
182,371
|
|
87,958
|
|
Leasehold
Improvements
|
624,133
|
|
532,804
|
|
Office
Furniture and Equipment
|
475,907
|
|
377,677
|
|
|
Total
Cost
|
1,282,411
|
|
998,439
|
|
Less
Accumulated Depreciation
|
256,046
|
|
46,348
|
|
|
Net
Book Value
|
1,026,365
|
|
952,091
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
15,523
|
|
99,089
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$ 2,922,130
|
|
$ 2,060,650
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Revolving
Bank Line of Credit
|
$
162,500
|
|
$
-
|
|
Accounts
Payable
|
1,855,109
|
|
292,909
|
|
Bank
Overdraft
|
93,843
|
|
-
|
|
Convertible
Debentures Payable, Net of Debt Discount
|
-
|
|
597,507
|
|
Convertible
Debentures Payable, Related Party
|
-
|
|
11,250
|
|
Note
Payable
|
100,000
|
|
-
|
|
Note
Payable, Related Party
|
-
|
|
2,025
|
|
Deferred
Revenue
|
204,243
|
|
141,124
|
|
Accrued
Expenses
|
413,507
|
|
30,316
|
|
|
Total
Current Liabilities
|
2,829,202
|
|
1,075,131
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
2,829,202
|
|
1,075,131
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
$0.001
Par Value, Authorized 100,000,000 Shares
|
|
|
|
|
|
Issued
and Outstanding, 49,002,247 and 46,342,940, respectively
|
49,002
|
|
46,343
|
PAID
IN CAPITAL
|
9,813,292
|
|
8,023,832
|
PREPAID
EXPENSES
|
-
|
|
(135,254)
|
OTHER
ACCUMULATED COMPREHENSIVE INCOME
|
(2,246)
|
|
2,086
|
ACCUMULATED
DEFICIT
|
(9,767,120)
|
|
(6,951,488)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
92,928
|
|
985,519
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 2,922,130
|
|
$ 2,060,650
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
.
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
For
the Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Year Ended
|
|
Dec. 31, 2006
|
|
|
|
|
|
|
Dec. 31, 2007
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
8,722,845
|
$
|
441,285
|
|
|
Cost
of Revenues
|
|
3,006,467
|
|
61,888
|
|
|
|
Gross
Profit
|
|
5,716,378
|
|
379,397
|
|
|
|
|
|
|
|
|
|
|
|
General,
Selling and Administrative
|
|
|
|
|
|
|
|
Advertising
and Marketing
|
|
755,090
|
|
269,116
|
|
|
|
Depreciation
and Amortization
|
|
428,327
|
|
149,778
|
|
|
|
Insurance
|
|
353,348
|
|
93,988
|
|
|
|
Contract
Labor
|
|
1,110,227
|
|
1,413,208
|
|
|
|
Professional
and Consulting Fees
|
|
366,169
|
|
289,698
|
|
|
|
Rent
|
|
332,531
|
|
96,603
|
|
|
|
Office
Expense
|
|
875,431
|
|
202,864
|
|
|
|
Travel,
Meals and Entertainment
|
|
401,705
|
|
253,637
|
|
|
|
Salaries
and Wages
|
|
2,745,687
|
|
495,440
|
|
|
|
Payroll
Taxes
|
|
213,238
|
|
45,890
|
|
|
|
Telephone
and Utilities
|
|
278,300
|
|
98,232
|
|
|
|
Other
|
|
243,420
|
|
17,054
|
|
|
|
|
Total
General, Selling and Administrative
|
|
8,103,473
|
|
3,425,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
(2,387,095)
|
|
(3,046,111)
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
Income (Expense)
|
|
|
|
|
|
|
|
Miscellaneous
Income (Expense)
|
|
(17,755)
|
|
12,825
|
|
|
|
Interest
Expense - Beneficial Conversion
|
|
(402,493)
|
|
(185,894)
|
|
|
|
Interest
Expense - Other
|
|
(8,289)
|
|
-
|
|
|
|
|
Total
Nonoperating Income (Expense)
|
|
(428,537)
|
|
(173,069)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Before Income Taxes
|
|
(2,815,632)
|
|
(3,219,180)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
|
(2,815,632)
|
$
|
(3,219,180)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share, Basic and Diluted
|
$
|
(0.06)
|
$
|
(0.07)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
|
47,775,230
|
|
44,828,952
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
A
summary of the components of other comprehensive income (loss) for the
fiscal years ended December 31, 2007 and 2006
|
|
|
|
|
|
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Net
loss
|
|
(2,815,632)
|
|
(3,219,180)
|
|
|
|
Foreign
currency translation adjustment
|
|
(4,332)
|
|
1,584
|
|
|
|
Comprehensive
loss
|
|
(2,819,964)
|
|
(3,217,596)
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
For
the Period January 1, 2006 through December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Common Stock
|
Paid In
|
Prepaid
|
Comprehensive
|
Accumulated
|
|
|
|
Shares
|
Amount
|
Capital
|
Expenses
|
Income
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2006
|
38,512,620
|
$ 38,513
|
$ 4,294,465
|
$
-
|
$
502
|
$ (3,732,308)
|
$ 601,172
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock For Services
|
588,500
|
588
|
934,161
|
-
|
-
|
-
|
934,750
|
Issuance
of Common Stock For Loan Fees
|
125,000
|
125
|
198,625
|
(198,750)
|
-
|
-
|
-
|
Issuance
of Reg S Stock, Net of Selling Expenses
|
7,116,820
|
7,117
|
2,006,581
|
-
|
-
|
-
|
2,013,697
|
Beneficial
Conversion Feature of Convertible Debt
|
-
|
-
|
590,000
|
-
|
-
|
-
|
590,000
|
Amortization
of Loan Fees
|
-
|
-
|
-
|
63,496
|
-
|
-
|
63,496
|
Foreign
Currency Translation Adjustments
|
-
|
-
|
-
|
-
|
1,584
|
-
|
1,584
|
Net
Loss, December 31, 2006
|
-
|
-
|
-
|
-
|
-
|
(3,219,180)
|
(3,219,180)
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006, (Restated)
|
46,342,940
|
46,343
|
8,023,832
|
(135,254)
|
2,086
|
(6,951,488)
|
985,519
|
|
|
|
|
|
|
|
|
|
Issuance
of Reg S Stock, Net of Selling Expenses
|
1,246,557
|
1,246
|
175,850
|
-
|
-
|
-
|
177,096
|
Issuance
of Common Stock For Services
|
127,750
|
128
|
261,872
|
-
|
-
|
-
|
262,000
|
Issuance
of Common Stock For Cash
|
285,000
|
285
|
284,715
|
-
|
-
|
-
|
285,000
|
Value
of Warrants Issued for Financing
|
-
|
-
|
68,023
|
-
|
-
|
-
|
68,023
|
Note
Payable Conversion to Common Stock
|
1,000,000
|
1,000
|
999,000
|
-
|
-
|
-
|
1,000,000
|
Amortization
of Loan Fees
|
-
|
-
|
-
|
135,254
|
-
|
-
|
135,254
|
Foreign
Currency Translation Adjustments
|
-
|
-
|
-
|
-
|
(4,332)
|
-
|
(4,332)
|
Net
Loss, December 31, 2007
|
-
|
-
|
-`
|
-
|
-
|
(2,815,632)
|
(2,815,632)
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2007
|
49,002,247
|
$ 49,002
|
$ 9,813,292
|
$
-
|
$
(2,246)
|
$ (9,767,120)
|
$
92,928
|
The accompanying notes
are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
For
the Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
2007
|
|
(Restated)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,815,632)
|
$
|
(3,219,180)
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
Used
in Operating Activities
|
|
|
|
|
|
|
|
Stock
Issued for Services
|
|
262,000
|
|
934,750
|
|
|
|
Depreciation
and Amortization
|
|
428,327
|
|
149,778
|
|
|
|
Impairment
of Intangible Asset
|
|
-
|
|
15,000
|
|
|
|
Accretion
of Convertible Debenture, Net
|
|
404,106
|
|
185,894
|
|
|
|
Warrants
Issued for Financing
|
|
68,023
|
|
-
|
|
|
|
Changes
in Current Assets and Current Liabilities
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in Receivables
|
|
(684,392)
|
|
(289,758)
|
|
|
|
|
Decrease
(Increase) in Costs and Earnings in Excess
|
|
|
|
|
|
|
|
|
of
Billings on Contracts in Progress
|
|
(741,296)
|
|
(30,184)
|
|
|
|
|
Decrease
in Prepaid Expenses
|
|
5,499
|
|
3,047
|
|
|
|
|
Increase
in Trade Accounts Payable
|
|
1,562,200
|
|
226,581
|
|
|
|
|
Increase
in Bank Overdrafts
|
|
93,843
|
|
-
|
|
|
|
|
Increase
(Decrease) in Deferred Revenues
|
|
63,119
|
|
141,124
|
|
|
|
|
Increase
(Decrease) in Accrued Expenses
|
|
383,191
|
|
25,542
|
|
|
Net
Cash (Used in) Operating Activities
|
|
(971,012)
|
|
(1,857,406)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Cash
Paid for Deposits
|
|
(1,500)
|
|
(14,023)
|
|
Purchase
of Property and Equipment
|
|
(283,972)
|
|
(998,439)
|
|
|
Net
Cash (Used in) Investing Activities
|
|
(285,472)
|
|
(1,012,462)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Issuance
of Common Stock, Net of Offering Costs
|
|
462,096
|
|
2,013,698
|
|
Loan
Fees Paid
|
|
-
|
|
(125,000)
|
|
Advances
on Revolving Bank Line of Credit
|
|
162,500
|
|
-
|
|
Proceeds
From Issuance of Note Payable
|
|
100,000
|
|
-
|
|
Repayments
of Note Payable
|
|
(13,275)
|
|
-
|
|
Issuance
of Convertible Debt
|
|
-
|
|
1,000,000
|
|
|
Net
Cash Provided by Financing Activities
|
|
711,321
|
|
2,888,698
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(4,332)
|
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
(549,495)
|
|
20,414
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
|
626,444
|
|
606,030
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
End of Period
|
$
|
76,949
|
$
|
626,444
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid For
|
|
|
|
|
|
Interest
|
|
$
|
22,039
|
$
|
-
|
|
Taxes
|
|
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Non-Cash
Transactions
|
|
|
|
|
|
Stock
Issued for Services
|
$
|
262,000
|
$
|
934,750
|
|
Stock
Issued in Conversion of Debt
|
$
|
1,000,000
|
$
|
-
|
The accompanying notes
are an integral part of these consolidated financial statements.
19
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note
1. Nature of Business and Basis of Presentation
Nature of business
Holmes Biopharma, Inc. (formerly Holmes Herbs, Inc.) was
organized December 3, 1998 under the laws of the State of Nevada ( Holmes).
Qualia Clinical Services, Inc. (Qualia) was organized May 20, 2005 under
the laws of the State of Nevada as a subsidiary of the Company. The
Company began operations during 2006 as a contract research organization
performing various studies for pharmaceutical companies.
On November 20, 2005, Qualia purchased Dr. Sohail
Khattaks business plan for clinical drug research and development in exchange
for 15,000,000 shares of Qualia common stock valued at $15,000. In
December 2005, Dr. Khattak was appointed President and CEO of this subsidiary
and Qualia issued 7,500,000 of its commons shares to him for his participation
in the business development of Qualia. Holmes Biopharma was issued
20,000,000 shares of Qualia common stock, resulting in Qualia remaining a
majority-owned subsidiary of Holmes Biopharma.
Effective July 21, 2006, Holmes Herbs, Inc. changed its
name to Holmes Biopharma, Inc. to more accurately reflect the new business
operations in the clinical drug research industry. The Company also
affected a 1-to-3 forward stock split of common shares on July 21, 2006,
increased the authorized common stock to 100,000,000 and changed the trading
symbol to HLMB. The Company also changed its website to
www.holmesbiopharma.com
.
Note 2. Significant
Accounting Policies
Principles of Consolidation
The consolidated financial statements of Holmes
Biopharma, Inc. include the accounts of Holmes and its 54.8% - owned subsidiary,
Qualia, collectively the "Company". All significant intercompany accounts
and transactions have been eliminated.
Revenue Recognition
The Company applies the provisions
of SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition in
Financial Statements ("SAB104"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 104 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. In general, the Company recognizes revenue related to monthly
contracted amounts for services provided when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been rendered,
(iii) the fee is fixed or determinable and (iv) collectability is reasonably
assured. The Companys pharmaceutical research services revenues are
provided under the terms of long-term contracts that can extend from several
months to several years. Revenues on these contracts are recognized using
the percentage-of-completion method based on a proportional performance basis
using output as a measure of performance. Amounts generally become
billable upon the achievement of certain milestones or in accordance with
predetermined payment schedules. Services performed in advance of billings
are recorded as costs in excess of billings on contracts in progress pursuant to
the contractual terms in the current section of the balance sheet. In some
cases, a portion of the contract fee is paid at the time the trial is initiated.
These advances are reported as deferred revenue and recognized as revenue as
services are performed or products are delivered, as discussed
20
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
above. Changes in the scope of work generally
result in a renegotiation of contract terms. Renegotiated amounts are not
included in net revenues until earned and realization is assured.
Cash and Cash Equivalents
The Companys policy is to invest excess cash in
income-producing investments. Cash equivalents consist of temporary cash
investments with maturities of three months or less. For purposes of the
statements of cash flows, the Company includes these amounts in cash and cash
equivalents.
Trade Accounts Receivable
Trade accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a periodic basis. Management determines the
allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer's financial condition, credit history,
and current economic conditions. Trade accounts receivable are written off
when deemed uncollectible. Recoveries of trade accounts receivable
previously written off are recorded when received.
Concentration of Credit Risk
The Company has two types of financial instruments
subject to credit risk. The Company maintains a bank account in which the
balance sometimes exceeds federally insured limits of $100,000. Trade
accounts receivable also subject the company to credit risk.
Property and Equipment
Property and equipment are recorded at cost.
Expenditures for additions and betterments are capitalized; expenditures
for maintenance and repairs are charged to expense as incurred. The costs
of assets disposed of and the related accumulated depreciation are eliminated
from the accounts in the year of disposal. Gains or losses from property
disposals are recognized in the year of disposal. Leasehold Improvements
are depreciated over the lesser of the life of the lease or managements
estimate of useful life.
Depreciation is computed using the straight line method
over the following estimated useful lives which vary from three to seven years.
Depreciation expense amounted to $208,007 and $46,348 in 2007 and 2006,
respectively. Property and equipment consists of the following at December
31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Computer Equipment
|
|
$
|
182,371
|
$
|
87,958
|
Leasehold Improvements
|
|
$
|
624,133
|
$
|
532,804
|
Office Furniture and Equipment
|
|
$
|
475,907
|
$
|
377,677
|
Total
Cost
|
|
$
|
1,282,411
|
$
|
998,439
|
Less Accumulated Depreciation
|
|
$
|
256,046
|
$
|
46,348
|
Net
Book Value
|
|
$
|
1,026,365
|
$
|
952,091
|
Expenditures for deposits, equipment and parts for
additions or improvements to equipment are recorded as projects in progress and
are depreciated when completed and placed into service. The Companys
property and equipment is not pledged as collateral on any indebtedness at
December 31, 2007 and 2006.
21
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Income Taxes
The Company follows the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting and reporting
for income taxes.
Deferred income tax assets and liabilities are computed
annually for differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and statutory rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Going Concern
The Company's financial statements are prepared in
accordance with accounting principals generally accepted in the United States of
America applicable to a going concern. This contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
The Company incurred cumulative net losses of approximately $9,700,000
from operations through December 31, 2007 and has recurring negative working
capital and cash flow operations raising substantial doubt about the Company's
ability to continue as a going concern.
The Company has committed over $3.6 million in funds for
the Qualia facilities and has been successful in raising capital through the end
of the year. The Company will seek additional sources of capital through
the issuance of debt or equity financing, but there can be no assurance the
Company will be successful in accomplishing its objectives. The ability of
the Company to continue as a going concern is dependent on additional sources of
capital and the success of the Company's business plan. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Beneficial Conversion Feature
We have adopted Emerging Issues Task Force (EITF) Issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and EITF Issue No.
00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments.
During 2005 and 2006 we incurred convertible debt which has been recorded as
beneficial conversion features pursuant to EITF Issues No. 98-5 and
00-27. Expense recorded on our financial statements during the years
ended December 31, 2007 and 2006 as a result of adoption of EITF issues No. 98-5
and 00-27 totaled $402,493 and $185,894, respectively. See Note 5
Stock Based Compensation
Effective January 1, 2006, we
adopted the fair value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment (SFAS 123R), using the modified-prospective-transition
method. Under this method, total compensation costs for all
share-based payments granted subsequent to January 1, 2006, are based on the
grant date fair value estimated in accordance with the provisions of SFAS
123R. The fair value of any options granted will be calculated using
the Black-Scholes option-pricing formula. Compensation expense for stock
options will be recognized ratably over the options vesting period
.
22
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial
Instruments an Amendment of FASB Statements No. 133 and 140" ("SFAS No. 155").
SFAS No. 155 allows financial instruments that contain an embedded derivative
and that otherwise would require bifurcation to be accounted for as a whole on a
fair value basis, at the holders' election. SFAS No. 155 also clarifies and
amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement
is effective for all financial instruments acquired or issued in fiscal years
beginning after September 15, 2006. We do not expect that the adoption of SFAS
No. 155 will have a material impact on our consolidated financial condition or
results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting
for Servicing of Financial Assets an Amendment of FASB Statement No. 140" ("SFAS
No. 156"). SFAS No. 156 provides guidance on the accounting for servicing assets
and liabilities when an entity undertakes an obligation to service a financial
asset by entering into a servicing contract. This statement is effective for all
transactions in fiscal years beginning after September 15, 2006. Management does
not expect that the adoption of SFAS No. 156 will have a material impact on our
consolidated financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109, or FIN 48, which clarifies the accounting for uncertainty in
tax positions. FIN 48 requires that the Company recognize in its financial
statements the impact of a tax position, if that position will more likely than
not be sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 also provide a measurement attribute for the financial
statement recognition of the tax position. FIN 48 will be effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact of the adoption of FIN 48 on its financial condition and results of
operations.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements, or SFAS No. 157, which defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In addition,
the statement establishes a framework for measuring fair value and expands
disclosure about fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods within those years.
The Company is currently evaluating the impact of the adoption of SFAS No. 157
on its financial condition and results of operations.
In September 2006, the SEC staff issued Staff Accounting
Bulletin 108 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, or SAB 108,
which requires that companies utilize a dual-approach when quantifying and
evaluating the materiality of financial misstatements. This dual approach
includes both an income statement focused assessment and a balance sheet focused
assessment. The guidance in SAB 108 must be applied to annual financial
statements for fiscal years ending after November 15, 2006. The Company is
currently evaluating the impact of adopting SAB 108, but does not expect that it
will have a material effect on its financial condition or results of operations.
In December 2007, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141(R), Business
Combinations (SFAS 141R). SFAS 141R establishes the principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill
acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for us on January 1, 2009, and is
not expected to have a material effect on our consolidated financial
statements
.
23
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51 (SFAS 160). SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS 160 is effective for us on
January 1, 2009, and is not expected to have a material effect on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair
Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value, and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is
effective for us on January 1, 2008, and is not expected to have a material
effect on our consolidated financial statements.
In September 2006, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS
158). SFAS 158 requires employers that sponsor defined benefit
pension and postretirement plans to recognize previously unrecognized actuarial
losses and prior service costs in the statement of financial position and to
recognize future changes in these amounts in the year in which changes occur
through comprehensive income. As a result, the statement of financial
position will reflect funded status of those plans as an asset or
liability. Additionally, employers are required to measure the funded
status of a plan as of the date of their year-end statements of financial
position and provide additional disclosures. SFAS 158 became
effective for us on January 1, 2007, but did not have a significant effect on
our consolidated financial tatements.
Use of estimates
The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that could affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. Actual results could differ
from those reported.
Foreign currency translation
Transaction amounts denominated in foreign currencies are
translated at exchange rates prevailing at transaction dates. Carrying
values of monetary assets and liabilities are adjusted at each balance sheet
date to reflect the exchange rate at that date. Non-monetary assets and
liabilities are translated at the exchange rate on the original transaction
date. Gains and losses from restatement of foreign currency monetary
assets and liabilities are included in the statement of operations.
Revenues and expenses are translated at the rates of exchange prevailing
on the dates such items are recognized in the statement of operations.
Impairment of long-lived assets
Long-lived assets, including property and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the long-lived asset may not be recoverable.
If the long-lived asset or group of assets is considered to be impaired,
an impairment change is recognized for the amount by which the carrying amount
of the asset or group of assets exceeds its fair value. Long-lived assets
to be disposed of are reported at the lower of the carrying amount or fair value
less cost to sell. Long-lived assets were evaluated for possible
impairment and determined not to be impaired as of December 31, 2007.
24
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The fair value of the Company's cash and cash
equivalents, receivables, accounts payable, convertible debt and accrued
liabilities approximate carrying value based on their effective interest rates
compared to current market prices.
Note 3. Intangible
Asset
The Company follows SFAS 142 for the loan fees and other
intangible assets which requires other intangible assets to be amortized only if
they have defined useful lives. The useful lives of the intangible assets
that are being amortized are evaluated each reporting period as to whether
events and circumstances warrant a revision to the remaining period of
amortization.
On August 10, 2006, the Company entered into a
convertible debenture agreement (See Note 6) whereby the Company paid a fee of
$125,000 in cash and 125,000 common shares of stock valued at $198,750 for a
total of $323,750. These loan fees were fully amortized at December 31,
2007.
Note 4. Stockholders'
Equity
Common stock (Restated
)
On July 24, 2006 the Company issued an aggregate of
64,500 shares of common stock to consultants for services rendered to the
Company. Compensation expense of $96,750 was recognized for the
shares issued. The fair market share price at the date of grant was
$1.50.
On July 27, 2006, the Company issued 4,000 shares to a
consultant for services rendered to the Company. Compensation
expense of $6,000 was recognized for the shares issued. The fair market
share price at the date of grant was $1.60.
On August 8, 2006, the Company entered into consulting
agreements under the Plan as described in Note 3. For the consulting
agreements, the Company issued 520,000 shares of free trading common stock.
Consulting expense of $832,000 was recognized as the fair market
value of the shares. The fair market share price at the date of grant was
$1.60.
On August 10, 2006 the Company issued 125,000 shares as a
portion of a fee for a convertible debenture agreement described in Note 6.
The shares were valued at $198,750.
On July 21, 2006, the Company's Board of Directors
authorized a forward split of the common stock of the Company on a 3 for 1
basis. Prior period information has been restated to reflect the stock
splits.
During 2007, the Company issued 127,750 shares of free
trading common stock at an average share price of $2.05 per share.
Compensation expense of $262,000 was recognized for the shares
issued.
On March 5, 2007, the Company sold 185,000 shares to an
investor for a total of $185,000 or $1.00 per share. The Company also
issued stock warrants which expire one-year after the date of issuance allowing
the investor to purchase 92,500 additional shares of Company stock at $1.50 per
share. The warrants were valued through the Black-Scholes Model and
expensed in the amount of $39,139.
25
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On May 30, 2007, the Company sold 100,000 shares to an
investor for a total of $100,000 or $1.00 per share. The Company also
issued stock warrants which expire one-year after the date of issuance allowing
the investor to purchase 50,000 additional shares of Company stock at $1.50 per
share. The warrants were valued through the Black-Scholes Model and
expensed in the amount of $28,884.
During the years ended December 31, 2007 and 2006 the
Company sold 1,246,557 and 7,116,820 shares of Regulation S common stock in the
European market for proceeds of $177,096 and $2,013,697, respectively.
The Company has not authorized any preferred stock.
Net loss per common share (Restated)
Net loss per share is calculated in accordance with SFAS
No. 128, "Earnings Per Share." The weighted-average number of common
shares outstanding during each period is used to compute basic loss per share.
Diluted loss per share is computed using the weighted averaged number of
shares and dilutive potential common shares outstanding. Dilutive
potential common shares are additional common shares assumed to be exercised.
Stock warrants of 142,500 were considered but not included due to their
anti-dilutive effect.
As of December 31, 2007 and December
31, 2006, the Company had no dilutive potential common shares
.
|
|
|
|
|
|
|
|
|
2007
|
|
2006
(Restated)
|
Income (Loss) Numerator
|
|
|
(2,815,632)
|
|
(3,219,180)
|
Weighted Average Common Shares (Denominator)
|
|
47,775,230
|
|
44,828,952
|
Per Share Amount
|
|
|
(0.06)
|
|
(0.07)
|
|
|
|
|
|
|
Note 5. Convertible Debentures Payable
(Restated
)
On August 10, 2006 the Company entered into a $1,000,000
Convertible Debenture Agreement with a foundation. The term of the
agreement is fifteen months and it allows the lender the right to convert the
principal to common stock at a value $1.00 per share, in whole or in part at any
time during the term. If the lender does not convert the principal during
the term, the Company shall have the right to either repay the principal without
interest or convert the principal to common stock at a value of $.50 per share.
In accordance with Emerging Issues Task Force ("EITF") 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," the Company determined that a beneficial
conversion feature existed at the date of issuing the convertible debt and
recorded a discount on convertible debt totaling $590,000. The discount
was expensed as interest expense over the term of the loan and was completely
expensed during 2007.This note was converted to 1,000,000 shares of Common Stock
in October of 2007.
During 2003 and 2004 the Company
entered into a Convertible Debenture Agreement with related parties. The
outstanding balance on these debentures was $0 and $11,250 at December 31, 2007
and 2006. The debentures are payable during 2007 and carry interest of 10% per
annum. The Company determined that no beneficial conversion feature
existed at the date of issuing the convertible debt. The outstanding
principal and interest was paid in full on these debentures during 2007
.
26
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Balances for notes payable and related accrued interest
payable for the debentures are as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Convertible Debt, Net of Unamortized debt discount,
|
|
|
|
|
of $420,493,
Non-interest bearing due October 2007, unsecured
|
$
|
-
|
$
|
597,507
|
|
|
|
|
|
|
Convertible debt, related party, due on
demand,
|
|
|
|
|
including
interest at 10%, unsecured
|
|
|
-
|
|
11,250
|
|
|
|
|
|
|
Total Convertible debt, payable
|
|
|
-
|
|
608,757
|
|
|
|
|
|
|
Less: current portion
|
|
|
-
|
|
(608,757)
|
|
|
|
|
|
|
Long-Term Convertible Debt Payable
|
|
$
|
-
|
$
|
-
|
The convertible note was non-interest bearing and had a
maturity date of October 2007 and therefore was reported as a current liability
at December 31, 2006. Interest expense related to the beneficial
conversion feature for the Convertible Debenture Agreement was approximately
$402,493 and $185,894 for the years ended December 31, 2007 and 2006,
respectively.
Note 6. Income Taxes
(Restated)
The Company has adopted FASB 109 to account for income
taxes. The Company currently has no issues that create timing differences that
would mandate deferred tax expense. Net operating losses would create possible
tax assets in future years. Due to the uncertainty as to the utilization of net
operating loss carry forwards, an evaluation allowance has been made to the
extent of any tax benefit that net operating losses may generate. No
provision for income taxes has been recorded due to the net operating loss
carryforward of approximately $7,200,000 as of December 31, 2007 that will be
offset against further taxable income. No tax benefit has been reported in
the financial statements.
Deferred tax assets and the
valuation account as of December 31, 2007 are as follows
:
|
|
|
2007
|
Deferred Tax Asset:
|
|
Net
operating loss carryforward
|
$
2,880,000
|
Valuation
allowance
|
(2,880,000)
|
Net
Deferred Tax Asset
|
$
-
|
27
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The components of the Company's deferred tax asset as of
December 31, 2006 are as follows:
|
|
|
2006
|
Deferred Tax Asset
|
|
Net operating loss
carryforward
|
$
2,086,063
|
Valuation allowance
|
(2,086,063)
|
Net
deferred tax asset
|
$
-
|
The net federal operating loss carry forward will expire
between 2016 and 2026. This carry forward may be limited upon the
consummation of a business combination under IRC Section 381. The
components of income tax expense are as follows:
|
|
|
|
|
|
December 31,
2007
|
2006
|
|
|
|
Current Federal Tax
|
$ -
|
$ -
|
Current State Tax
|
-
|
-
|
Change in NOL benefit
|
793,937
|
821,279
|
Change in allowance
|
$
(793,937)
|
$
(821,279)
|
|
$ -
|
$ -
|
Note 7. Lease
commitment
Qualia entered into
a building lease as a tenant on February 9, 2006. Under the terms of the
lease agreement, Qualia
occupies 22,180 square
foot facility in Omaha Nebraska for 60 months beginning March 1, 2006. Qualia
paid a security deposit of $14,023 and monthly payments of $12,938, plus
operating expenses, beginning in September 2006. The agreement provides a
schedule of increased rents each year and no rent for the six month period March
through August of 2007. The agreement expires on February 28, 2011 and contains
two five year options to extend the lease. Rent expense recorded under
this lease agreement was $148,187 for the year ending December 31,
2007.
Qualia entered into a second building lease in Omaha,
Nebraska as a tenant on August 1, 2007. Under the terms of the lease
agreement, Qualia occupies 8,117 square feet for 60 months beginning August 1,
2007. Qualia paid a security deposit of $6,091 and monthly payments of $3,608,
plus operating expenses, beginning in November 2006. The agreement
provides a schedule of increased rents each year and no rent for the three month
period August through October of 2007. The agreement expires on July 31, 2012
and contains two five year options to extend the lease. Rent expense
recorded under this lease agreement was $10,957 for the year ending December 31,
2007.
On July 1, 2007 Qualia entered into
a lease agreement in Toronto, Canada for 2442 square feet beginning on August 1,
2007 for a period of 60 months. The monthly rent is $1,660 plus operating
expenses, a five percent management fee and applicable taxes. The
agreement expires on July 31, 2012 and contains a five year option to extend the
lease. Qualia has the option to terminate the lease if upon notice to the
landlord, the landlord cannot provide additional space as indicated in such
notice to landlord. If the lease is terminated early, Qualia is
responsible for a pro rata share for the remaining life of the lease of the
capital expenditures paid for by the landlord
.
28
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On November 6, 2007 Qualia entered into a lease agreement
in Kiev, Ukraine for 97 square meters beginning November 1, 2007 for a period of
35 months. The monthly rent is $6,900. The rent will be adjusted
accordingly if there is more than a 20% increase in rent rates in Kiev according
to the Blagovest Real Estate Agency or if the dollar decreases to less than 5.00
grivnas according to the National Bank of Ukraine. Qualia has the option
to extend the agreement for one year.
The Company records rent on a straight line basis over
the life of the lease in accordance with FTB 85-3.
The future minimum lease payments under these operating
leases as of December 31, 2007 are as follows:
|
|
Year Ending December 31,
|
|
2008
|
$
319,820
|
2009
|
339,299
|
2010
|
325,695
|
2011
|
120,889
|
2012
|
54,251
|
|
$
1,268,450
|
Note 8. Bank Line of Credit
The Company entered into a line of credit arrangement
with Wells Fargo Bank with a credit limit of $175,000 and an interest rate at
8.75% over the Wall Street Journal Prime Rate (The Wall Street Journal Prime
Rate was 7.50% at December 31, 2007). This line of credit is not
collateralized. There was $162,500 outstanding against this line of credit
at December 31, 2007, which was the total amount borrowed during 2007.
Note 9. Note Payable
During 2007, the Company received $100,000 from a
corporation in return for a note payable. The note is payable in full on
June 17, 2008 including interest at 7.00%.
In addition, the Company had a note
payable to a related party with a balance of $2,025 at December 31, 2006, which
was paid in full during 2007
.
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Notes payable, related party, due on
|
|
|
|
|
|
demand with
interest at 10%
|
$
|
-
|
$
|
2,025
|
|
|
|
|
|
|
|
Notes payable, due June 2008 with interest at
7%
|
|
100,000
|
|
-
|
|
|
|
|
|
|
|
Less: Current Portion
|
|
(100,000)
|
|
(2,025)
|
|
|
|
|
|
|
|
Long-Term Notes Payable
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
29
HOLMES BIOPHARMA, INC
.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 10. Related Party
The Company had outstanding convertible debentures due on
demand to a related party, Rockridge Capital Corp, at December 31, 2006 for
$11,250. Rockridge Capital Corp. is a stockholder of the Company.
The debentures carried interest at 10% per annum and were paid in full
during 2007. These debentures were issued in 2003 and 2004 and there were
no transactions related to these debentures until 2007 when the debentures were
paid in full.
The Company had a demand note payable to a stockholder,
Peter Matthews, at December 31, 2006 for $2,025. The note carried interest
at 10% and was paid in full during 2007. Prior to 2007, there were no
transactions related to this note since 2004.
Note 11. Factoring
On December 11, 2007 Qualia entered into a Factoring and
Security Agreement to sell accounts receivables to Inova Capital Funding
("Inova") with a maximum credit amount under the agreement of $2,500,000.
The purchase price for each invoice sold is the face amount of the invoice
less a discount of 1.8% to 3.7% based on the timing of the collection of the
receivable. The advance rate is 85% of the invoice amount on the first
three invoices per customer and 75% thereafter, with the remaining amount funded
when the invoice is paid.
All accounts sold are with recourse by Inova. Inova
has the authority to chargeback any receivable that is not collected within 71
days of the original invoice date. When Inova receives payment in full on
an invoice, the additional amount owed to Qualia is computed by calculating the
difference between 100% and the advance rate and subtracting from the difference
the appropriate discount rate and charge factor applicable based on the
collection period.
The initial term is open-ended but the agreement can be
terminated by either party with 30 days written notice. The Company has
recorded the transactions in accordance with SFAS 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The
Company determined the receivables to be 100% collectible due to the collection
history with customers, and therefore has recorded no recourse liability.
A loss on sale of receivables in the amount of $24,793 was recorded for
the year ended 12/31/07.
Note 12. Warrants
At December 31, 2007, we had outstanding warrants that
allow the holders to purchase up to 142,500 shares of Common Stock at $1.50 per
share. These warrants expire at various dates through May 2008.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R), Share-Based Payment
(SFAS 123R), using the modified-prospective-transition method. Under this
transition method, total compensation cost recognized in years beginning after
December 31, 2005 includes compensation costs for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
123, and compensation costs for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS 123R. Accordingly, financing costs for
issuance of warrants of $68,023 and $0 has been recognized in the accompanying
consolidated statements of operations for 2007 and 2006, respectively. The
Company has recognized no tax benefit associated with these amounts and has not
capitalized any such cost as an asset. The Company estimated the fair
value of the stock purchase warrants issued subsequent to January 1, 2006 using
the Black-Scholes option-pricing formula. We record expense for warrants ratably
over the warrants period. Results for prior periods have not been
restated.
The fair value of each warrant
issued has been estimated on the date of issuance using the Black-Scholes option
valuation model, using the following weighted average assumptions: risk-free
interest rates ranging from 4.89% to 4.96%, dividend yield of 0.00%, effective
expected volatility of 99%, and expected life of 1 year
.
30
HOLMES BIOPHARMA, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
A summary of our outstanding Common Stock
warrants as of December 31, 2007 and 2006, and the changes during 2007 and 2006
are presented below:
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
-
|
$
|
-
|
Warrants Granted
|
|
142,500
|
$
|
1.50
|
Warrants Exercised
|
|
-
|
$
|
-
|
Warrants Expired
|
|
-
|
$
|
-
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
142,500
|
$
|
1.50
|
Exercisable at December 31, 2007
|
|
142,500
|
$
|
1.50
|
|
|
|
|
|
|
Warrants Outstanding
|
Warrants Exercisable
|
Year
|
Exercise
Price
|
Number of Shares
Outstanding
|
Weighted Average
Contractual Life (Years)
|
Number
Exercisable
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
2007
|
$ 1.50
|
142,500
|
.25
|
142,500
|
$ 1.50
|
Note 13. Subsequent Event
On January 9, 2008 the Company granted options to
purchase 1,000,000 shares of common stock to a consulting firm in consideration
for services. The options have exercise prices ranging from $0.75 to $3.00
and vesting dates ranging from April 10, 2008 through January 10, 2010.
On January 24, 2008 the Company issued 50,000 shares of
common stock to a consultant in consideration for investment relations services.
The shares were valued at $50,000.
On January 28, 2008 the Company issued an aggregate of
15,000 shares of common stock to two entities for investor relations services.
The shares were valued at $15,000.
Note 14. Restatement and Reclassification
We have restated our financial statements for the year
ended December 31, 2006 to reflect issues identified during 2007. The
restatements also affected our 2007 quarterly filings which have also been
restated as detailed below.
The following are descriptions of the revisions affecting
the 2006 year end financial statements and the 2007 interim periods ending
3/31/07, 6/30/07, and 9/30/07:
·
During the year ended December 31,
2006, the Company included $30,184 of costs incurred in excess of billings on
contracts in progress together with deferred revenue on the balance sheet.
The restated balance sheet below separately reports this amount as an
asset and reflects the correct amount of deferred revenue.
31
HOLMES BIOPHARMA,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
·
During 2006, the Company reported
certain loan fees paid with cash and Company stock associated with the issuance
of a convertible debenture during 2006 as Other Assets on the Companys balance
sheet. A portion of these fees should have been reported as prepaid
equity. On the restated balance sheets, the following amounts have been
reclassified from Other Assets to Prepaid Equity:
|
|
|
Year End 2006
|
$
|
135,254
|
First Quarter 2007
|
$
|
96,113
|
Second Quarter 2007
|
$
|
56,537
|
Third Quarter 2007
|
$
|
16,526
|
|
|
|
·
The Company erroneously calculated
the beneficial conversion feature on the convertible debt issued during 2006.
Originally, it was calculated through the Black-Scholes model in the
amount of $963,716. After calculating it through the intrinsic value
method, per Emerging Issues Task Force ("EITF") 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," the Company determined that a beneficial conversion feature
at the date of issuing the convertible debt was $590,000. As a result, at
12/31/06, Paid In Capital was overstated by $373,716. Convertible
Debentures Payable was understated and interest expense was overstated by the
following amounts at the following period ends:
|
|
|
|
|
Convertible
|
|
|
Debenture
|
|
|
Payable
|
|
|
Understatement
|
|
|
|
Year End 2006
|
$
|
254,976
|
First Quarter 2007
|
$
|
181,256
|
Second Quarter 2007
|
$
|
108,830
|
Third Quarter 2007
|
$
|
37,697
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Expense
|
|
|
Overstatement
|
|
|
|
Year End 2006
|
$
|
118,740
|
First Quarter 2007$
|
$
|
73,719
|
Second Quarter 2007
|
$
|
146,145
|
Third Quarter 2007
|
$
|
217,278
|
·
The Company erroneously reported
contract labor expense associated with stock issued for services during 2006.
As a result, Contract Labor Expense and Paid In Capital were understated
by $934,750.
32
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
DECEMBER
31, 2006
|
As Previously
|
|
|
|
|
|
|
|
Reported
|
As Restated
|
Changes
|
|
|
|
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
626,444
|
$
626,444
|
$
-
|
|
|
Receivables
|
347,343
|
347,343
|
-
|
|
|
Costs
and Earnings in Excess of Billings on Contracts in Progress
|
-
|
30,184
|
30,184
|
a
|
|
Prepaid
Expenses
|
5,499
|
5,499
|
-
|
|
|
|
Total
Current Assets
|
979,286
|
1,009,470
|
30,184
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
Computer
Equipment
|
87,958
|
87,958
|
-
|
|
|
Leasehold
Improvements
|
532,804
|
532,804
|
-
|
|
|
Office
Furniture and Equipment
|
377,677
|
377,677
|
-
|
|
|
|
Total
Cost
|
998,439
|
998,439
|
-
|
|
|
Less
Accumulated Depreciation
|
46,348
|
46,348
|
-
|
|
|
|
Net
Book Value
|
952,091
|
952,091
|
-
|
|
OTHER
ASSETS
|
234,343
|
99,089
|
(135,254)
|
b
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
2,165,720
|
$ 2,060,650
|
$ (105,070)
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Revolving
Bank Line of Credit
|
$
-
|
$
-
|
$
-
|
|
|
Accounts
Payable
|
292,909
|
292,909
|
-
|
|
|
Checks
Drawn on Future Deposits
|
-
|
-
|
-
|
|
|
Convertible
Debentures Payable, Net of Debt Discount
|
353,781
|
608,757
|
254,976
|
c
|
|
Note
Payable
|
2,025
|
2,025
|
-
|
|
|
Deferred
Revenue
|
110,940
|
141,124
|
30,184
|
a
|
|
Accrued
Expenses
|
30,316
|
30,316
|
-
|
|
|
|
Total
Current Liabilities
|
789,971
|
1,075,131
|
285,160
|
|
TOTAL
LIABILITIES
|
789,971
|
1,075,131
|
285,160
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
|
$0.001
Par Value, Authorized 100,000,000 Shares
|
|
|
|
|
|
|
Issued
and Outstanding, 49,002,247
|
46,343
|
46,343
|
-
|
|
PAID
IN CAPITAL
|
7,462,798
|
8,023,832
|
561,034
|
c,d
|
PREPAID
EXPENSES
|
-
|
(135,254)
|
(135,254)
|
b
|
OTHER
ACCUMULATED COMPREHENSIVE INCOME
|
2,086
|
2,086
|
-
|
|
ACCUMULATED
DEFICIT
|
(6,135,478)
|
(6,951,488)
|
(816,010)
|
|
|
Total
Stockholders' Equity
|
1,375,749
|
985,519
|
(390,230)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
2,165,720
|
$ 2,060,650
|
$ (105,070)
|
|
|
|
|
|
|
|
|
|
a
|
|
To
reclassify cost in excess of billings on contracts in progress from
deferred revenue
|
b
|
|
To
reclassify prepaid equity from other assets
|
c
|
|
To
properly record convertible debenture
|
d
|
|
To
properly record stock issued for services and paid in capital received
from sales of Reg S shares
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
|
|
For
the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Reported
|
As Restated
|
Changes
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
441,285
|
$ 441,285
|
$
-
|
|
Cost
of Revenues
|
|
61,888
|
61,888
|
-
|
|
|
Gross
Profit
|
|
379,397
|
379,397
|
-
|
|
General,
Selling and Administrative
|
|
|
|
|
|
|
Advertising
and Marketing
|
|
269,116
|
269,116
|
-
|
|
|
Depreciation
and Amortization
|
|
149,778
|
149,778
|
-
|
|
|
Insurance
|
|
93,988
|
93,988
|
-
|
|
|
Contract
Labor
|
|
478,458
|
1,413,208
|
934,750
|
d
|
|
Professional
and Consulting Fees
|
|
289,698
|
289,698
|
-
|
|
|
Rent
|
|
96,603
|
96,603
|
-
|
|
|
Office
Expense
|
|
202,864
|
202,864
|
-
|
|
|
Travel,
Meals and Entertainment
|
|
253,637
|
253,637
|
-
|
|
|
Salaries
and Wages
|
|
495,440
|
495,440
|
-
|
|
|
Payroll
Taxes
|
|
45,890
|
45,890
|
-
|
|
|
Telephone
and Utilities
|
|
98,232
|
98,232
|
-
|
|
|
Other
|
|
17,054
|
17,054
|
-
|
|
|
|
Total
General, Selling and Administrative
|
|
2,490,758
|
3,425,508
|
934,750
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
(2,111,361)
|
(3,046,111)
|
(934,750)
|
|
|
|
|
|
|
|
|
Nonoperating
Income (Expense)
|
|
|
|
|
|
|
Miscellaneous
Income (Expense)
|
|
12,825
|
12,825
|
-
|
|
|
Interest
Expense
|
|
(304,634)
|
(185,894)
|
118,740
|
c
|
|
|
Total
Nonoperating Income (Expense)
|
|
(291,809)
|
(173,069)
|
118,740
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Before Income Taxes
|
|
(2,403,170)
|
(3,219,180)
|
(816,010)
|
|
|
Income
Taxes
|
|
-
|
-
|
-
|
|
|
Net
Loss
|
|
$ (2,403,170)
|
$ (3,219,180)
|
$ (816,010)
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share, Basic and Diluted
|
|
$
(0.05)
|
$
(0.07)
|
$
(0.02)
|
|
|
|
|
|
|
|
|
|
|
Average
Number of Shares of Common Stock Outstanding
|
44,828,952
|
44,828,952
|
-
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
A
summary of the components of other comprehensive income (loss)
|
|
|
|
for
the fiscal years ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
2006
|
|
|
|
Net
loss
|
|
(2,403,170)
|
(3,219,180)
|
(816,010)
|
|
|
Foreign
currency translation adjustment
|
|
1,584
|
1,584
|
-
|
|
|
Comprehensive
loss
|
|
(2,401,586)
|
(3,217,596)
|
(816,010)
|
|
|
|
|
|
|
|
|
|
C
|
|
To
properly record convertible debenture
|
|
|
|
|
|
D
|
|
To
properly record stock issued for services and paid in capital received
from sales of Reg S shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
For
the Year Ended December 31, 2006
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
As Restated
|
Changes
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
|
$ (2,403,170)
|
$ (3,219,180)
|
$ (816,010)
|
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
Used
in Operating Activities
|
|
|
|
|
|
|
|
|
Stock
Issued for Services
|
|
1,005,749
|
934,750
|
(70,999)
|
d
|
|
|
|
Depreciation
and Amortization
|
|
149,778
|
149,778
|
-
|
|
|
|
|
Impairment
of Intangible Asset
|
|
15,000
|
15,000
|
-
|
|
|
|
|
Accretion
of Convertible Debenture, Net
|
|
127,167
|
185,894
|
58,727
|
c
|
|
|
|
Warrants
Issued for Financing
|
|
-
|
-
|
-
|
|
|
|
|
Changes
in Current Assets and Current Liabilities
|
|
|
|
|
|
|
|
|
|
Increase
in Receivables
|
|
(289,758)
|
(289,758)
|
-
|
|
|
|
|
|
Increase
in Costs and Earnings in Excess of
|
|
|
|
|
|
|
|
|
|
Billings
on Contracts in Progress
|
|
-
|
(30,184)
|
(30,184)
|
a
|
|
|
|
|
Decrease
in Prepaid Expenses
|
|
3,047
|
3,047
|
-
|
|
|
|
|
|
Increase
in Trade Accounts Payable
|
|
230,232
|
226,581
|
(3,651)
|
e
|
|
|
|
|
Increase
in Checks Drawn Against
Future Deposits
|
|
-
|
-
|
-
|
|
|
|
|
|
Increase
(Decrease) in Deferred Revenues
|
|
110,940
|
141,124
|
30,184
|
a
|
|
|
|
|
Increase
(Decrease) in Accrued Expenses
|
|
25,542
|
25,542
|
-
|
|
|
|
Net
Cash (Used in) Operating Activities
|
|
(1,046,260)
|
(1,878,193)
|
(831,933)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Cash
Paid for Deposits
|
|
-
|
(14,023)
|
(14,023)
|
e
|
|
Purchase
of Property and Equipment
|
|
(998,439)
|
(998,439)
|
-
|
|
|
|
Net
Cash (Used in) Investing Activities
|
|
(998,439)
|
(1,012,462)
|
(14,023)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Issuance
of Common Stock, Net of Offering Costs
|
|
1,191,697
|
2,013,698
|
822,001
|
d
|
|
Loan
Fees Paid
|
|
(125,000)
|
(125,000)
|
-
|
|
|
Net
Advances on Revolving Bank Line of Credit
|
|
-
|
-
|
-
|
|
|
Proceeds
From Issuance of Note Payable
|
|
-
|
-
|
-
|
|
|
Repayments
of Note Payable
|
|
-
|
-
|
-
|
|
|
Issuance
of Convertible Debt
|
|
1,000,000
|
1,000,000
|
-
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
2,066,697
|
2,888,698
|
822,001
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(1,584)
|
(1,584)
|
-
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
20,414
|
20,414
|
-
|
|
|
|
Cash,
Beginning of Period
|
|
606,030
|
606,030
|
-
|
|
|
|
Cash,
End of Period
|
|
$
626,444
|
$ 626,444
|
$
-
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
Interest
Paid
|
|
$
-
|
$
-
|
$
-
|
|
|
Taxes
Paid
|
|
$
-
|
$
-
|
$
-
|
|
|
Stock
Issued for Services
|
|
$ 1,005,749
|
$ 934,750
|
$ (70,999)
|
d
|
|
|
|
|
|
|
|
|
|
|
a
|
|
To
reclassify cost in excess of billings on contracts in progress from
deferred revenue
|
b
|
|
To
reclassify prepaid equity from other assets
|
c
|
|
To
properly record convertible debenture
|
d
|
|
To
properly record stock issued for services and paid in capital received
from sales of Reg S shares
|
e
|
|
Other
reclassifications
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
MARCH
31, 2007
|
|
|
|
|
(Unaudited)
|
As previously
|
As
|
|
|
|
|
|
|
Reported
|
Restated
|
Changes
|
|
|
|
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
398,176
|
$ 398,176
|
|
|
|
Receivables
|
103,564
|
103,564
|
|
|
|
|
Total
Current Assets
|
501,740
|
501,740
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
Computer
Equipment
|
87,958
|
87,958
|
|
|
|
Leasehold
Improvements
|
532,804
|
532,804
|
|
|
|
Office
Furniture and Equipment
|
395,019
|
395,019
|
|
|
|
|
Total
Cost
|
1,015,781
|
1,015,781
|
|
|
|
Less
Accumulated Depreciation
|
72,506
|
72,506
|
|
|
|
|
Net
Book Value
|
943,275
|
943,275
|
|
|
OTHER
ASSETS
|
170,585
|
74,472
|
96,113
|
b
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
1,615,600
|
$ 1,519,487
|
$
96,113
|
|
|
|
|
LIABILITIES
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Revolving
Bank Line of Credit
|
$
20,206
|
$
20,206
|
|
|
|
Accounts
Payable
|
294,520
|
294,520
|
|
|
|
Deferred
Revenue
|
68,411
|
68,411
|
|
|
|
Accrued
Expenses
|
43,831
|
43,831
|
|
|
|
|
Total
Current Liabilities
|
426,968
|
426,968
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
Convertible
Debentures Payable, Net of Debt Discount
|
532,634
|
713,890
|
(181,256)
|
a
|
|
|
Total
Long-Term Liabilities
|
532,634
|
713,890
|
(181,256)
|
|
|
Total
Liabilities
|
959,602
|
1,140,858
|
(181,256)
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
|
$0.001 Par Value, Authorized 100,000,000 and
50,000,000
|
|
|
|
|
|
|
Shares
Respectively; Issued and Outstanding, 47,774,497
|
47,774
|
47,774
|
|
|
PAID
IN CAPITAL
|
7,856,831
|
8,417,865
|
(561,034)
|
a
|
PREPAID
EXPENSES
|
-
|
(96,113)
|
96,113
|
b
|
ACCUMULATED
DEFICIT
|
(7,250,411)
|
(7,992,701)
|
742,290
|
|
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
1,804
|
1,804
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
655,998
|
378,629
|
277,369
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
1,615,600
|
$ 1,519,487
|
$ 96,113
|
|
|
|
|
|
|
|
|
|
|
a
|
|
To
properly record convertible debenture
|
|
|
|
|
|
b
|
|
To
reclassify prepaid equity from other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
3 Months Ended
|
3 Months Ended
|
|
|
|
|
|
|
March 31, 2007
|
March 31, 2007
|
|
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ 436,725
|
$
436,725
|
|
|
Cost
of Revenues
|
|
202,834
|
202,834
|
|
|
|
Gross
Profit
|
|
233,891
|
233,891
|
|
|
|
General,
Selling and Administrative
|
|
|
|
|
|
|
Advertising
and Marketing
|
|
170,301
|
170,301
|
|
|
|
Depreciation
and Amortization
|
|
88,225
|
88,225
|
|
|
|
Insurance
|
|
66,842
|
66,842
|
|
|
|
Contract
Labor
|
|
95,089
|
95,089
|
|
|
|
Professional
and Consulting Fees
|
|
75,072
|
75,072
|
|
|
|
Rent
|
|
61,055
|
61,055
|
|
|
|
Office
Expense
|
|
71,073
|
71,073
|
|
|
|
Travel,
Meals and Entertainment
|
|
94,086
|
94,086
|
|
|
|
Salaries
and Wages
|
|
305,251
|
305,251
|
|
|
|
Payroll
Taxes
|
|
27,231
|
27,231
|
|
|
|
Other
|
|
63,711
|
63,711
|
|
|
|
|
Total
Operating Expenses
|
|
1,117,936
|
1,117,936
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
(884,045)
|
(884,045)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
Miscellaneous
Income (Loss)
|
|
(37,164)
|
(37,164)
|
|
|
|
Interest
Expense
|
|
(193,724)
|
(120,005)
|
(73,719)
|
a
|
|
|
Total
Other Income (Expense)
|
|
(230,888)
|
(157,169)
|
|
|
|
Net
Loss Before Minority Interest
|
|
(1,114,933)
|
(1,041,214)
|
(73,719)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
of Subsidiary
|
|
-
|
-
|
|
|
|
Net
Loss Before Income Taxes
|
|
(1,114,933)
|
(1,041,214)
|
(73,719)
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
(1,114,933)
|
(1,041,214)
|
(73,719)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share, Basic and Diluted
|
|
$ (0.02)
|
$
(0.02)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Number of Shares of
|
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
|
46,795,015
|
46,795,015
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
A
summary of the components of other comprehensive income (loss) for the
three months ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
March 31, 2007
|
|
|
|
Net
loss
|
|
(1,114,933)
|
(1,041,214)
|
(73,719)
|
|
|
|
Foreign
currency translation adjustment
|
|
(282)
|
(282)
|
-
|
|
|
|
Comprehensive
loss
|
|
(1,115,215)
|
(1,041,496)
|
(73,719)
|
|
|
|
|
|
|
|
|
|
|
|
a
|
To
reclassify prepaid equity from other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
Three Months
Ended
|
|
|
|
|
|
|
|
|
March 31, 2007
|
March 31, 2007
|
|
|
|
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
|
$
(1,114,933)
|
$ (1,041,214)
|
$ (73,719)
|
a
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
Used
in Operating Activities
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
88,225
|
88,225
|
|
|
|
|
|
Warrants
Issued For Financing
|
|
39,139
|
39,139
|
|
|
|
|
|
Accretion
of Convertible Debenture, Net
|
|
190,103
|
116,384
|
73,719
|
a
|
|
|
|
Minority
Interest in Loss of Subsidiary
|
|
|
|
|
|
|
|
|
Changes
in Current Assets and Current Liabilities
|
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in Receivables
|
|
243,779
|
243,779
|
|
|
|
|
|
|
Increase
in Deposits
|
|
|
|
|
|
|
|
|
|
Decrease
in Prepaid Expenses
|
|
5,499
|
5,499
|
|
|
|
|
|
|
Increase
in Trade Accounts Payable
|
|
1,611
|
1,611
|
|
|
|
|
|
|
Decrease
in Deferred Revenues
|
|
(42,529)
|
(42,529)
|
|
|
|
|
|
|
Increase
in Accrued Expenses
|
|
13,515
|
13,515
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities
|
|
(575,591)
|
(575,591)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
(16,215)
|
(16,215)
|
|
|
|
|
|
|
|
|
(16,215)
|
(16,215)
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Issuance
of Common Stock, Net of Offering Costs
|
|
356,325
|
356,325
|
|
|
|
Advances
on Revolving Bank Line of Credit
|
|
20,206
|
20,206
|
|
|
|
Repayments
of Notes Payable
|
|
(2,025)
|
(2,025)
|
|
|
|
Repayments
of Convertible Debt
|
|
(11,250)
|
(11,250)
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
363,256
|
363,256
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
282
|
282
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
(228,268)
|
(228,268)
|
|
|
|
|
Cash,
Beginning of Period
|
|
626,444
|
626,444
|
|
|
|
|
Cash,
End of Period
|
|
$ 398,176
|
$
398,176
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Interest
Paid
|
|
$
-
|
$
-
|
|
|
|
Taxes
Paid
|
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
To
reclassify prepaid equity from other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
June
30, 2007 (restated)
|
|
|
|
|
(Unaudited)
|
As previously
|
As
|
|
|
|
|
|
|
Reported
|
Restated
|
Changes
|
|
|
|
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
120,623
|
$ 120,623
|
|
|
|
Receivables
|
660,573
|
660,573
|
|
|
|
|
Total
Current Assets
|
781,196
|
781,196
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
Computer
Equipment
|
127,290
|
127,290
|
|
|
|
Leasehold
Improvements
|
532,804
|
532,804
|
|
|
|
Office
Furniture and Equipment
|
396,776
|
396,776
|
|
|
|
|
Total
Cost
|
1,056,870
|
1,056,870
|
|
|
|
Less
Accumulated Depreciation
|
98,886
|
98,886
|
|
|
|
|
Net
Book Value
|
957,984
|
957,984
|
|
|
OTHER
ASSETS
|
106,827
|
50,290
|
56,537
|
b
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
1,846,007
|
$ 1,789,470
|
$
56,537
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Revolving
Bank Line of Credit
|
$
15,644
|
$
15,644
|
|
|
|
Accounts
Payable
|
578,986
|
578,986
|
|
|
|
Note
Payable
|
100,000
|
100,000
|
|
|
|
Accrued
Expenses
|
52,179
|
52,179
|
|
|
|
|
Total
Current Liabilities
|
746,809
|
746,809
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
Convertible
Debentures Payable, Net of Debt Discount
|
722,737
|
831,567
|
(108,830)
|
a
|
|
|
Total
Long-Term Liabilities
|
722,737
|
831,567
|
(108,830)
|
|
|
|
Total
Liabilities
|
1,469,546
|
1,578,376
|
(108,830)
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
|
$0.001
Par Value, Authorized 100,000,000 Shares;
|
|
|
|
|
|
|
Issued
and Outstanding, 47,902,247
|
47,902
|
47,902
|
|
|
ADDITIONAL
PAID IN CAPITAL
|
8,012,203
|
8,573,237
|
(561,034)
|
a
|
PREPAID
EXPENSES
|
-
|
(56,537)
|
56,537
|
b
|
ACCUMULATED
DEFICIT
|
(7,655,751)
|
(8,325,615)
|
669,864
|
|
OTHER
COMPREHENSIVE LOSS
|
(27,893)
|
(27,893)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
376,461
|
211,094
|
165,367
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
1,846,007
|
$ 1,789,470
|
$
56,537
|
|
|
|
|
|
|
|
|
|
|
a
|
|
To
properly record convertible debenture
|
|
|
|
|
|
b
|
|
To
reclassify prepaid equity from other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA AND SUBSIDIARY
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS)
|
|
|
|
|
|
|
(Unaudited
|
3 Months Ended
|
3 Months Ended
|
|
|
6 Months Ended
|
6 Months Ended
|
|
|
|
|
June 30, 2007
|
June 30, 2007
|
|
|
June 30, 2007
|
June 30, 2007
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
As Reported
|
As Restated
|
Changes
|
|
Revenues
|
$
1,628,600
|
$
1,628,600
|
|
|
$ 2,065,325
|
$
2,065,325
|
|
|
Cost
of Revenues
|
298,315
|
298,315
|
|
|
501,149
|
501,149
|
|
|
Gross
Profit
|
1,330,285
|
1,330,285
|
|
|
1,564,176
|
1,564,176
|
|
|
General,
Selling & Administrative
|
|
|
|
|
|
|
|
|
Advertising
and Marketing
|
192,147
|
192,147
|
|
|
362,448
|
362,448
|
|
|
Depreciation
and Amortization
|
90,138
|
90,138
|
|
|
178,363
|
178,363
|
|
|
Insurance
|
138,556
|
138,556
|
|
|
205,398
|
205,398
|
|
|
Contract
Labor
|
255,395
|
255,395
|
|
|
350,484
|
350,484
|
|
|
Professional
& Consulting Fees
|
93,222
|
93,222
|
|
|
168,294
|
168,294
|
|
|
Rent
|
39,121
|
39,121
|
|
|
100,176
|
100,176
|
|
|
Office
Expense
|
95,472
|
95,472
|
|
|
166,545
|
166,545
|
|
|
Travel,
Meals & Entertainment
|
118,331
|
118,331
|
|
|
212,417
|
212,417
|
|
|
Salaries
and Wages
|
467,984
|
467,984
|
|
|
773,235
|
773,235
|
|
|
Payroll
Taxes
|
36,671
|
36,671
|
|
|
63,902
|
63,902
|
|
|
Other
|
50,737
|
50,737
|
|
|
114,448
|
114,448
|
|
|
|
Total
Operating Expenses
|
1,577,774
|
1,577,774
|
|
|
2,695,710
|
2,695,710
|
|
|
Operating
Loss
|
(247,489)
|
(247,489)
|
|
|
(1,131,534)
|
(1,131,534)
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Miscellaneous
Income (Loss)
|
4,503
|
4,503
|
|
|
(4,912)
|
(4,912)
|
|
|
Interest
Expense
|
(190,103)
|
(117,677)
|
(72,426)
|
b
|
(383,827)
|
(237,682)
|
(146,145)
|
a
|
|
Total
Other Income (Expense)
|
(185,600)
|
(113,174)
|
(72,426)
|
|
(388,739)
|
(242,594)
|
(146,145)
|
|
Net
Loss Before Minority Interest
|
(433,089)
|
(360,663)
|
(72,426)
|
|
(1,520,273)
|
(1,374,128)
|
(146,145)
|
|
|
Loss
of Subsidiary
|
-
|
-
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Before Income Taxes
|
(433,089)
|
(360,663)
|
(72,426)
|
|
(1,520,273)
|
(1,374,128)
|
(146,145)
|
|
Income
Taxes
|
-
|
-
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
(433,089)
|
$
(360,663)
|
$ (72,426)
|
|
$ (1,520,273)
|
$ (1,374,128)
|
$ (146,145)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share Basic and Diluted
|
$
(0.01)
|
$
(0.01)
|
|
|
$ (0.03)
|
$
(0.03)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of Common
|
|
|
|
|
|
|
|
|
Stock
Outstanding
|
47,807,626
|
47,807,626
|
|
|
47,304,118
|
47,304,118
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
|
|
|
|
|
|
|
A
summary of the components of other comprehensive income (loss) for
|
|
|
|
|
|
the
three and six Months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
Three Months
|
Three Months
|
|
|
Six Months
|
Six Months
|
|
|
|
|
Ended
|
Ended
|
|
|
Ended
|
Ended
|
|
|
|
|
June 30, 2007
|
June 30, 2007
|
|
|
June 30, 2007
|
June 30, 2007
|
|
|
Net
loss
|
(433,089)
|
(360,663)
|
(72,426)
|
|
(1,520,273)
|
(1,374,128)
|
(146,145)
|
|
Foreign
currency translation adjustment
|
(1,948)
|
(1,948)
|
|
|
(29,979)
|
(29,979)
|
|
|
Comprehensive
loss
|
(435,037)
|
(362,611)
|
(72,426)
|
|
(1,550,252)
|
(1,404,107)
|
(146,145)
|
|
|
|
|
|
|
|
|
|
|
|
a
|
To
properly record convertible debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
Six Months
|
|
|
|
|
|
|
|
|
Ended
|
Ended
|
|
|
|
|
|
|
|
|
June 30, 2007
|
June 30, 2007
|
|
|
|
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
|
$ (1,520,273)
|
$ 1,374,128)
|
$ (146,145)
|
a
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
Used in Operating Activities
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
178,363
|
178,363
|
|
|
|
|
|
Stock
Issued for Services
|
|
55,500
|
55,500
|
|
|
|
|
|
Warrants
Issued For Financing
|
|
39,139
|
39,139
|
|
|
|
|
|
Minority
Interest in Loss of Subsidiary
|
|
-
|
-
|
|
|
|
|
|
Accretion
of Convertible Debenture, Net
|
|
380,206
|
234,061
|
146,145
|
a
|
|
|
|
Changes
in Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in Receivables
|
|
(312,666)
|
(312,666)
|
|
|
|
|
|
|
Decrease
(Increase) in Prepaid Expenses
|
|
5,499
|
5,499
|
|
|
|
|
|
|
Decrease
(Increase) in Deposits
|
|
-
|
-
|
|
|
|
|
|
|
Increase
(Decrease) in Trade Accounts Payable
|
|
286,077
|
286,077
|
|
|
|
|
|
|
Increase
(Decrease) in Deferred Revenue
|
|
(110,940)
|
(110,940)
|
|
|
|
|
|
|
Increase
(Decrease) in Accrued Expenses
|
|
21,863
|
21,863
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities
|
|
(977,232)
|
(977,232)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
(57,304)
|
(57,304)
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
(57,304)
|
(57,304)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Issuance
of Common Stock, Net of Offering Costs
|
|
456,325
|
456,325
|
|
|
|
Advances
on Revolving Bank Line of Credit
|
|
20,206
|
20,206
|
|
|
|
Repayments
on Revolving Bank Line of Credit
|
|
(4,562)
|
(4,562)
|
|
|
|
Proceeds
From Issuance of Note Payable
|
|
100,000
|
100,000
|
|
|
|
Repayments
of Notes Payable
|
|
(2,025)
|
(2,025)
|
|
|
|
Repayments
of Convertible Debt
|
|
(11,250)
|
(11,250)
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
558,694
|
558,694
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(29,979)
|
(29,979)
|
|
|
|
|
Net
Decrease in Cash
|
|
(505,821)
|
(505,821)
|
|
|
|
|
Cash,
Beginning of Period
|
|
626,444
|
626,444
|
|
|
|
|
Cash,
End of Period
|
|
$
120,623
|
$
120,623
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Interest
Paid
|
|
$
-
|
$
-
|
|
|
|
Taxes
Paid
|
|
$
-
|
$ -
|
|
|
|
Shares
Issued for Services
|
|
$
55,500
|
$
55,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
To
properly record convertible debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
SEPTEMBER
30, 2007 (restated)
|
|
|
|
|
(unaudited)
|
As previously
|
As
|
|
|
|
|
|
|
Reported
|
Restated
|
Changes
|
|
|
|
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
90,016
|
$
90,016
|
|
|
|
Receivables
|
1,587,471
|
1,587,471
|
|
|
|
|
Total
Current Assets
|
1,677,487
|
1,677,487
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
Computer
Equipment
|
145,451
|
145,451
|
|
|
|
Leasehold
Improvements
|
578,508
|
578,508
|
|
|
|
Office
Furniture and Equipment
|
442,920
|
442,920
|
|
|
|
|
Total
Cost
|
1,166,879
|
1,166,879
|
|
|
|
Less
Accumulated Depreciation
|
129,850
|
129,850
|
|
|
|
|
Net
Book Value
|
1,037,029
|
1,037,029
|
|
|
OTHER
ASSETS
|
43,069
|
26,543
|
16,526
|
b
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
2,757,585
|
$ 2,741,059
|
$
16,526
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
Payable
|
$
1,175,445
|
$ 1,175,445
|
|
|
|
Note
Payable - Related
|
100,000
|
100,000
|
|
|
|
Deferred
Revenue
|
67,092
|
67,092
|
|
|
|
Accrued
Expenses
|
1,997
|
1,997
|
|
|
|
|
Total
Current Liabilities
|
1,344,534
|
1,344,534
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
Convertible
Debentures Payable, Net of Debt Discount
|
912,840
|
950,537
|
(37,697)
|
a
|
|
|
Total
Long-Term Liabilities
|
912,840
|
950,537
|
(37,697)
|
|
|
|
Total
Liabilities
|
2,257,374
|
2,295,071
|
(37,697)
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
|
$0.001
Par Value, Authorized 100,000,000 Shares;
|
|
|
|
|
|
|
Issued
and Outstanding, 47,902,247
|
47,902
|
47,902
|
|
|
ADDITIONAL
PAID IN CAPITAL
|
8,012,203
|
8,573,237
|
(561,034)
|
a
|
PREPAID
EXPENSES
|
-
|
(16,526)
|
16,526
|
b
|
ACCUMULATED
DEFICIT
|
(7,563,212)
|
(8,161,943)
|
598,731
|
|
OTHER
COMPREHENSIVE INCOME
|
3,318
|
3,318
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
500,211
|
445,988
|
54,223
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 2,757,585
|
$ 2,741,059
|
$
16,526
|
|
|
|
|
|
|
|
|
|
|
a
|
|
To
properly record convertible debenture
|
|
|
|
|
|
b
|
|
To
reclassify prepaid equity from other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended
|
3 Months Ended
|
|
|
9 Months Ended
|
9 Months Ended
|
|
|
|
|
|
September 30, 2007
|
September 30, 2007
|
|
|
September 30, 2007
|
September 30, 2007
|
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
As Reported
|
As Restated
|
Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
3,013,658
|
$
3,013,658
|
|
|
$
5,078,983
|
$
5,078,983
|
|
|
Cost
of Revenues
|
866,784
|
866,784
|
|
|
1,367,933
|
1,367,933
|
|
|
|
Gross
Profit
|
2,146,874
|
2,146,874
|
|
|
3,711,050
|
3,711,050
|
|
|
General,
Selling and Administrative
|
|
|
|
|
|
|
|
|
|
Advertising
and Marketing
|
168,236
|
168,236
|
|
|
530,684
|
530,684
|
|
|
|
Depreciation
and Amortization
|
94,720
|
94,720
|
|
|
273,083
|
273,083
|
|
|
|
Insurance
|
70,881
|
70,881
|
|
|
276,279
|
276,279
|
|
|
|
Contract
Labor
|
181,507
|
181,507
|
|
|
531,991
|
531,991
|
|
|
|
Professional
and Consulting Fees
|
89,224
|
89,224
|
|
|
257,518
|
257,518
|
|
|
|
Rent
|
89,122
|
89,122
|
|
|
189,298
|
189,298
|
|
|
|
Office
Expense
|
192,829
|
192,829
|
|
|
359,374
|
359,374
|
|
|
|
Travel,
Meals and Entertainment
|
116,100
|
116,100
|
|
|
328,517
|
328,517
|
|
|
|
Salaries
and Wages
|
662,972
|
662,972
|
|
|
1,436,207
|
1,436,207
|
|
|
|
Payroll
Taxes
|
46,846
|
46,846
|
|
|
110,748
|
110,748
|
|
|
|
Other
General and Administrative
|
149,168
|
149,168
|
|
|
263,616
|
263,616
|
|
|
|
|
Total
Operating Expenses
|
1,861,605
|
1,861,605
|
|
|
4,557,315
|
4,557,315
|
|
|
|
Operating
Income (Loss)
|
285,269
|
285,269
|
|
|
(846,265)
|
(846,265)
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
Miscellaneous
Income (Loss)
|
4,427
|
4,427
|
|
|
(485)
|
(485)
|
|
|
|
Interest
Expense
|
(197,157)
|
(126,024)
|
(71,133)
|
b
|
(580,984)
|
(363,706)
|
(217,278)
|
a
|
|
|
Total
Other Income (Expense)
|
(192,730)
|
(121,597)
|
(71,133)
|
|
(581,469)
|
(364,191)
|
(217,278)
|
|
|
Net
Income (Loss) Before Minority Interest
|
92,539
|
163,672
|
(71,133)
|
|
(1,427,734)
|
(1,210,456)
|
(217,278)
|
|
|
|
Income
(Loss) of Subsidiary
|
-
|
-
|
|
|
-
|
-
|
|
|
|
Net
Income (Loss) Before Income Taxes
|
92,539
|
163,672
|
(71,133)
|
|
(1,427,734)
|
(1,210,456)
|
(217,278)
|
|
|
Income
Taxes
|
-
|
-
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
92,539
|
$
163,672
|
(71,133)
|
|
$
(1,427,734)
|
$
(1,210,456)
|
(217,278)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share, Basic and Diluted
|
$
0.00
|
$
0.00
|
|
|
$
(0.03)
|
$
(0.03)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
47,902,247
|
47,902,247
|
|
|
47,505,685
|
47,505,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
A
summary of the components of other comprehensive income (loss) for the
three
|
|
|
|
|
|
|
|
and
nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
|
|
Nine Months Ended
|
Nine Months Ended
|
|
|
|
|
September 30,
|
September 30,
|
|
|
September 30,
|
September 30,
|
|
|
|
|
2007
|
2007
|
|
|
2007
|
2007
|
|
|
Net
Income (Loss)
|
92,539
|
163,672
|
(71,133)
|
|
(1,427,734)
|
(1,210,456)
|
(217,278)
|
|
Foreign
currency translation adjustment
|
1,251
|
1,251
|
|
|
1,232
|
1,232
|
|
|
Comprehensive
Income (Loss)
|
93,790
|
164,923
|
|
|
(1,426,502)
|
(1,209,224)
|
|
|
|
|
|
|
|
|
|
|
|
a
|
|
To
properly record convertible debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLMES
BIOPHARMA, INC. AND SUBSIDIARY
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
|
|
|
|
|
|
(unaudited)
|
|
|
Nine Months
|
Nine Months
|
|
|
|
|
|
|
|
|
Ended
|
Ended
|
|
|
|
|
|
|
|
|
September 30,
|
September 30,
|
|
|
|
|
|
|
|
|
2007
|
2007
|
|
|
|
|
|
|
|
|
As Reported
|
As Restated
|
Changes
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
|
$
(1,427,734)
|
$
(1,210,456)
|
$ 217,278)
|
a
|
|
Adjustments
to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
Used
in Operating Activities
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
273,083
|
273,083
|
|
|
|
|
|
Stock
Issued for Services
|
|
55,500
|
55,500
|
|
|
|
|
|
Warrants
Issued For Financing
|
|
39,139
|
39,139
|
|
|
|
|
|
Minority
Interest in Loss of Subsidiary
|
|
-
|
-
|
|
|
|
|
|
Accretion
of Convertible Debenture, Net
|
|
570,309
|
353,031
|
$ 217,278
|
a
|
|
|
|
Changes
in Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in Receivables
|
|
(1,239,564)
|
(1,239,564)
|
|
|
|
|
|
|
Decrease
(Increase) in Prepaid Expenses
|
|
5,499
|
5,499
|
|
|
|
|
|
|
Increase
(Decrease) in Trade
Accounts Payable
|
|
883,663
|
883,663
|
|
|
|
|
|
|
Increase
(Decrease) in Deferred Revenue
|
|
(43,848)
|
(43,848)
|
|
|
|
|
|
|
Increase
(Decrease) in Accrued Expenses
|
|
(28,319)
|
(28,319)
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities
|
|
(912,272)
|
(912,272)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
(168,438)
|
(168,438)
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
(168,438)
|
(168,438)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Issuance
of Common Stock, Net of Offering Costs
|
|
456,325
|
456,325
|
|
|
|
Advances
on Revolving Bank Line of Credit
|
|
20,206
|
20,206
|
|
|
|
Repayments
on Revolving Bank Line of Credit
|
|
(20,206)
|
(20,206)
|
|
|
|
Proceeds
From Issuance of Note Payable - Related
|
|
100,000
|
100,000
|
|
|
|
Issuance
of Convertible Debt
|
|
-
|
-
|
|
|
|
Repayments
of Notes Payable
|
|
(2,025)
|
(2,025)
|
|
|
|
Repayments
of Convertible Debt
|
|
(11,250)
|
(11,250)
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
543,050
|
543,050
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
1,232
|
1,232
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
(536,428)
|
(536,428)
|
|
|
|
|
Cash,
Beginning of Period
|
|
626,444
|
626,444
|
|
|
|
|
Cash,
End of Period
|
|
$
90,016
|
$
90,016
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Interest
Paid
|
|
$
977
|
$
977
|
$
-
|
|
|
Taxes
Paid
|
|
$
-
|
$ -
|
$
-
|
|
|
Stock
Issued for Services
|
|
$
55,500
|
$ 55,500
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
To
properly record convertible debenture
|
|
|
|
|
|
44
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On August 2, 2006 we filed a current report on Form 8-K
disclosing that we dismissed Kyle Tingle, CPA, LLC as our independent registered
public accounting firm, effective August 9, 2006. In that same report we
disclosed the we had engaged Chisholm, Bierwolf & Nilson, LLC, Certified
Public Accountants, as our independent registered public accounting firm,
effective August 9, 2006.
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our filings
under the Exchange Act is recorded, processed, summarized and reported within
the periods specified in the rules and forms of the SEC. This information
is accumulated and communicated to our executive officers to allow timely
decisions regarding required disclosure. Our Chief Financial Officer, who
also is our principal executive officer, evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, he concluded that during the year ended
December 31, 2007 our disclosure controls and procedures were effective.
Managements Annual Report on Internal Control over
Financial Reporting
Our Chief Financial Officer is responsible to design or
supervise a process to be effected by our board of directors that provides
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The policies and procedures
include:
$
maintenance of records in reasonable
detail to accurately and fairly reflect the transactions and dispositions of
assets,
$
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles,
and that receipts and expenditures are being made only in accordance with
authorizations of management and directors, and
$
provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on our financial
statements.
For the year ended December 31, 2007, management has
relied on the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), Internal Control - Integrated Framework, issued in 1992, to evaluate
the effectiveness of our internal control over financial reporting and based
upon that framework management has determined that our internal control over
financial reporting is effective. However, during the course of the
2007 audit, management became aware of certain errors in the financial
statements for the year ended December 31, 2006 which carry through our 2007
financial numbers. (See Note 14 to the financial statements.) We intend to
file a Current Report on Form 8-K informing the public that they should not rely
on previously issued financial statements for 2006 and we intend to file an
amendment to our annual report on Form 10-KSB for the year ended December 31,
2006.
Our management determined that there were no changes made
in our internal controls over financial reporting during the fourth quarter of
2007 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
This annual report does not include an attestation report
of our registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by
the our registered public accounting firm pursuant to temporary rules of the SEC
that permit the company to provide only managements report in this annual
report.
45
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our executive officer and director and his age, term of
office and biographical information are set forth below. Our bylaws
require at least one director but no more than nine directors to serve until
each is replaced by an elected or qualified director. Our executive
officers are chosen by our board of directors and serve at its discretion.
|
|
|
|
Name
|
Age
|
Position
Held
|
Director Term of
Office
|
John F. Metcalfe
|
59
|
President,
Secretary/Treasurer
Chief Financial Officer and
Director
|
From January 2002 until
next annual meeting
|
Mr. Metcalfe has been our President since January 2002.
He has a background in business development and marketing. He was
employed for five years by Moore Corporation, a designer and supplier of
business forms and related office solutions, where he held the position of
Director of Marketing and Consulting Services. He also has business
experience as a officer and director of an anti-virus software company.
Compliance with Section 16(a) of the Exchange
Act
Section 16(a) of the Securities Exchange Act of 1934
requires our directors, executive officers and persons who own more than ten
percent of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and our other equity securities. Officers, directors and greater than
ten-percent beneficial owners are required by SEC regulations to furnish us with
copies of all Section 16(a) reports they file and provide written representation
that no Form 5 is required. Based upon a review of these forms furnished
to us for the fiscal year ended December 31, 2007, we believe John F. Metcalfe
filed late two Forms 4 related to six transactions and Rockridge Capital Corp.
filed late one Form 4 related to one transaction.
Code of Ethics
Due to the fact that we have only one officer and
director and minimal operations, we have not adopted a code of ethics for our
principal executive and financial officers. Our board of directors will
revisit this issue in the future to determine if adoption of a code of ethics is
appropriate. In the meantime, our management intends to promote honest and
ethical conduct, full and fair disclosure in our reports to the SEC, and
compliance with applicable governmental laws and regulations.
Committees
We are a smaller reporting company with one director and
officer and as a result, we do not have a standing nominating committee for
directors, nor do we have an audit committee with an audit committee financial
expert serving on that committee. Mr. Metcalfe acts as our audit
committee.
ITEM 11. EXECUTIVE
COMPENSATION
Executive Officer Compensation
46
The following table shows the compensation paid to our
principal executive officer for the fiscal years ended December 31, 2007 and
2006.
|
|
|
|
|
SUMMARY
COMPENSATION TABLE
|
Name and Principal
Position
|
Year
|
Salary
|
All Other
Compensation
|
Total
|
John F. Metcalfe
President
|
2007
|
$ 112,269 (1)
|
$ 110,000 (2)
|
$ 222,269
|
2006
|
$ 42,250
|
$ 150,000 (3)
|
$
192,250
|
(1)
Represents cash and non-cash
compensation received by Mr. Metcalfe from Qualia.
(2)
Represents the fair value of 50,000
common shares issued to Mr. Metcalfe.
(3)
Represents fair value of 100,000
common shares issued to Mr. Metcalfe.
We have not entered into employment contracts with our
executive officer and his compensation is determined at the discretion of our
board of directors. However, Mr. Metcalfe entered into a consulting
agreement with Holmes on August 10, 2006 under which he agreed to provide
consulting services related to business plan review and on-going strategic
corporate planning. Under the consulting agreement Mr. Metcalfe was issued
100,000 shares of common stock valued at $150,000 based on the trading price of
our common stock on that day. The consulting agreement expired December
31, 2006.
On October 31, 2007 we issued 50,000 shares to Mr.
Metcalfe in consideration for services rendered on our behalf valued at
approximately $110,000.
Outstanding Equity Awards
For the fiscal year ended December 31, 2007, we have not
granted any equity or stock awards to our named executive officer.
Retirement Benefits or Other
Arrangements
We do not offer a retirement benefit plan to our
executive officer, nor have we entered into any contract, agreement, plan or
arrangement, whether written or unwritten, that provides for payments to a named
executive officer at or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the company
or a change in the named executive officers responsibilities following a change
in control.
Compensation of Directors
We do not have any standard arrangement for compensation
of our director for any services provided as director, including services for
committee participation or for special assignments.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table lists the securities authorized for
issuance under any equity compensation plans approved by our shareholders and
any equity compensation plans not approved by our shareholders.
47
|
|
|
|
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
category
|
Number of securities to be issued upon
exercise of outstanding options, warrants and rights
(a)
|
Weighted-average exercise price of
outstanding options,
warrants and rights
(b)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
(c)
|
Equity compensation plans
approved by security holders
|
0
|
$
0
|
3,299,000
|
Equity compensation
plans
not approved by security
holders
|
0
|
$
0
|
0
|
Total
|
0
|
$
0
|
3,299,000
|
2005 Equity Incentive
Plan
On May 21, 2005, our board of directors adopted "The 2005
Equity Incentive Plan of Holmes Herbs, Inc." (the "Plan"). The purpose of
the Plan is to aid the company in maintaining and continuing its development of
a quality management team, in attracting qualified employees, consultants, and
advisors who can contribute to our future success, and in providing such
individuals with an incentive to use their best efforts to promote our growth
and profitability.
Pursuant to the Plan, the Board may authorize the
issuance of common stock or options to purchase common stock up to an aggregate
of five million (5,000,000) shares over a maximum of a five year period,
although the Board may shorten this period. Any options granted under the
Plan are "non-qualified" stock options. The Board shall determine which
employees are eligible to receive shares or options under the Plan. The
term "Employee" includes any employee, director, officer, or consultant or
advisor of the company or any of its subsidiaries, provided that bona fide
services are rendered by consultants and advisors and such services are not
rendered in connection with the offer or sale of securities in a capital-raising
transaction and do not directly or indirectly promote or maintain a market for
our common stock.
On May 26, 2005, we filed a registration statement on
Form S-8 (Registration No. 333-125265) which registered the 5,000,000 common
shares to be issued under the Plan. As of December 31, 2007, our Board has
granted 1,701,000 common shares to consultants and advisors pursuant to the
Plan.
Beneficial Ownership
The following table sets forth the beneficial ownership
of our outstanding common stock by our management and by each person or group
known by us to own beneficially more than 5% of our outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Except as indicated by footnote, the persons named in the table below have
sole voting power and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 49,060,247 shares of common stock outstanding as of April
4, 2008.
48
|
|
|
CERTAIN
BENEFICIAL OWNERS
|
Name and address of
beneficial owners
|
Amount and nature of
beneficial owner
|
Percent
of
class
|
Rockridge Capital Corp
1 Beim Antonskraiz
Bridel 8116
Luxembourg
|
22,500,000
|
45.9
|
|
|
|
MANAGEMENT
|
Name and address of
beneficial owners
|
Amount and nature of
beneficial owner
|
Percent
of
class
|
John F. Metcalfe
8655 East Via De Ventura, Suite G-200
Scottsdale, AZ
85258
|
50,000
|
Less than
1%
|
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Since the beginning of the last fiscal year we have not
engaged in, nor have we proposed to engage in, any transactions involving our
executive officers, directors, more than 5% stockholders, or immediate family
members of these persons.
Director Independence
We do not have an independent director serving on our
board of directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
Accountant Fees
The following table presents the aggregate fees billed or
accrued for each of the last two fiscal years by our independent registered
public accounting firm, Chisholm, Bierwolf & Nilson LLC, in connection with
the audit of our financial statements and other professional services rendered
by those accounting firms.
|
|
|
|
2007
|
2006
|
Audit fees
|
$ 34,208
|
$ 9,195
|
Audit-related fees
|
0
|
0
|
Tax fees
|
0
|
0
|
All other fees
|
0
|
0
|
Audit fees represent the professional services rendered
for the audit of our annual financial statements and the review of our financial
statements included in quarterly reports, along with services normally provided
by the accounting firm in connection with statutory and regulatory filings or
engagements. Audit-related fees represent professional services rendered
for assurance and related services by the accounting firm that are reasonably
related to the performance of the audit or review of our financial statements
that are not reported under audit fees.
49
Tax fees represent professional services rendered by the
accounting firm for tax compliance, tax advice, and tax planning. All
other fees represent fees billed for products and services provided by the
accounting firm, other than the services reported for the other categories.
Audit Committee Pre-approval Policies
We do not have an audit committee currently serving, and
as a result, our board of directors performs the duties of an audit committee.
We do not rely on pre-approval policies and procedures. Our board of
directors will evaluate and approve in advance, the scope and cost of the
engagement of an auditor before the auditor renders audit and non-audit
services.
PART IV
ITEM 15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
Exhibits
No.
Description
3.1
Articles of Incorporation of Holmes
Biopharma, Inc. as amended (Incorporated by reference to exhibit 3.1 to Form
10-QSB filed August 21, 2006)
3.2
Bylaws of Holmes Biopharma, Inc.
(Incorporated by reference to exhibit 3.2 to Form 10-QSB filed August 21,
2006)
10.1
Consulting Agreement between Holmes
and Newport Capital Consultants, Inc., dated January 9, 2008
21.1
Subsidiaries of Holmes Biopharma
(Incorporated by reference to exhibit 21 to Form 10-QSB, filed August 17,
2005)
31.1
Principal Executive Officer
Certification
31.2
Chief Financial Officer
Certification
32.1
Section 1350 Certification
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, there unto duly
authorized
HOLMES BIOPHARMA, INC.
By:
/s/ John F. Metcalfe
John F. Metcalfe
President, Secretary/Treasurer
Chief Financial Officer and
Director
Date: April 11, 2008
50
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