2nd Apr 2008 07:01
TyraTech, Inc.02 April 2008 For Immediate release 2 April 2008 TYRATECH, INC. ("TyraTech" or "the Group") MAIDEN FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 TyraTech Inc. (AIM: TYR), a leading independent novel pesticide company forhuman, animal and environmental health, today announces its maiden full yearresults for the year ended 31 December 2007 and the first since listing in June2007. Operational Highlights • First commercial launch from TyraTech's own product range for a generalpurpose insect spray for hospitality industry containing all natural activeingredients • First product launch from Sustainable Solutions business of dairy wastemanagement equipment for the production of Nature's Natural, a uniquehorticulture soil product • Completion of the key objectives for human functional foods to receive thefirst major milestone payment from worldwide exclusive agreement with KraftFoods Inc. • Development and financial milestones achieved with insecticide strategicpartners Arysta and Syngenta • Strengthened senior management team and sales and marketing function Financial Highlights • Successful initial public offering (IPO) in June, listing on the AIM marketof the London Stock Exchange, raising gross proceeds of £25 million • Revenue increased to US$5.5 million (£2.8 million) from US$(0.3) million inthe prior period • Gross research and development costs US$5.9 million (2006: US$4.5 million) • Net cash US$27.5 million (2006: US$1.7 million) Commenting on the Group's maiden Full Year Results since Listing, DouglasArmstrong Ph.D., Chief Executive Officer of TyraTech, said: "TyraTech had its debut on AIM in June and the Group has made good progressthroughout this period. 2008 is going to be an exciting year when we willcontinue to focus on the Kraft development, plan to create further newpartnerships, and launch new products. We also expect this year to haveimportant new value building discovery advances of proprietary activeingredients needed for the delivery of disruptive products for the control ofagricultural and animal pests. We have built a strong infrastructure with keyteam additions bringing industry leading expertise and experience to TyraTech. Iam very optimistic about the future and we look forward to creating significantshareholder value as we progress the Group." For Further Information Please Contact: TyraTech Inc.Douglas Armstrong Ph.D., Chief Executive Officer +1 (321) 409 7403www.tyratech.com Nomura Code SecuritiesCharles Walker/Clare Terlouw +44 (0)20 7776 1200www.nomuracode.com Buchanan CommunicationsMary-Jane Johnson ([email protected])/Lisa Baderoon/Catherine Breen +44 (0) 20 7466 5000www.buchanan.uk.com Chairman's Statement TyraTech, which was formed in 2004, develops and commercializes products for thecontrol of invertebrate pests and pathogens using TyraTech's proprietarydiscovery core technology. This technology provides the Group with a widevariety of product and business opportunities in many markets and geographicregions. The differentiating feature of these products is the potential to havea combined level of potency and safety that other invertebrate control productsare unable to offer. Our platform brings many of the principles of drugdiscovery and development to the fields of insecticides and parasiticides. Bytargeting specific chemoreceptors that are found in invertebrates but not inhumans and animals, TyraTech can produce products that use natural plant derivedcompounds targeting these receptors to rapidly kill insects and parasites whilebeing environmentally friendly and harmless to humans and animals. The key elements of the Group's strategy are based on the creation ofsignificant shareholder value through bringing products to market to serve theanimal health, human health and the pesticides market via the following routes: • Development of the core technology to identify more potent and cost-effective proprietary Active Ingredients (AIs) needed to support our currentproducts, • Development of disruptive products using a combination of in- house andthird party programs, • Complete new third party development and licensing strategic relationshipsin consumer, animal health and selected agriculture market segments that delivermilestone and exclusivity payments, • Bring products to market through partners in key markets, • Bring products direct to market, • Complete the milestones for the Kraft project and leverage the data for use in animal health applications, • Develop a TyraTech brand that is associated with optimal invertebrate pestand pathogen control while providing unsurpassed safety to humans, animals andthe environment, and • Build Sustainable Solutions, a waste reprocessing technology, into amaterial asset, focusing on the U.S. market. TyraTech's plan for the use of its technology is to develop selected proprietaryactive ingredients which can then be used across a wide variety of marketsegments, either by development partners or by TyraTech itself. The work done todate has confirmed the capability of the platform and provided direction for newAI discovery. TyraTech intends to expand and exploit its platform in order todevelop new AIs which will create significant additional value in the marketwith products that materially improve potency while sustaining or improvingsafety. TyraTech also has a separate technology with associated intellectual propertythat is the basis for the Sustainable Solutions business. This technology hasbeen incorporated into specialized dairy farm equipment for processing cattlemanure waste to a usable material for cow bedding and plant growing medium.TyraTech's main emphasis will be to further develop the technology, improve theprocessing equipment, and develop markets for the processed material. At the end of 2007 we have (US$27.5) million in cash and short term deposits andwe will be investing in 2008 to continue to exploit the market opportunitiesthat this exciting technology provides. Geoffrey Vernon Chairman April 2, 2008 Chief Executive Officer's Review Introduction TyraTech has had a successful year following its debut on the AlternativeInvestment Market in London. The Group aims to be the recognized commercialleader for revolutionary products that control invertebrate pests and pathogensand have an unsurpassed combination of efficacy and safety for humans, animalsand the environment. The Group looks to maximize sustainable growth and valuefor its shareholders, customers, partners, and employees through the developmentof quality industry-changing products enabled by our proprietary, targeted,receptor-based screening platform. TyraTech's Core Technology TyraTech's founding technology has broad applicability, for human and animalhealth markets, as well as the control of insects and other agricultural pests.The Group's molecular screening technology is principally based on threespecific receptors that are members of the G-coupled protein receptor (GPCR)class and: • Is used to assay receptor-specific natural and other compounds as putativepesticides; • Is highly predictive of activity in the in vivo setting; and • Provides a sensitive quality control procedure for qualifying naturalcompounds in manufacturing. TyraTech has focused primarily on certain botanical essential oils which arenatural ligands for the targeted receptors and, due to their broad spectrumactivity, have an excellent safety profile and can sometimes have a speedierregulatory pathway. However, the receptor-based technology can also be used forthe characterization of any chemical (synthetic or natural) to rapidly assessboth the binding to receptors and the potency of receptor activation. Thebiological pathways associated with the receptors also offer a directed way toidentify additional active compounds - including other existing pesticides -that may act in a favorable or synergistic fashion with the receptor ligands. By targeting different modes of action, TyraTech's technology supports thedevelopment of a line of products called "TyraTech EXTEND" which are composed oflower concentrations of marketed pesticides combined with TyraTech's naturalblends and which demonstrate efficacy at a level equal to that of higherconcentrations of these chemicals, with a superior safety profile and morefavorable environmental impact. As a result of the different modes of action inthe TyraTech EXTEND products, the development of resistance that currentlyoccurs with recurrent use of chemical pesticides is expected to significantlydecrease. TyraTech's screening platform can also be used to find othersubstances, either natural or synthetic chemicals, which dramatically amplifythe efficacy of the receptor-activating blends without negatively affectingtheir safety profile. This is the basis for TyraTech's planned amplified potency(called TyraTech AMP) products and will target compounds that have a directedactivity at the biology that results following the receptor activation. Based on the capabilities of its screening platform, TyraTech is able to furtherexpand the use of this platform to support the development of selective blendsthat target or spare specific invertebrates. This capability is expected toprovide TyraTech products to satisfy unmet need in various commercialapplications by decreasing the negative environmental impact of pesticides onbeneficial species. Sustainable Solutions In addition to its own core technology, TyraTech has proprietary technologywhich is used in equipment that converts dairy cow manure into a useful growingor potting soil medium and suitable sphagnum peat alternative. A separatedivision (TyraTech Sustainable Solutions LLC) has been created to sell thisequipment to dairy farms in the U.S., purchase the pathogen-free growing mediumoutput at a nominal fee, and resell the manufactured product to either: • The horticulture and home lawn and garden markets as a natural growingmedium or as a substitute to peat moss, with or without the addition of aTyraTech Natural pesticide to protect new plant growth; or • Local dairy farms as natural bedding, which could incorporate a TyraTechinsect repellent to protect the cattle. TyraTech's Market and Partnering Strategy The key to TyraTech's success will be the effective development of well-structured channels to market. TyraTech will approach market entry, at least inits early years, primarily through strategic marketing and developmentpartnerships. The rationale behind this is that TyraTech's core technologyprovides such a large base of products in many diverse market segments that itis impossible for an early stage company to maximize the broad scope ofcommercial opportunities, particularly in an organized and timely fashion. As aresult, strategic partnerships with companies that have a strong global and/orkey regional presence will provide its products with the most extensive marketcoverage at a lower cost and with higher operating margins. However, the Group'sopportunity for immediate revenues necessitates identifying alternative routesto market directly to customers or through distribution partners in the shortand medium term. • When strategic partners are used, TyraTech aims to structure therelationships so that the opportunity for access to a major market share isenabled, and that the partnership arrangement will provide a financial returnthat is commensurate with the added value that TyraTech provides. Partners areexpected, in many cases, to develop their own final formulations/dose forms andproducts using TyraTech's AIs, IP, and/or prototype formulations. Differentapproaches will be explored to structure these relationships to enableappropriate financial return, including profit sharing structures, jointventures and traditional licensing. Future Strategy TyraTech has formed a key strategic partnership with Kraft Foods Inc for thedevelopment of a functional food that can aid in the control of human intestinalparasites. This project and relationship is progressing well and together weachieved the first major milestone at the end of 2007. TyraTech's pesticidetechnology has matured over the past year and now demonstrates an opportunityfor broader pest control capabilities. With this progress, we are changing; ourstrategic partnering approaches are changing to better coordinate bringing abroader array of products to the marketplace. The Group is now in a position toexplore strategic development and marketing partnerships that have broadersegment opportunity to better leverage our new active ingredient formulations.Our current insecticide relationships with Arysta and Syngenta also progressedthis year, successfully achieving target performance and financial milestones.However these relationships are for relatively narrow segments in pest control,namely professional pest control operators, vector control, and limitedhorticultural applications. Having broader, rather than narrow market rights isalso a preferred objective of Arysta and Syngenta. As we are now pursuing thesebroader market segment partnerships, we expect our current partners will competealong with other pesticide companies as we determine the best partner optionsfor TyraTech, which will likely result in changes in the scope of rights. Forexample in preparing for this new phase, Syngenta and TyraTech have recentlymutually agreed to suspend development activity in the current narrow marketsegments and to explore the Group's technology for a potentially differentrelationship with broader and larger market segments. Arysta continues to moveforward with the lead TyraTech insecticide products, while discussing new areasof partnership. Not only are we targeting a revamped partner strategy for the agricultural andhorticultural markets, but we expect new relationships in the consumer andprofessional pest control markets, and in our animal health business. Ourshareholders should begin to see the results of these strategic allianceactivities this over the coming year. In the future, the Group will target relationships and license agreements thatwill be more "product" specific rather than providing the partner with rights toall technology within a market segment. As a result, TyraTech plans to: • Create development and product license agreements with competentpartners for those products that require very specialized and onerousdevelopment and/or marketing skills (more specifically, functional foods, shelf-space consumer products, human acute treatment products). • Create product license agreements with partners to sell products that aregenerated from existing technology and AIs in market segments with many endcustomers, • Enter, on its own, those market segments where there is, together, an unmetneed (safety and/or efficacy), the development process is not onerous and thenumber of key customers is limited, and • Go to market with its own sales force for Sustainable Solutions equipmentand through distributors for the processed Nature's Natural growing medium. In the longer term TyraTech will seek to enter markets with its own productswhere its core technology can create AIs that have the ability to disrupt marketdynamics. Outlook and Summary We have had a successful year in the Kraft relationship, achieving the firstmajor milestone, as well as development milestones with Arysta and Syngenta.2008 promises to be an exciting year with the continued focus on the Kraftdevelopment, new partnerships to be created, new products to be released and thecontinued focus on the development of the technology. To this last point, webelieve that the technology platform can serve to generate the market-changingproducts that we all strive for: products that can control the targeted pests ina way that provides safety to people, animals and the environment. In doingthis, the era of toxic chemical pesticides should end; with pesticides that wedon't have to be afraid to use, and food crops that won't carry poisons. We havean increasingly strong organization in place to help achieve these ambitiousgoals and I am optimistic for the future. We look forward to building andreturning value to our shareholders and thank them for their support. Finally Iwould like to thank our employees for the significant effort they have put in,to make this a successful year for the Group. R. Douglas Armstrong, Ph.D., Chief Executive Officer April 2, 2008 Financial Review Overview Results for the year to December 31, 2007 show a successful year in achievingkey milestones, bringing products to market and investing in key resources.Revenues increased to US$5.5 million from US$(0.3) million and we grew theoperating expenses to US$18.9 million from US$7.1 million. Revenues The Group achieved major milestones during the year from Kraft and othercontract milestones from Arysta and Syngenta resulting in payments of US$5.2million (2006: US$2.3 million); the amounts recognized for revenue during theyear was US$5.6 million (2006: US$0.2 million). In the year ended December 31,2007, we also released products to the market and we invoiced and recognizedUS$0.4 million of revenue in new areas. Revenue was offset by an amount relatingto the fair value of warrants issued to a commercial partner and treated as asales incentive of US$(0.5) million (2006: US$(0.5) million). Cost of Sales and Gross Profit Cost of sales for the year was US$2.4 million (2006: nil). This related tosignificant first costs of our "Wastesolver" manure management equipment ofUS$0.7 million, cost of new insecticide products introduced in the US and Indiaof US$0.1 million, research and development costs related to collaborativerevenue projects of US$1.4 million, and an inventory write off from last year ofUS$0.2 million relating to business that we did not pursue with AgCertInternational Plc. Operating Expenses Overall operating expenses increased to US$18.9 million (2006: US$7.1 million)and include non cash compensation expense relating to founder share grants andoptions of US$4.0 million (2006: US$0.4 million). The net cash expenditure inoperating expenses grew to US$14.9 million (2006: US$6.7 million). Research and development expenditure increased to US$5.9 million (2006: US$4.5million) gross and $4.5 million net after allocating $1.4 million (2006: nil) tocost of goods sold, as we increased the number of staff in the department andexpanded the work on patent protection. The cash expenditure grew to US$5.3million (2006: US$4.3 million). General and administrative spending alsoincreased to US$8.1 million from US$1.4 million, reflecting the development of amanagement team and supply chain organization. The cash expenditure grew toUS$6.0 million (2006: US$1.3 million). Business Development expenditure alsogrew to US$6.2 million (2006: US$1.2 million) as the Group recruited businessdevelopment and sales and marketing teams to take the Group's technology tomarket. The cash expenditure grew to US$4.9 million (2006: US$1.1 million) Other Income and Costs Finance income increased to US$0.8 million (2006: nil) earned from the fundsraised from the listing on June 1, 2007. Part of the proceeds was used to pay ofall the outstanding debt to XL TechGroup Inc to which the interest expense ofUS$1.0 million (2006: US$1.6 million) relates. Changes in the fair value of warrants amounted to US$(11) thousand (2006 US$2.2million) and relates to warrants issued to the underwriters of the IPO. Thecharge in 2006 of US$2.2 million is for warrants issued to XLTechGroup, Inc. An arrangement to accelerate payment of the Vanderbilt University licensingagreement resulted in a US$518 thousand loss on extinguishment of the discountedVanderbilt license liability. Payment of the liability was made through acombination of cash (US$0.5 million) and 65,457 shares of TyraTech, Inc. commonstock valued at US$651,000. Results before and after tax for the year were a loss of US$16.5 millioncompared to a loss before and after tax of US$11.2 million in the previousyear. Balance Sheet Non-current assets increased to US$1.3 million (2006: US$0.7 million) as aresult of the fit out of new offices and laboratories to accommodate theexpansion of staff and the upgrade of our information technology infrastructureand new ERP systems. Current assets show a significant increase to US$29.1million (2006: US$2.1 million). Cash and cash equivalents were US$27.5 million(2006: 1.7 million) as a result of the fundraising completed June 1, 2007, whiletrade and other receivables increased to US$0.5 million (2006: US$0.2 million).Inventories grew to US$0.8 million (2006: US$0.2 million) with a build ofmaterials to support the growth in revenues for 2008. Prepayments and short termdeposits grew to US$0.3 million (2006: US$0.0 million) due to the separation ofoperations from XLTechGroup, Inc. Total liabilities decreased to US$6.4 million (2006: US$14.8 million). The Grouphas no debt at the end of 2007, part of the proceeds from the IPO were used topay down the debt of US$6.0 million payable to XLTechGroup, Inc. at the end of2006. The accounts payable and accrued liabilities have grown to US$3.8 million(2006: US$1.9 million) with the increase in the size of the Group's operations.The deferred revenue has reduced by a small amount to US$1.6 million (2006US$2.2 million) due to the timing and size of milestone payments and when theyare recognized as revenue. The deferred revenue outstanding at the end of 2007is expected to be recorded as revenue during the first half of 2008 as costs areincurred on collaborative research and development activities. The warrantliability at the end of 2007 of US$1.0 million, which will not be settled incash, relates to warrants issued to the underwriters of the IPO. The warrantliability at the end of 2006 of US$4.6 million was for warrants issued toXLTechGroup, Inc., which were reclassified to equity upon completion of the IPO. During the year TyraTech LLC a Delaware LLC was merged with and into TyraTechInc, a company formed on April 27, 2007 as a Delaware Corporation. The existingmembers of TyraTech LLC received 16,934,565 common shares in TyraTech Inc. Afurther 5,000,000 shares were issued with the admission of the Group to tradingon the AIM market of the London Stock Exchange for cash net proceeds of US$43.7million. At that time 65,457 common shares were issued to Vanderbilt Universityin conjunction with a cash payment for the assignment of outright ownership tothe Group of certain patents and patent applications. Further warrants for198,002 common shares were granted to the Group's advisers on admission of theshares to the AIM exchange. During the year the Group acquired 129,121 treasuryshares under the terms of a buy back agreement with an employee who had retired. Liquidity and Cash Flow Net loss before and after tax for the year was US$16.5 million (2006: US$11.2million) including non-cash expenses such as amortization of employee stockawards of US$4.0 million (2006: US$0.4 million), depreciation and amortizationof US$0.9 million (2006: US$1.4 million) and warrants issued and changes in thevalue of existing warrants of US$0.5 million (2006: US$2.7 million). Theincreased operational activity including sales and product development hasincreased accounts receivable, prepaid expenses and inventory by US$1.5 million(2006: US$0.3 million), this is offset by an increase in payables and accrualsof US$2.5 million (2006: US$1.0 million). All this together has resulted in anet cash outflow from operating activities in the year of US$10.3 million (2006:US$3.8 million). Cash invested in property, plant and equipment increased to US$0.9 million(2006: US$0.6 million). This was largely for the fit out of new offices andlaboratories to accommodate the expansion of staff and the upgrade of ourinformation technology infrastructure and new ERP systems. As noted above, during the year the Group issued 5,000,000 shares with theadmission of the Group to trading on the AIM market of the London StockExchange, for net proceeds of $43.7 million. Part of the proceeds from the issuewas used to repay the notes payable to XL TechGroup, Inc. Cash and cash equivalents were US$27.5 million (2006: US$1.7 million). Weinvest our cash resources in deposits with banks with the highest creditratings, putting security before absolute levels of return. Currency Effects The Group has no significant overseas currency exposures and does not usefinancial derivatives to manage currency risk. Keith BigsbyChief Financial OfficerApril 2, 2008 TYRATECH, INC.Consolidated Balance SheetsDecember 31, 2007 and 2006 Assets 2007 2006Current assets:Cash and cash equivalents $ 27,521,625 1,656,666Accounts receivable 485,590 194,496Inventory 765,107 219,180Prepaid expenses 283,028 19,996Total current assets 29,055,350 2,090,338Property and equipment, net of accumulated depreciation 1,329,563 705,089Total assets $ 30,384,913 2,795,427 Liabilities and Shareholders' Equity (Deficit)Current liabilities: Accounts payable $ 573,100 132,435 Accrued liabilities 2,830,017 868,067 Accrued license fees - 501,780 Due to affiliate 401,852 340,702 Deferred revenue 1,605,666 2,187,062 Current installments of obligation under capital lease 18,462 16,758 Notes payable to affiliate - 6,019,578 Liability for warrants 997,930 4,655,345 Total current liabilities 6,427,027 14,721,727Capital lease obligation, excluding current installments 36,940 55,402 Total liabilities 6,463,967 14,777,129 Common stock, $0.001 par, Authorized and issued 22 million in 2007 (16 million in 2006) 22,000 16,256 Additional paid-in capital 55,818,617 3,383,194 Retained deficit (31,919,006) (15,381,152) Treasury stock (665) -Shareholders' equity(deficit) 23,920,946 (11,981,702)Total liabilities and shareholders' equity (deficit) $ 30,384,913 2,795,427See accompanying notes to consolidated financial statements. TYRATECH, INC.Consolidated Statements of OperationsDecember 31, 2007 and 2006 2007 2006Revenues:Product sales 404,979 - License and royalty revenue 100,000 150,000 Collaborative revenue 5,525,037 80,834 Gross revenues 6,030,016 230,834 Contra-revenues from sales incentives provided in warrants (482,919) (495,889) Net revenue 5,547,097 (265,055)Costs and expenses related to product sales and collaborative revenue 2,439,558 - Gross profit (loss) 3,107,539 (265,055)Costs and expenses: General and administrative 8,139,193 1,366,789 Business development 6,206,324 1,231,322 Research and technical development 4,517,300 4,505,042 Total costs and expenses 18,862,817 7,103,153 Loss from operations (15,755,278) (7,368,208)Other (income) expense: Interest income (758,004) - Interest expense 1,032,859 1,593,908 Change in fair value of warrant liabilities (10,971) 2,228,646 Loss on extinguishment of liability 518,692 - Total other expense 782,576 3,822,554 Loss before income taxes (16,537,854) (11,190,762)Income taxes - - Net loss $ (16,537,854) (11,190,762)Net loss per common share: Basic and diluted $ (0.84) (0.69)Weighted average number of common shares: Basic and diluted 19,756,955 16,195,975 See accompanying notes to consolidated financial statements. TYRATECH, INC.Consolidated Statements of Shareholders' Equity (Deficit)Years ended December 31, 2007 and 2006 Additional Total Common paid-in Retimed Treasury stockholders' stock capital earnings stock equityBalances as of December 31, 2005 $ 15,159 2,987,077 (4,190,390) - (1,188,154) Stock based compensation 1,097 396,117 - - 397,214 Net loss - - (11,190,762) - (11,190,762)Balances as of December 31, 2006 16,256 3,383,194 (15,381,152) - (11,981,702) Issuance of shares to settle license liability 65 650,935 - - 651,000 Issuance of shares, net of offering costs of $7,266,519 of which $1,390,556 represent non-cash warrants issued to underwriters 5,000 42,292,805 - - 42,297,805 Reclassification of warrants from liability to equity - 5,037,000 - - 5,037,000 Issuance of warrants - 482,919 - - 482,919 Purchase of treasury stock - - - (665) (665) Stock based compensation 679 3,971,764 - - 3,972,443 Net loss - - (16,537,854) - (16,537,854)Balances as of December 31, 2007 $ 22,000 55,818,617 (31,919,006) (665) 23,920,946 See accompanying notes to consolidated financial statements. TYRATECH, INCConsolidated Statements of Cash FlowsDecember 31, 2007 and 2006 2007 2006Cash flows from operating activities:Net loss $ (16,537,854) (11,190,762)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 870,931 1,356,026 Exclusivity fees - (70,834) Write-off of inventory 219,180 - License maintenance fee 100,528 116,363 Change in fair value of warrants 471,948 2,724,535 Amortization of stock awards 3,972,443 397,214 Loss on extinguishment of liability 518,692 - Changes in operating assets and liabilities: Accounts receivable (448,990) (36,600) Inventory (765,107) (219,180) Prepaid expenses (263,032) (19,996)Accounts payable and accrued liabilities 2,402,615 810,126Accrued license fee (470,000) -Deferred revenue (423,500) 2,100,000Due to affiliate 61,150 219,406Net cash used for operating activities (10,290,996) (3,813,702)Cash flows used for investing activities: Purchases of property and equipment (851,802) (618,301)Net cash (used) for investing activities (851,802) (618,301)Cash flows from financing activities: Net (payments) borrowings on notes payable to affiliate (6,663,181) 6,062,002 Payments made under capital lease (16,758) (3,942) Net proceeds from sale of common stock 43,688,361 - Treasury stock purchase from employee (665) -Net cash provided by financing activities 37,007,757 6,058,060Net increase in cash 25,864,959 1,626,057Cash, beginning of year 1,656,666 30,609Cash, end of year $ 27,521,625 1,656,666Supplemental disclosures: Cash paid for interest $ 1,032,859 266,860 Cash paid for income taxes $ - - TYRATECH, INC.Consolidated Statements of Cash Flows (continued)December 31, 2007 and 2006 2007 2006Noncash investing and financing activities:The Company incurred a capital lease obligation that wascapitalized to property and equipment $ - 76,102The Company issued warrants to acquire its commonshares in connection with financing obtained, whichwas recorded as discount to debt and anoncash warrant liability - 1,930,810The Company issued shares in connection with thesettlement of a license liability 651,000 -The Company issued warrants in connection with aresearch and development agreement 482,919 -The Company recorded a receivable and defenserevenue related transaction with a related party - 157,896The Company recorded and subsequently wrote-off arevenue related transaction with an affiliate 157,896 -The Company reclassified warrants issued to a vendorand an affiliate to equity 5,037,000 -The Company issued warrants in satisfaction ofcosts incurred to advisors 1,390,556 - See accompanying notes to consolidated financial statements. Noted to Consolidated Financial Statements (1) Summary of Significant Accounting Policies and Practices (a) Description of Business TyraTech, Inc., a corporation (the Company) is engaged in the development,manufacture, marketing and sale of proprietary insecticide and parasiticideproducts, through the utilization of a proprietary development platform thatenables rapid characterization of potent blends of plant oil derived pesticides.TyraTech is focused on developing safer natural products with plant essentialoils to be used in a wide variety of pesticidal and parasitic applications.These new synergistic formulations target specific receptors unique toinvertebrates. The Company is subject to risks common to companies in the biotechnologyindustry including, but not limited to, development by its competitors of newtechnological innovations, dependence on key personnel, and its ability toprotect proprietary technology. XL TechGroup, Inc. (XLTG), an entrepreneurial high technology company listed onthe London Exchange's Alternative Investment Market under the trading symbolXLT, is a major shareholder of the Company. (b) Basis of Presentation The consolidated financial statements of the Company in U.S. Dollars ($) havebeen prepared in accordance with United States generally accepted accountingpolicies (US GAAP). The consolidated financial statements include the accountsof TyraTech, Inc. and subsidiaries TyraTech Holdings India, LLC, TyraTechSustainable Solutions, LLC, and TyraTech India Pvt. Ltd. All significantintercompany balances and transactions have been eliminated. On May 23, 2007, the Company was recapitalized from a limited liability companyto a corporation in preparation of an initial public offering (IPO) on theLondon Stock Exchange's Alternative Investment Market (AIM). Member units of thelimited liability company were exchanged for common shares of the corporation onthe basis of 1 unit to 0.8606 common share. On June 1, 2007, the Companycompleted an IPO of its common stock under the symbol TYR and raisedapproximately $43.7 million, net of cash offering costs of $5.9 million.Employees, consultants, and investors of the Company own the balance of thecommon stock. The consolidated financial statements of equity (deficit) have been presented asif the recapitalization occurred on December 31, 2005. In the opinion of the Company directors, the financial information for theseperiods presents fairly the financial position, results of operations and cashflows for the periods in conformity with U.S. GAAP. (c) Cash and Cash Equivalents The Company considered all highly liquid securities with maturities of threemonths or less when acquired to be cash equivalents. (d) Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bearinterest. Amounts collected on trade accounts receivable are included in netcash provided by operating activities in the consolidated statements of cashflows. The Company does not have any off-balance-sheet credit exposure relatedto its customers. (e) Inventory Inventory is stated at the lower of cost or market. Cost is determined using thefirst-in, first-out method (FIFO). (f) Property and Equipment Purchased property and equipment is recorded at cost. Depreciation andamortization are provided on the straight-line method over the estimated usefullives of the related assets or the remaining terms of the leases, whichever isshorter, as follows: Leasehold improvements 3 yearsFurniture, fixtures and equipment 4 - 7 yearsComputer equipment and software 5 years The Company accounts for long-lived assets in accordance with the provisions ofStatement of Financial Accounting Standards (SFAS) No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, an impairment charge is recognized bythe amount by which the carrying amount of the asset exceeds the fair value ofthe asset. Assets to be disposed of are reported at the lower of the carryingamount or fair value, less costs to sell. (g) Discounts on Debt Discounts on debt are amortized to interest expense using the effective interestmethod over the term of the respective debt. (h) Revenue Recognition The Company's business strategy includes entering into collaborative license anddevelopment agreements with agricultural and food companies for the developmentand commercialization of the Company's product candidates. The terms of theagreements typically include nonrefundable license fees, funding of research anddevelopment, payments based upon achievement of development milestones androyalties on product sales. The Company follows the provisions of the Securitiesand Exchange Commission's Staff Accounting Bulletin (SAB) No. 104 (SAB No. 104),Revenue Recognition, Emerging Issues Task Force (EITF) Issue No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple Deliverables, EITF IssueNo. 99-19 (EITF 99-19), Reporting Revenue Gross as a Principal Versus Net as anAgent, and EITF Issue No. 01-9 (EITF 01-9), Accounting for Consideration Givenby a Vendor to a Customer (Including a Reseller of the Vendor's Products). Product Sales Revenue is recognized for product sales when persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, therisks and rewards of ownership have been transferred to the customer, the amountof revenue can be measured reliably, and collection of the related receivable isreasonably assured. If product sales are subject to customer acceptance,revenues are not recognized until customer acceptance occurs. License Fees and Multiple Element Arrangements Non-refundable license fees are recognized as revenue when the Company has acontractual right to receive such payment, the contract price is fixed ordeterminable, the collection of the resulting receivable is reasonably assuredand the Company has no further performance obligations under the licenseagreement. Multiple element arrangements, such as license and developmentarrangements are analyzed to determine whether the deliverables, which ofteninclude a license and performance obligations such as research and steeringcommittee services, can be separated or whether they must be accounted for as asingle unit of accounting in accordance with EITF 00-21. The Company recognizesup-front license payments as revenue upon delivery of the license only if thelicense has stand-alone value and the fair value of the undelivered performanceobligations, typically including research and/or steering committee services,can be determined. If the fair value of the undelivered performance obligationscan be determined, such obligations would then be accounted for separately asperformed. If the license is considered to either (i) not have stand-alone valueor (ii) have stand-alone value but the fair value of any of the undeliveredperformance obligations cannot be determined, the arrangement would then beaccounted for as a single unit of accounting and the license payments andpayments for performance obligations are recognized as revenue over theestimated period of when the performance obligations are performed. Whenever the Company determines that an arrangement should be accounted for as asingle unit of accounting, it must determine the period over which theperformance obligations will be performed and revenue will be recognized.Revenue will be recognized using a relative method. The Company recognizesrevenue using the relative performance method provided that the Company canreasonably estimate the level of effort required to complete its performanceobligations under an arrangement and such performance obligations are providedon a best-efforts basis. Revenue recognized under the relative performancemethod would be determined by multiplying the total payments under the contractby the ratio of level of effort incurred to date to estimated total level ofeffort required to complete the Company's performance obligations under thearrangement. Revenue is limited to the lesser of the cumulative amount ofpayments received or the cumulative amount of revenue earned, as determinedusing the relative performance method, as of each reporting period. If the Company cannot reasonably estimate the estimated level of effort requiredto complete its performance obligation, then revenue is deferred until theCompany can reasonably estimate its level of effort or the performanceobligation ceases or becomes inconsequential. Significant management judgment is required in determining the level of effortrequired under an arrangement and the period over which the Company is expectedto complete its performance obligations under an arrangement. In addition, ifthe Company is involved in a steering committee as part of a multiple elementarrangement that is accounted for as a single unit of accounting, the Companyassesses whether its involvement constitutes a performance obligation or a rightto participate. Steering committee services that are not inconsequential orperfunctory and that are determined to be performance obligations are combinedwith other research services or performance obligations required under anarrangement, if any, in determining the level of effort required in anarrangement and the period over which the Company expects to complete itsaggregate performance obligations. Royalty Revenue Royalty revenue is recognized upon the sale of the related products, providedthat the royalty amounts are fixed or determinable, collection of the relatedreceivable is reasonably assured and the Company has no remaining performanceobligations under the arrangement. If royalties are received when the Companyhas remaining performance obligations, the royalty payments would be attributedto the services being provided under the arrangement and therefore would berecognized as such performance obligations are performed under either therelative performance or straight line methods, as applicable, and in accordancewith these policies as described above. Deferred Revenue Amounts received prior to satisfying the above revenue recognition criteria arerecorded as deferred revenue in the accompanying consolidated balance sheets.Amounts not expected to be recognized during the year ending December 31, 2008are classified as long-term deferred revenue. As of December 31, 2007, theCompany has short-term deferred revenue of $1,605,666 (2006: $2,187,062) relatedto its collaborations. Summary The Company has one customer in the pesticides and insecticides segment in 2007that represents 91% of total revenue (2006: two customers represent 32%). (i) Equity Based Compensation Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of SFAS No. 123, Accounting forStock-Based Compensation (SFAS 123). SFAS 123R requires all share-basedpayments, including grants of employee stock options, to be recognized in thestatement of operations based on their fair values. All unit equity based compensation issued by the Company were issued after July1, 2005 and therefore all were accounted for in accordance with SFAS 123R. (j) Research and Technical Development Research and technical development costs are expensed as incurred. Research andtechnical development costs for the years ended December 31, 2007 amounts to$4,517,300 (2006: $4,505,042) after charging $1,413,518 (2006: nil) to cost ofsales. (k) Income Taxes Prior to its recapitalization as discussed below, under provisions of theInternal Revenue Code and applicable state laws, the Company was not directlysubject to income taxes; the result of its operations was includable in the taxreturns of its members. Therefore, no provision for income taxes was included inthe accompanying financial statements prior to May 23, 2007. After being recapitalized from a limited liability company to a corporation onMay 23, 2007, income taxes are accounted for under the asset and liabilitymethod. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis and operating losses and tax credit carry forwards. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expected tobe recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. (l) Foreign Currency Translation The assets and liabilities of consolidated foreign entities are translated intoU.S. dollars at the exchange rate as of the balance sheet date and revenues andexpenses are translated at the average exchange rate during the period. Anyresulting translation adjustment is recorded as a separate component ofshareholder's equity. (m) Use of Estimates The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying disclosures. Although these estimates arebased on management's best knowledge of current events and actions the Companymay undertake in the future, actual results ultimately may differ from theestimates. (n) Segment Information The Company operates in two primary business segments which are (1) pesticidesand insecticides and (2) sustainable solutions (o) Recently Issued Accounting Standards In February 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of FASB Statement No. 115 (Statement 159). Statement 159gives the Company the irrevocable option to carry most financial assets andliabilities at fair value that are not currently required to be measured at fairvalue. If the fair value option is elected, changes in fair value would berecorded in earnings at each subsequent reporting date. SFAS 159 is effectivefor the Company's 2008 fiscal year. The Company is currently evaluating theimpact the adoption of this statement could have on its financial condition,results of operations and cash flows. In September 2006, the FASB issued FASB Statement No. 157, Fair ValueMeasurement (Statement 157). Statement 157 defines fair value, establishes aframework for the measurement of fair value, and enhances disclosures about fairvalue measurements. The Statement does not require any new fair value measures.The Statement is effective for fair value measures already required or permittedby other standards for fiscal years beginning after November 15, 2007. TheCompany is required to adopt Statement 157 beginning on January 1, 2008.Statement 157 is required to be applied prospectively, except for certainfinancial instruments. Any transition adjustment will be recognized as anadjustment to opening retained earnings in the year of adoption. In November2007, the FASB proposed a one-year deferral of Statement 157's fair-valuemeasurement requirements for non-financial assets and liabilities that are notrequired or permitted to be measured at fair value on a recurring basis. TheCompany is currently evaluating the impact of adopting Statement 157 on itsresults of operations and financial position. The FASB issued FASB Statement No. 160, Non-controlling Interests inConsolidated Financial Statements (Statement 160) in December 2007. Statement160 will require non-controlling interests (previously referred to as minorityinterests) to be treated as a separate component of equity, not as a liabilityor other item outside of permanent equity. The Statement applies to theaccounting for non-controlling interests and transactions with non-controllinginterest holders in consolidated financial statements. Statement 160 iseffective for periods beginning on or after December 15, 2008. Earlierapplication is prohibited. Statement 160 will be applied prospectively to allnon-controlling interests, including any that arose before the effective dateexcept that comparative period information must be recast to classifynon-controlling interests in equity, attribute net income and othercomprehensive income to non-controlling interests, and provide other disclosuresrequired by Statement 160. (2) Liquidity and Capital Resources The Company has funded operating and investing cash requirements principallythrough borrowings from members prior to the IPO. As of December 31, 2007, theCompany had $27,521,625 in cash and no indebtedness. The Company has had significant negative cash flows from operating activitiessince inception. The Company believes that the proceeds from the sale ofsecurities during June 2007 and cash proceeds from operating activities will besufficient to meet the working capital and capital expenditures needs of theCompany through 2008. (3) Accounts Receivable Accounts receivable as of December 31, 2007 and 2006 consist of: 2007 2006Trade receivables $ 393,340 193,203Interest receivables 92,250 -Other receivables - 1,293 $ 485,590 194,496 (4) Inventories Inventories as of December 31, 2007 and 2006 consist of: 2007 2006Raw materials $ 380,405 219,180Work in progress 298,351 -Finished goods 86,351 - $ 765,107 219,180 (5) Property and Equipment Property and equipment, net as of December 31, 2007 and 2006 consist of: 2007 2006Leasehold improvements $ 746,683 394,986Furniture, fixtures and equipment 618,982 338,053Computer equipment and software 261,563 42,387 1,627,228 775,426Less accumulated depreciation (297,665) (70,337) $ 1,329,563 705,089 (6) Accrued liabilities Accrued liabilities as of December 31, 2007 and 2006 consist of: 2007 2006Accrued compensation $ 1,395,842 151,146Professional fees 971,098 336,845Other 463,077 380,076 $ 2,830,017 868,067 (7) Leases During the year ended December 31, 2006, the Company entered into a capitallease for certain equipment that expires in September 2010. At December 31,2007, the gross amount and related gross amortization of the equipment recordedunder capital lease amounted to $55,402 (2006: $76,102) and $16,758 (2006:3,171), respectively. Amortization of assets under the capital lease is includedwith depreciation expense. The Company has non-cancelable operating leases for office space and equipmentthat expires during April 2009. Rental expense for operating leases during theyears ended December, 2007 was $10,020 (2006: $41,320). Future minimum lease payments under non-cancelable operating leases (withinitial or remaining lease terms in excess of one year) and future minimumcapital lease payments as of December 31, 2007 are: Capital Operating leases leasesYear ending December 31: 2008 $ 23,040 58,746 2009 23,040 4,909 2010 17,279 - Total minimum lease payments 63,359 $ 63,655 Less estimated executory costs - Net minimum lease payments 63,359 Less amount representing interest (at 9.72%) 7,957 Present value of net minimum capital lease payments 55,402 Less current installments of obligations under 18,462 capital leases Obligations under capital leases excluding current installments $ 36,940 (8) Related Party Transactions (a) Notes Payable to XLTG Notes payable as of December 31, 2007 and 2006 consist of: 2007 2006$2,000,000 secured note, interest payable at Libor plus 4.0%, (5.24% at December 31, 2006) $ - 2,000,000$10,000,000 secured note, interest payable at Prime plus 3.0%, (8.50% at December 31, 2006) - 4,663,181 - 6,663,181Discount on debt - (643,603) $ - 6,019,578 On October 31, 2005, the Company entered into a $2,000,000 secured noteagreement with XLTG which matures on the earlier of the termination date,qualified public offering, sale of all assets of the Company or December 31,2009. The note is secured with Company's assets and personal property. The noterequires the Company to pay XLTG on a monthly basis the interest on the unpaidand outstanding principal amount at a rate of LIBOR plus 4%. Unpaid interest isaccrued and treated as a draw. The Company has the option to prepay the note atany time in whole or in part with accrued interest without penalty. The Companyrepaid the note in full with the proceeds of the IPO in June 2007. On May 1, 2006, the Company entered into a $10,000,000 secured note agreementwith XLTG which matures on the earlier of the termination date, qualified publicoffering, sale of all assets of the Company or December 31, 2009. The note issecured with Company's assets and personal property. The note requires theCompany to pay the XLTG on a monthly basis the interest on the unpaid andoutstanding principal amount at a rate of Prime plus 3%. Unpaid interest isaccrued and treated as a draw. The Company has the option to prepay the note atany time in whole or in part with accrued interest without penalty. The Companyrepaid the note in full with the proceeds of the IPO in June 2007. (b) Support Services from XLTG During the years ended December 31, 2007 and 2006, the Company received supportunder a services agreement with XLTG. These services include support in the formof personal labor, management, and various other administrative functionsincluding payroll processing, accounts payable processing, and other recordkeeping tasks. Services were billed to the Company based on actual costs ofthese support services, including overhead for various support functionsprovided. Additionally, the services agreement included a charge for usage ofoffice facilities in Melbourne, Florida. These services and terms upon whichthey were provided were outlined in a formal services agreement between theCompany and XLTG. Fees charged for services for the year ended December 31, 2007 amount to$1,339,752 (2006: $2,448,546). Such costs are included in general andadministrative expenses. As of December 31, 2007 $401,852 (2006: $340,702) was payable to the XLTG underthis agreement. The obligation is non-interest bearing. (c) Research and Development Services from Vanderbilt University During the year ended December 31, 2007, the Company paid $564,000 (2006:$395,010) to Vanderbilt University (Vanderbilt), a shareholder, for thededicated use of a laboratory and staff which houses the Company's proprietarydevelopment platform. Such amounts are included in research and developmentcosts in the consolidated statements of operations As of December 31, 2007 $60,000 (2006: $nil) was payable to Vanderbilt underthis arrangement. Such amounts are included in accrued liabilities. (d) License Fee On June 4, 2004, the Company entered into an agreement with Vanderbilt, a memberof the Company, to acquire an exclusive license to undertake the development ofbusiness, technical, regulatory, and market strategies in order to make, havemade, use, sell, offer to sell, license and improve and to grant sublicenses ofLicensed Products. In consideration for this license, the Company agreed to paya license maintenance fee in the amount of $50,000 per year effective on thefirst anniversary of the agreement date and increasing by $50,000 per year ineach successive year for a period of ten years. On June 5, 2005, the Company amended and restated its Operating Agreement toratify the issuance of the 33% interest in the Company to Vanderbilt for thecontributed licensed intellectual property (IP) noted above into the Company.The IP was valued at $1,404,051 and has been recorded as a $1.0 million capitalcontribution and $404,051 of license maintenance fees payable, representing thepresent value of the remaining future payments due under the license maintenancefee agreement. The present value of the future payments due under the licensemaintenance fee agreement has been included in in-process research anddevelopment expenses in the statement of operations and was determined using arisk adjusted discount rate of 55%, which corresponded with the stage ofdevelopment of the Company at that time. The present value will be re-stated at each period end, as the discount unwindsand further payments are made in accordance with the agreement. As of December31, 2006, the license maintenance fee liability on the balance sheet was$501,780. On April 23, 2007, an arrangement to accelerate payment of the Vanderbiltlicensing agreement was executed between the Company and Vanderbilt for cash of$470,000 and 65,457 shares of the Company's common stock valued at $651,000.Related to this settlement of the license agreement, the Company recognized$518,692 loss on the early extinguishment of the liability during the year endedDecember 31, 2007. (e) Product Sale to Affiliate of XLTG During the year ended December 31, 2006, the Company deferred revenue of$157,896 for products shipped to an affiliate of the XLTG. The products shippedto the affiliate of XLTG were products originally purchased from an unrelatedthird party under an exclusive purchasing agreement. As of December 31, 2006,$157,896 was due from the affiliate of XLTG and was included in receivables anddeferred revenues. During the year ended December 31, 2007, the Company and theaffiliate of XLTG settled a dispute relating to the outstanding amounts atDecember 31, 2006. Under the terms of the settlement, the Company forgave thereceivable as the products sold to the affiliate did not perform as expected. (9) Warrants (a) XLTG Warrants In connection with the $10.0 million secured note payable to XLTG, the Companyentered into a purchase option agreement by which XLTG was granted an option topurchase equity in the Company. Under the purchase option, the Company grantedXLTG the right to purchase a variable number of shares based upon the amount ofthe note payable drawn down by the Company at the qualified public offering andthe qualified public offering initial share price. The warrants are for a termof 5 years. At the date of grant the warrants were recorded at fair value as awarrant liability and as a discount in obtaining financing. The fair value ofthe warrant at the grant was $1.9 million. The warrant is re-measured at fairvalue at each reporting date with subsequent changes in fair value recorded inthe statement of operations. Upon the qualified public offering of the shares inJune 1, 2007, the warrant qualified for equity classification within the balancesheet and as such the warrant liability was reclassified to equity at fair valueon June 1, 2007. The warrant is not subsequently re-measured to fair value afterthis date as it qualifies for equity classification. The fair value of thewarrant as of June 1, 2007 upon the qualified public offering was $4.5 million(December 31, 2006: $4.1 million). The fair value of this purchase option was estimated by using the Black-Scholesoption-pricing model with the following assumptions: no dividends, risk-freerate of 4.8% - 4.9%, the remaining contractual life of the purchase option and avolatility of 100%. (b) Collaborative Warrants In connection with research and development collaborations, the Company grantedwarrants to purchase a variable number of common shares of Company's commonshares equal to $2.0 million divided by the per share price to the public in aninitial public offering or the price paid in a private placement for each commonshare of the Company. The $2.0 million of warrants were divided into two parts:$1.0 million of the warrants are exercisable upon the closing of a qualifiedequity investment offering and the remaining $1.0 million of warrants areexercisable upon successful completion of prescribed co-development activitiesin accordance with the technology sublicensing agreement. The warrants have aterm of three years from the time of the qualified equity offering. With the IPOin June 2007, the warrants have a term until June 1, 2010. At the date of grant,the first $1.0 million of warrants were recorded at fair value to a warrantliability and included as a reduction to revenue as a sales incentive to theunrelated third party. The fair value of the first $1.0 million of warrants asof December 31, 2006 was $0.5 million. The remaining $1.0 million of warrantsare recorded at fair value upon successful completion of the first milestonerelated to the technology and sublicensing agreement as a reduction to therevenue as a sales incentive. The first 1.0 million of warrants were initiallyre-measured at fair value at each reporting date with subsequent changes in fairvalue recorded in the statement of operations. Upon the qualified publicoffering of the shares in June 2007, the first $1 million of warrants qualifiedfor equity classification within the balance sheet and as such the warrantliability was reclassified to equity at fair value. With equity classificationof the warrants, the warrant are not subsequently re-measured to fair valueafter this date. The fair value of the first $1.0 of warrants upon the qualifiedpublic offering in June 2007 was $0.5 million. The fair value of the second $1.0 million of warrants upon the achievement of the first milestone in December2007 was $0.5 million with the warrant being equity classified. The $2.0 millionof warrants are for 202,941 common shares of the Company at an exercise pricesof $9.80 to $9.89 per share. The fair value of the warrants was determined by using the Black-Scholes option-pricing model with the following assumptions: no dividends, risk-free rate of4.6% to 4.8%, 3 year life of the warrants from the time of a qualified equityinvestment offering, volatility of 68% to 80% and a discount factor related tothe probability of a qualified offering not occurring of 0%. (c) IPO Underwriter Warrants In connection with the IPO, the Company granted warrants to underwriters of theIPO to purchase 198,002 common shares of the Company at £5 per commonshare. The warrants are for a term of 5 years. At the date of grant, thewarrants were recorded at fair value to a warrant liability with the expenseoffset against the IPO proceeds in equity. The warrant is re-measured at fairvalue at each reporting date with subsequent changes in fair value recorded inthe statement of operations. The fair value of the warrant as of December 31,2007 and the date of the IPO on June 1, 2007 were $1.0 million and $1.4 million,respectively. The fair value of these warrants was determined by using the Black-Scholesoption-pricing model with the following assumptions: no dividends, risk-freerate of 4.4%, the remaining contractual life of the warrants, and a volatilityof 68% - 100%. (10) Stock Based Compensation (a) Unit Grants From inception until recapitalized from a limited liability company to acorporation on May 23, 2007, the Company has granted a total of 2.0 million netmember units to various employees through unit grant agreements. The unit grantsgenerally vest over four years of continual service and has initial cost to theunit holder of $0.01. The fair value of these grants was determined by theCompany at the grant date and was equal to the fair market value of the units atthe date of grant. The fair value is amortized to compensation expense on astraight line basis over the vesting period. Employees As of December 31, 2007 the total unrecognized compensation cost for these unitgrants was $10.0 million (2006: $6.7 million), which is being amortized over theremaining weighted average vesting period of 2.9 years (2006: 3.7 years). Thecompensation recognized in operating expenses for unit grants for the year endedDecember 31, 2007 was $3.0 million (2006: $0.2 million). Since inception toDecember 31, 2007, 310,964 units granted have vested. The initial cost of theunit grants to the employees was forgiven by the Company and is treated asadditional compensation to the employee. The weighted average grant date fairvalue for all unit grants during the year ended December 31, 2007 was $6.2million (2006: $6.5 million). Nonemployees In 2007, the Company granted 60,000 units (2006: 70,000) units to severalnonemployees through unit grant agreements. The unit grants vest based onachieving performance terms of the contract and have an initial cost to the unitholder of $0.01 per unit. The fair value of these grants are recognized as theperformance terms of the contract have been met. The compensation recognized forunit grants for the year ended December 31, 2007 totaled $0.5 million (2006:$0.2 million) and is included in operating expenses. During the year ended December 31, 2007, 35,000 units (2006: 25,000 units)vested under the terms of the unit grant agreements. The initial cost of theunits to the holder was forgiven by the Company and treated as additionalcompensation to the non-employee. Summary Unit Grant Information The Company determined the estimated unit price of the Company at themeasurement date by using a combination of an independent valuation of theCompany's units and internal analysis of milestones of the Company throughoutthe year. Effective with the recapitalization from a limited liability company to acorporation on May 23, 2007 and the IPO the units granted to employees andnonemployees were converted to shares based up the IPO conversion of 1 unit to0.8606 shares. A summary of unit grant activity under the unit grant plan is summarized asfollows: Number of shares*Outstanding at December 31, 2005 -Forfeited or expired 1,213,446Repurchased (25,818)Outstanding at December 31, 2006 1,187,628Granted 626,517Forfeited or expired (55,939)Outstanding at December 31, 2007 1,758,206Vested at December 31, 2007 326,041* - Units granted under the plan converted to shares. The total shares granted under unit grant agreements included in the statementof shareholders' equity include both vested and non-vested shares. (b) 2007 Equity Compensation Plan On May 23, 2007, the board of directors approved the TyraTech, Inc. 2007 EquityCompensation Plan which authorizes up to a maximum of 10% of the sharesoutstanding after the IPO (2,200,002 shares based upon the IPO) be madeavailable for granting of awards to all employees and non-employee directors.These share awards can be in the form of options to purchase capital stock,stock appreciation rights (SARS), restricted shares, and other option stockbased awards the Board of Directors Remuneration Committee shall determine. TheRemuneration Committee of our board of directors, which is comprised of allindependent directors, determines the number of shares, the term, the frequencyand date, the type, the exercise periods, any performance criteria pursuant towhich awards may be granted and the restrictions and other terms of each grantof restricted shares in accordance with terms of our Plan. Stock Appreciation Rights During the period from May 23, 2007 to December 31, 2007, the Company granted737,000 stock appreciation rights (SARS) to employees and 40,000 SARS toconsultants of the Company. SARs can be granted with an exercise price lessthan, equal to or greater than the stock's fair market value at the date ofgrant and require the Company to issue stock to the employee upon exercise ofthe SAR. The SARs have ten year terms and vest and become fully exercisableafter four years from the date of grant. The fair value of each SAR was estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumption in thefollowing table. The Company estimated the expected term of the SARs using anapproach that approximated the "simplified approach", as outlined in StaffAccounting Bulletin (SAB) No. 107, Share-Based Payments. Using this approach,the Company assigned an expected term of 7 years for grants with four-yeargraded vesting. The expected stock price volatility was determined by examiningthe historical volatilities for industry peers and using the Company's commonstock. Industry peers consist of several public companies in the biotechnologyindustry similar in size, stage of life cycle and financial leverage. TheCompany will continue to analyze the historical stock price volatility andexpected term assumption as more historical data for the Company's common stockbecomes available. The risk-free interest rate assumption is based on the U.S.Treasury instruments at grant date whose term was consistent with the expectedterm of the Company's SARs. The expected dividend assumption is based on theCompany's history and expectation of dividend payouts. Valuation assumptions: Expected dividend yield 0% Expected volatility 86% Expected term (years) 7 Risk-free interest rate 4.6% - 4.8% SAR activity during the period indicated as follows: Weighted Weighted average average remaining Aggregate Number of exercise contractual intrinsic shares price term valueBalance at May 23, 2007 - $ -Granted 777,000 9.74Exercised - -Expired - -Balance at December 31, 777,000 $ 9.74 9.70 $ 141,7602007Exercisable at December 31, - $ - - $ -2007 The weighted average grant date fair value of options granted during from May23, 2007 to December 31, 2007 was $6.0 million. No SARs vested or were exercisedfrom May 23, 2007 to December 31, 2007. A summary of the status of the Company's non-vested SARs as of December 31,2007, and changes during the period from May 23, 2007 to December 31, 2007, ispresented below: Weighted average grant-date Nonvested shares Shares fair valueBalance at May 23, 2007 - $ - Granted 777,000 8.48 Vested - - Forfeited - -Balance at December 31, 2007 777,000 $ 8.48 As of December 31, 2007, there was $5.6 million of total unrecognizedcompensation cost related to non-vested SAR arrangements granted under the plan.That cost is expected to be recognized over a weighted average period of 3.7years. The total fair value of shares vested during the period from May 23, 2007to December 31, 2007 was $0. The compensation recognized in operating expensesfor SARS for the year ended December 31, 2007 was $0.5 million (2006: $0million). The Company plans to use authorized and un-issued shares to satisfy SARexercises. Restricted Stock Grant During the period from May 23, 2007 to December 31, 2007, the Company granted50,000 shares of restricted stock to one employee of the Company equal to thestock's fair market value at the date of grant and requires the Company to issuecommon stock to the employee upon exercise of the restricted stock grant. Therestricted stock grant has ten year term and 50% vest and become fullyexercisable after one year and the balance after two years from the date ofgrant. The fair value of these grants was determined by the Company at the grant dateand was equal to the fair market value of the common stock at the date of grant. Restricted stock grant activity during the period indicated as follows: Aggregate Number of intrinsic shares valueBalance at May 23, 2007 -Granted 50,000Exercised -Expired -Balance at December 31, 2007 50,000 $ 491,500Exercisable at December 31, 2007 - $ - The grant date fair value of restricted stock granted during from May 23, 2007to December 31, 2007 was $0.5 million. The restricted stock grant did not vestnor were there any exercises from May 23, 2007 to December 31, 2007. A summary of the status of the Company's non-vested restricted stock grant as ofDecember 31, 2007, and changes during period from May 23, 2007 to December 31,2007, is presented below: Weighted average grant-date Nonvested shares Shares fair valueBalance at May 23, 2007 - $ - Granted 50,000 9.83 Vested - - Forfeited - -Balance at December 31, 2007 50,000 $ 9.83 At December 31, 2007, there was $0.4 million of total unrecognized compensationcost related to non-vested restricted stock granted under the plan. That cost isexpected to be recognized over a weighted average period of 1.74 years. Thetotal fair value of shares vesting during the period from May 23, 2007 toDecember 31, 2007 was $0. The compensation recognized in operating expenses forrestricted stock granted for the year ended December 31, 2007 was $0.06 million(2006: $0 million). The Company plans to use authorized and unissued shares as well as any treasuryshares to satisfy restricted stock grant exercises. (11) Research and Development Collaborations The Company has the following significant research and development collaborativeagreement outstanding at December 31, 2007 and 2006: Kraft Agreement Summary On December 5, 2006, the Company entered into a technology sublicense agreementwith Kraft. Pursuant to this agreement Kraft is granted limited exclusivesublicense to use the Company's know-how and related license and patentsrelating to the production of "functional foods" which treat and preventparasites in humans through additives to foods, beverages and dietarysupplements. Kraft is required to use commercially reasonable efforts pursue theachievement of milestones set out in the agreement. The project for thedevelopment of licensed products is divided into four development stages. Withineach stage certain designated milestones are to be accomplished in accordancewith the development and implementation priorities agreed by the parties. TheCompany has the obligation to fund product development with a portion of theproduct development funded through an upfront payment and milestone payments.The Company and Kraft agreed to negotiate a supply agreement in "good faith"after commercial launch. In addition, Kraft has agreed to pay the Companyroyalties for any product sales related to the "functional foods" with theCompany's technology. Accounting Summary The Company considers its arrangement with Kraft to be a revenue arrangementwith multiple deliverables. The Company's deliverables under this collaborationinclude an exclusive license to its parasitic technologies, research anddevelopment services, and participation on a steering committee. The Companyapplied the provisions of EITF 00-21 to determine whether the performanceobligations under this collaboration could be accounted for separately or shouldbe accounted for as a single unit of accounting. The Company determined that thedeliverables, specifically, the license, research and development services andsteering committee participation, represented a single unit of accountingbecause the Company believes that the license, although delivered at theinception of the arrangement, does not have stand-alone value to Kraft withoutthe Company's research and development services and steering committeeparticipation and because objective and reliable evidence of the fair value ofthe Company's research and development services and steering committeeparticipation could not be determined. (12) Income Taxes Beginning on May 31, 2007, the Company is subject to both federal and stateincome taxes. For period prior to May 31, 2007, the Company operated as a passthrough entity for tax purposes and tax liability was the responsibility of itsmembers. The difference between the "expected" tax benefit (computed by applying thefederal corporate income tax rate of 34% to the loss before income taxes) andthe actual tax benefit is primarily due to the effect of the valuation allowancedescribed below. Deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and amounts utilized for income tax purposes. The tax effects oftemporary differences that give rise to significant portions of deferred taxesat December 31, 2007 are presented below: 2007Deferred tax assets: Accrued compensation $ 184,024 Deferred revenue 10,229 Net operating loss and charitable contribution 3,466,894 carryforward Basis in intangibles 4,810,014 Property and equipment 34,409 Warrants 1,535,883 Stock compensation 762,385 Total gross deferred tax assets 10,769,428 Less valuation allowance (10,771,784) Net deferred tax assets 32,044 Deferred tax liabilities: Prepaid expenses (32,044) Net deferred tax liability $ - At December 31, 2007, the Company had federal and state net operating loss carryforwards of $3.5 million. The federal net operating loss carry forwards begin toexpire in 2027 and state net operating loss carry forwards begin to expire in2027, if not utilized. Management establishes a valuation allowance for those deductible temporarydifferences when it is more likely than not that the benefit of such deferredtax assets will not be recognized. The ultimate realization of deferred taxassets is dependent upon the Company's ability to generate taxable income duringthe periods in which the temporary differences become deductible. Managementconsiders the historical level of taxable income, projections for future taxableincome, and tax planning strategies in making this assessment. Management'sassessment in the near term is subject to change if estimates of future taxableincome during the carry forward period are reduced. Given the Company does not have a history of taxable income or a basis on whichto assess its likelihood of the generation of future taxable income, managementhas determined that it is most appropriate to reflect a valuation allowanceequal to its net deferred tax assets. The total valuation allowance at December31, 2007 was $10.8 million. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertaintyin Income Taxes, an interpretation of FAS 109" ("FIN 48"). This statementclarifies the criteria that an individual tax position must satisfy for some orall of the benefits of that position to be recognized in a company's financialstatements. The Company adopted FIN No. 48 on January 1, 2007. Theimplementation of FIN No. 48 had no material impact on the Company'sconsolidated financial statements, results of operations or cash flows. As of December 31, 2007, the Company has yet to file a tax return to which theCompany is subject directly to income taxes. Accordingly, no tax returns areopen to examination by major taxing jurisdictions which would directly impactthe financial position of the Company. The Company recognizes both accruedinterest and penalties related to unrecognized benefits in income tax expense.The Company has not recorded any interest and penalties on any unrecognized taxbenefits since its inception. (13) Earnings Per Share Basic earnings per common share were computed by dividing net income by theweighted average number of shares of common stock outstanding during the year.Diluted earnings per common share were determined based on the assumption of theconversion of stock options using the treasury stock method at average marketprices for the periods. 2007 2006 Loss available to common shareholders: Net loss $ (16,537,854) (11,109,762) Weighted average shares outstanding 19,756,955 16,195,975 Per share information:Basic and diluted loss per share $ 0.84 0.69 Diluted shares outstanding do not assume the conversion of stock appreciationrights or warrants outstanding of 103,939 common shares as it would have ananti-dilutive effect on earnings per share. (14) Reportable Segment Information The Company's reportable segments are strategic business units that offerdifferent products. They are managed separately because each business requiresdifferent knowledge, skills and marketing strategies. Information concerning the various segments of the Company for the yearsDecember 31, 2007 and 2006 is summarized as follows: 2007 2006Revenues: Pesticides and insecticides $ 5,257,097 (265,055) Sustainable solutions 290,000 - $ 5,547,097 (265,055)Income(loss) Pesticides and insecticides (15,909,209) (11,190,762) Sustainable solutions (628,645) - $ (16,537,854) (11,190,762) Identifiable Assets: Pesticides and insecticides $ 30,065,841 2,795,427 Sustainable solutions 319,072 - $ 30,384,913 2,795,427 Depreciation and amortization Pesticides and insecticides $ 227,328 1,356,236 Sustainable solutions - - $ 227,328 1,356,026 Capital expenditures Pesticides and insecticides $ 851,802 618,301 Sustainable solutions - - $ 851,802 618,301Interest Income Pesticides and insecticides $ 758,004 - Sustainable solutions - - $ 758,004 -Stock compensationPesticides and insecticides $ 3,954,975 397,214Sustainable solutions 17,468 - $ 3,972,443 397,214 All significant revenue and identifiable assets of the Company are currently inthe United States of America. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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