ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Xeno Transplants Corporation (the Company) cautions
readers that certain important factors (including without limitation those set
forth below) may affect the Companys actual results and could cause such
results to differ materially from any forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities and Exchange Act of 1934,
as amended (the Exchange Act), made herein. The Company intends such
forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with
those safe-harbor provisions. You should not rely on forward-looking statements
in this document. Forward-looking statements are based on current management
expectations that involve risks and uncertainties that may result in such
expectations not being realized. Without limiting the generality of the
foregoing, words such as may, expect, expects, believe, believes,
plan, plans, anticipate, anticipates, intend, intends, could,
estimate, estimates, continue, or continues and the negative of such
words and phrases are intended to identify forward-looking statements. These
statements are based on the Companys beliefs as well as assumptions the Company
has made using information currently available to it. Some, but not all, of the
factors that may cause these differences include those discussed in the Risk
Factors section of the Companys Annual Report on Form 10-KSB for the year ended
June 30, 2007.
In particular, this document contains forward-looking
statements pertaining to the following:
-
the Companys intended business objectives and the implementation of those
objectives going forward;
-
the inability of the Companys pig herd cells to infect humans with PERV
(as defined herein);
-
the Companys position in the field of tolerance and rejection with
respect to transplantation methods and materials;
-
the timing, scope and success of the Companys desired clinical trials;
-
the closing of the proposed private placements and the need for additional
financing in the future;
-
the possibility that xenotransplantation will become a treatment
alternative to limited human donor sources;
-
the desirability of the Companys inbred miniature swine for
xenotransplantation;
-
the ability of the Company to identify miniature swine donor pigs that may
be incapable of infecting human cells;
-
the Companys intended focus on the field of end stage liver and renal
disease, specifically the transplantation of porcine livers and kidneys;
diabetes, specifically the transplantation of porcine islet cells; and their
impact upon the Companys other research and development activities;
-
the Companys research and development plans, including its plan to
advance its miniature swine breeding program and the costs associated with
such plans;
-
the Companys ability to obtain additional funding to expand its research
and development program, and satisfy the requirements of the MGH license; and
-
the potential for the Companys technology to provide the opportunity for
xenotransplantation of multiple types of organs and cells;
The actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risk factors
contained in the Risk Factors section of the Companys Annual Report on Form
10-KSB for the year ended June 30, 2007 and other risks and uncertainties
identified elsewhere in this document.
These forward-looking statements are made as of the date of
this document and the Company assumes no obligation to update such
forward-looking statements or to update the reasons why actual results could
differ materially from those anticipated in such forward-looking
statements.
15
About Xeno Transplants Corporation
Xeno Transplants Corporation is a bio-technology research and
development company that holds an exclusive commercial license from
Massachusetts General Hospital of what the Company considers to be some of the
medical industrys most advanced research, intellectual property and associated
technologies, derived from over 15 years of development in the field of
xenotransplantation by Novartis Pharmaceuticals and its associated research
entities. Xenotransplantation is defined as the transplantation of organs, cells
and tissues from one species to another. At this time, the Company has no
employees and no material business operations.
Overview
The Companys Business
The Company intends to develop therapeutic applications of
organs and cells derived from genetically engineered pigs as a transplant
alternative to limited human donor sources. Xenotransplantation is intended to
address the problems arising from the limited supply of available human cells,
tissues and organs for transplantation by developing technologies to permit the
transplantation of cells, tissues and organs from other species, such as swine,
into humans. There is a critical shortage of sources for transplantation
worldwide.
Critical Issues Governing the Application of
Xenotransplantation
A need exists for the creation of pig organs that can match the
size needed for replacing human organs. In order to address this issue, a pig
herd has been created of inbred miniature swine that develop organs which are
human in size. It is thus possible to match the pig donor and human recipient
organ sizes, which is expected to be an important factor for success in
transplantation.
It is also desirable to create a pig herd with uniformity to
facilitate production, quality assurance and quality control of donor cells and
organs. The genetic profile of the planned breeding nucleus to be selected from
the current herd should ensure uniformity of the pigs in the herd, which could
become a production lot, rather than each animal being a unique production
lot. Uniformity also facilitates genetic engineering of the herd.
Safety concerns caused by Porcine Endogenous Retrovirus
(PERV) must be addressed. Xenotransplantation guidelines have been created by
the FDA and clinical trials have been opened and completed under these
guidelines. Beyond the existing guidelines, miniature swine have been identified
by the Company that are believed to be incapable of infecting human cells, based
on laboratory studies, with PERV. Their subtype of PERV has been shown not to
recombine with human endogenous retroviral gene segments.
Research demonstrating the efficacy of life supporting pig
organs and cells in primates is necessary before human clinical trials can be
conducted. Research evidence has been demonstrated for donor specific
immunological tolerance to organs from cloned miniature swine whose expression
of alpha galactose (the major target of rejection) has been knocked out. This
combination of technologies, tolerance and pig genetic engineering, has resulted
in survival of life supporting pig kidneys in primates for up to 83 days,
without evidence of rejection. In addition, tolerance is now being demonstrated
in patients receiving allogeneic organ transplants.
The Companys Intellectual Property
Massachusetts General Hospital
On May 16, 2006 AXI signed an exclusive license agreement with
MGH to have the exclusive right to commercially develop, manufacture, distribute
and use products and processes for public use with regard to
xenotransplantation. The MGH license includes 38 issued U.S. patents and 51
issued international patents, with multiple patent applications. Technologies
covered by AXIs exclusive commercial licensee from MGH include the following:
|
Exclusive rights to the commercial use of a herd of proprietary in-bred
miniature swine for xenotransplantation. The AXI pig herd has been in-bred
over decades in a controlled scientific environment in order to ensure
greater animal uniformity, which facilitates consistent transplant quality
control.
|
|
AXIs exclusively licensed patent rights include the methods and
composition for targeting and eliminating a major cause of rejection of
xenotransplants.
|
16
|
The Company believes it is in a strong position in the field of tolerance
whereby a patients immune system can be re-educated to more closely
recognize transplanted foreign cells, tissues and organs as self,
reducing the requirement for chronic systemic immunosuppressive drugs.
|
Infigen, Inc. Patents
On January 31, 2007, AXI also acquired a patent assignment from
Infigen, Inc. consisting of two issued U.S. and seven issued international
patents and multiple patent applications relating to producing pigs by cloning,
including the methods used in producing the Companys genetically engineered
pigs. In these miniature swine a specific porcine gene, which is a major cause
of xenotransplantation rejection, has been knocked out. The genetic
engineering uses somatic cell nuclear transfer (SCNT), including oocyte
maturation, oocyte/donor cell fusion, oocyte activation and embryo transfer.
This is often referred to as pig cloning. SCNT is presently the only known
method for introducing complex and predictably regulated genetic modifications
into the pig genome. The Infigen patents cover key technologies with respect to
pig cloning and have been demonstrated to be enabling. The Company believes that
these patents represent one of the most efficient processes currently available
for performing genetic modifications in pigs.
Acquisition Letter of Intent
On September 20, 2007 the Company entered into a Letter of
Intent (the LOI) to acquire CrossCart, Inc. (CrossCart), a privately held
California corporation. This LOI has expired and the Company and CrossCart
continue with discussions to determine if a merger or acquisition on amended
terms can be agreed to.
There can be no assurance however, that the Company will reach
any agreement with CrossCart or that any and all of the terms and conditions to
any such agreement will be satisfied.
PLAN OF OPERATION
The Company intends to conduct its research and development
programs through its wholly-owned subsidiary AXI. Over the next year the Company
intends to advance its miniature swine breeding program and further develop its
research plan. During this period the Company will be seeking additional funding
to expand its research and development program. The Company expects to conduct
its research primarily through the use of sub-contractors that are experts in
the fields that the various research programs relate to. As such, the Company
does not expect to incur substantial increases in its number of employees or
overhead costs including rent or plant and equipment.
In order to fund its operations the Company believes that it
will be required to raise funds through private placements of equity securities.
The Company will seek to raise approximately $10 million over a two year period,
in particular to satisfy the requirements of the MGH license. There can be no
assurance that such financing will be available to the Company on terms
acceptable to it, if at all. Failure to obtain adequate financing if necessary
could result in significant delays in development of new products and a
substantial curtailment of the Companys operations.
The Company intends to prioritize development of its exclusive
xenotransplantation rights through the evaluation of its proprietary porcine
organs to treat end stage organ disease and of its proprietary porcine islet
cells to treat diabetes. After prioritization, each of these initial
applications will be directed through independent research and development
programs, but with common management. The Company believes that encouraging
clinical results with the initial product may make it possible to achieve more
rapid therapeutic deployment of additional transplantable organs, tissues and
cells.
Research and Development Focus
The research and development focus will be to evaluate porcine
transplant applications and determine their priorities. The Company expects to
focus a portion of its early research and development program on the application
of its intellectual property as it relates to the field of end stage liver
disease and end stage renal disease, specifically the transplantation of porcine
liver and kidneys. The Company believes that the focused development of
xenotransplantation of porcine livers and organs may also permit the resulting
technology platform to serve as a foundation and template for the rapid
development of other porcine organs through to approved therapy. The proposed
development plan is a continuation of the major research advances already in
place through the recent work of Dr. David Sachs at MGH where he successfully
demonstrated evidence of tolerance in pig to primate
17
kidney transplants. The transplantation of other organs will
also be evaluated and prioritized for the Companys initial research and
development.
The Company also seeks to focus a portion of its research and
development program on evaluating the application of its intellectual property
as it relates to the field of diabetes, specifically the transplantation of
porcine islet cells. The Company is exploring technology options and potential
collaborations for developing the use of porcine pancreatic islet cells from its
GalT-KO miniature swine to treat brittle type 1 diabetics and diabetic
patients with renal failure. There are approximately 100,000 brittle type 1
diabetics in the US alone who do not respond adequately to insulin therapy.
These patients might be able to achieve an improved life expectancy if islet
cell transplants were not limited by the lack of donor cells. Islet cell
transplants have demonstrated the capability to remove short-term insulin
dependence in brittle diabetics, but with only approximately 500 pancreases
available each year in the US for islet cell extraction and transplantation, the
development of this potentially life-saving therapy is currently severely
limited to a very small minority of patients.
Competition
Source of porcine organs
The Company believes that its proprietary inbred miniature
swine will be desirable donors for xenotransplantation because of the ability to
match donor recipient organs and the potential to identify miniature swine donor
pigs which may be incapable of infecting human cells. We are unaware of any
other suppliers of inbred miniature swine.
Porcine cloning
The Company considers Revivicor and the Mayo Clinic group as
potential competitors in using nuclear cloning and genetic engineering of pigs
for xenotransplantation.
Geron and their joint venture, stART Licensing Inc., may hold
some relevant intellectual property (originally from the Roslin Institute) that
they have been nonexclusively licensing to interested parties. These patents
have broad generic claims to methods of nuclear transfer in which quiescent
cells are used as the nuclear transfer donor cell. Nuclear transfer cloning has
also been successfully accomplished by Revivicor and the Mayo clinic group. The
Company is leveraging the prior work done with Immerge, Infigen and University
of Missouri in this area. The major target for this work by all the above groups
was the production of pigs whose organs reduce rejection.
The other area of interest has been dominant transgenesis of
human complement inhibitor proteins in pigs. The Company has control of the
assets and intellectual property from Novartis and Imutran in this area The Mayo
group and Revivicor both have pigs with similar but not identical proteins
expressed.
Tolerance
From the recent Nature Medicine publications, the Company
expects that creation of tolerance will be necessary to prevent immune responses
to further develop against swine organs in primate recipients. Through the
Companys license with MGH, it believes that it has a strong position in the
field of tolerance (the re-education of the patients immune system to more
closely recognize foreign cells, tissues and organs as self) to potentially
reduce the need for chronic systemic immunosuppressive drugs. On January 24,
2008, the New England Journal of Medicine (Kawai et al.,N.Engl.J.Med.
358:353-361) published an article which the Company believes has important
implications for the potential success of the Company's strategy for
xenotransplantation. The article, co-authored by Dr. David H. Sachs, the
Company's chief Scientific Advisor and a member of Xenos Board of Directors,
demonstrates that tolerance to mismatched kidney transplants can be achieved in
humans, thereby reducing the risk of rejection of the organ. This is potentially
a major breakthrough in the field of transplantation as tolerance facilitates
the acceptance of the donor organ by the recipient and provides a means for
avoiding the need for life-long immunosuppressive drugs. Although this study
deals only with allotransplants (person to person), the same research team is
also applying a tolerance approach to xenotransplants (pig-to-baboon), with
encouraging preliminary results. The Company is unaware of current competitors
that are creating tolerance in pig-to-primate transplants.
18
Critical Accounting Polices and Estimates
Critical accounting policies are those that management believes
are both most important to the portrayal of the Companys financial condition
and results, and that require difficult, subjective, or complex judgements,
often as a result of the need to make estimates about the effects of matters
that involve uncertainty.
The Company believes the critical accounting policies it uses
in the preparation of its financial statements are as follows:
Use of estimates
The
preparation of financial statements in accordance with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Intellectual
property
Intellectual property such as patents and licences applications
is recorded at cost. Capitalized amounts relate to the acquisition of patents
and licences, which include legal and advisory costs incurred in registration of
the patents. Depreciation is calculated using the straight-line method over the
useful lives of the patents. No depreciation is provided for as the patents have
not yet been awarded and/or begun to generate revenues.
Impairment of long-lived assets
Long-lived assets are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No.144, Accounting for the Impairment
or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
which requires that companies consider whether events or changes in facts and
circumstances, both internally and externally, may indicate that an impairment
of long-lived assets held for use are present. Management periodically evaluates
the carrying value of long-lived assets and has determined that there was no
impairment as of December 31, 2007. Should there be impairment in the future,
the Company would recognize the amount of the impairment based on the expected
future cash flows from the impaired assets. The cash flow estimates would be
based on managements best estimates, using appropriate and customary
assumptions and projections at the time.
Research and Development
As the Company is in the early stages of its development it has
not incurred any research and development expenses to date. Its total
expenditures have related to administrative costs and costs associated with the
acquisition, maintenance and development of intellectual property.
Results of Operations for the three and six month periods
ended December 31, 2007
The Company is in the early stage of its development and just
beginning operations. As a result there is a very limited history of operations.
Due to the reverse merger accounting, change in fiscal year-end from December 31
to June 30, and the fact that AXI did not prepare quarterly financial statements
prior to the Merger the comparative results of operations for the three and six
month periods ended December 31, 2006 are not presented. The comparative results
of operations are not considered to be material in nature nor are they
considered to be reflective of the Companys current operations.
Operating Expenses
Operating expenses totalled $170,149 and $310,987 for the three
and six month periods ended December 31, 2007. The operating expenses consisted
of general and administrative expenses, which primarily included legal and
consulting fees. Prior to 2007 the Company was privately held and quarterly
financial statements were not prepared.
Amortization
Amortization on computer equipment for the three and six month
periods ended December 31, 2007 was $144 and $192.
19
Net Loss for the Period
Overall, the Company incurred a net loss for the three and six
month periods ended December 31, 2007 of $170,149 and $310,987.
Liquidity and Capital Resources
The Companys aggregated cash on hand at the beginning of the
six month period ended December 31, 2007 was $32,096.
The impact on cash after adjustment for non-cash items and
changes to other working capital accounts in the period, resulted in a negative
cash flow from operations of $51,135. The Company spent $187,587 to increase its
intellectual property, and advanced $100,000 to CrossCart as part of its LOI to
acquire CrossCart, now recorded in loan receivable. The Company purchased
computer equipment at a cost of $1,727. The Company received $308,716 in loans
payable. The Companys cash position decreased for the six-month period by
$31,734 to $363 cash on hand at December 31, 2007.
During the prior period ended June 30, 2007 the Company
received $675,000 in stock subscriptions with $50,000 in corresponding issuance
costs resulting in a net stock subscription amount of $625,000. The
subscriptions have been received as part of the intended private placement of up
to 1,500,000 Units of the Company at a price of $1.00 per Unit to certain
eligible investors. Each Unit will consist of one share of common stock and one
common stock purchase warrant of the Company. Each whole purchase warrant will
entitle the holder for two years from the date of issuance of the Units to
acquire one additional share of common stock of the Company at an exercise price
of $1.00. The Company intends to complete this Private Placement by March 31,
2008. There can be no assurance that the Company will be able to complete this
Private Placement by that date, or at all.
On September 20, 2007 the Company entered into a LOI to acquire
CrossCart, a privately held California corporation. The LOI has expired and the
Company and CrossCart continue with discussions to determine if a merger or
acquisition on amended terms can be agreed to. The Company has advanced $100,000
to CrossCart in connection with the LOI and under the terms of the LOI this
advance has been converted to a loan receivable.
There can be no assurance that the Company will reach any
agreement with CrossCart or that any and all of the terms and conditions to any
such agreement will be satisfied.
As the Company is just beginning its research and development
program, it does not yet have any products for sale and it has not generated any
revenues and does not anticipate generating any revenues for the next several
years. It will need to raise additional funds through private placements of its
securities or seek other forms of financing during the 2008 and future financial
years. Completion of the remaining $825,000 of the $1.5 million private
placement described above would provide the Company with sufficient capital to
fund its operations for approximately six months. The Company intends to seek a
minimum of $2.5 million and up to a maximum of $15 million in private placement
funding in order to be able to complete the planned acquisition of CrossCart and
complete anticipated preclinical studies programs in organ transplantation. The
costs of proceeding with the preclinical studies are estimated to be $3 million
per year for the next two years.
There can be no assurance that any such financing will be
available to the Company on terms acceptable to it, if at all. Failure to obtain
adequate financing could result in significant delays in development of new
products and a substantial curtailment of the Companys operations. If the
Companys operations are substantially curtailed, it may have difficulty
fulfilling its current and future contract obligations.
Recent Accounting Pronouncements
In February, 2007, the FASB issued SFAS No. 159 The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits
entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the
impact of SFAS No. 159 on its financial position and results of operations, but
does not anticipate a material impact.
20
Off-Balance Sheet Arrangements
At December 31, 2007 the Company did not have any off-balance
sheet arrangements.
21