Filing
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 000-33219
BIOKEYS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1318182
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
9948 HIBERT STREET, SUITE 100
SAN DIEGO, CALIFORNIA 92131
(Address of principal executive office and zip code)
(858) 271-9671
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO []
As of November 25, 2002, 15,689,965 shares of the Registrant's common
stock, $0.001 par value, were outstanding.
Transitional Small Business Disclosure Format ( Check One): YES [] NO |X|
BIOKEYS PHARMACEUTICALS, INC.
FORM 10-QSB
SEPTEMBER 30, 2002
INDEX
PART I FINANCIAL INFORMATION...........................................3
Item 1. Financial Statements............................................3
a. Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001...............................3
b. Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001, the nine months ended
September 30, 2002 and 2001 and for the period from inception
through September 30, 2002 (Unaudited)..........................4
c. Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 and for the period from inception
through September 30, 2002 (Unaudited)..........................5
d. Notes to Consolidated Financial Statements (Unaudited)..........6
Item 2. Management's Discussion and Analysis...........................14
Item 3. Controls and Procedures........................................18
Part II Other Information..............................................19
Item 1. Legal Proceedings..............................................19
Item 2. Changes In Securities..........................................19
Item 3. Defaults Upon Senior Securities................................20
Item 4. Submission Of Matters To A Vote Of Security Holders............20
Item 5. Other Information..............................................20
Item 6. Exhibits And Reports On Form 8-K...............................20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 89,658 164,476
Advances to employees 37,461 29,872
Note receivable - related party (note 8) -- 35,993
----------------- -----------------
Total current assets 127,119 230,341
Property and equipment, net (note 3) 11,800 13,612
Other assets, net 7,053 34,053
----------------- -----------------
Total assets $ 145,972 278,006
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 957,896 430,216
Accrued salary and related taxes 325,681 303,837
Accrued dividends payable 328,220 128,000
Deposit (note 13) 80,000 --
Notes payable (notes 4 and 13) 410,442 54,439
----------------- -----------------
Total current liabilities 2,102,239 916,492
----------------- -----------------
Shareholders' equity (deficit) (notes 5 and 6): Series A convertible preferred
stock, $0.01 par value.
Authorized 8,000 shares; issued and outstanding, 3,337 shares on
September 30, 2002 and December 31, 2001 (aggregate liquidation
preference $3,337,000 on
September 30, 2002 and December 31, 2001) 33 33
Series B convertible preferred stock, $0.01 par value.
Authorized 300,000 shares; issuable,
200,000 shares on September 30, 2002 (aggregate liquidation
preference $300,000 on September 30, 2002) 2,000 --
Common stock, $0.001 par value. Authorized 50,000,000 shares;
issued and outstanding, 15,689,965 shares on September 30, 2002
and 15,005,191 shares on December 31, 2001 15,690 15,005
Additional paid-in capital 24,184,941 23,389,818
Deficit accumulated during the development stage (26,158,931) (24,043,342)
----------------- -----------------
Total shareholders' equity (deficit) (1,956,267) (638,486)
Commitments and contingencies (notes 4, 5, 6, 7, 11, 12, and 13)
----------------- -----------------
Total liabilities and shareholders' equity (deficit) $ 145,972 278,006
================= =================
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
(unaudited)
INCEPTION
(SEPTEMBER 12, 1996)
THREE MONTHS ENDED NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002
-------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------
Net sales $ -- -- -- -- 174,830
Cost of goods sold -- -- -- -- 51,094
-----------------------------------------------------------------------
Gross margin -- -- -- -- 123,736
Grant revenue -- -- -- -- 80,338
Interest income -- 8,014 948 30,693 89,643
-----------------------------------------------------------------------
-- 8,014 948 30,693 293,717
-----------------------------------------------------------------------
Operating expenses:
Research and development 205,701 81,840 390,328 591,384 4,088,291
General and administrative 331,644 502,970 1,301,001 1,555,539 6,742,229
Depreciation and amortization (note 2) 128,272 1,902,367 384,815 5,707,101 10,046,443
Interest expense 13,613 -- 40,393 -- 164,401
Impairment loss - write off of goodwill
(note 2) -- -- -- -- 5,702,130
Equity in loss of subsidiary -- -- -- -- 178,936
-----------------------------------------------------------------------
Total operating expenses 679,230 2,487,177 2,116,537 7,854,024 26,922,430
-----------------------------------------------------------------------
Loss before cumulative effect of
change in accounting principle (679,230) (2,479,163) (2,115,589) (7,823,331) (26,628,713)
Cumulative effect of change in accounting
principle -- -- -- -- (25,821)
-----------------------------------------------------------------------
Net loss $(679,230) (2,479,163) (2,115,589) (7,823,331) (26,654,534)
=======================================================================
Loss per common share -
basic and diluted (note 10) $ (0.05) (0.17) (0.15) (0.55)
=================================================
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(unaudited)
INCEPTION
(SEPTEMBER 12, 1996)
THROUGH
NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002
---------------------------------
2002 2001
-------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,115,589) (7,823,331) (26,654,534)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,812 5,707,101 9,609,001
Amortization of debt discount 356,003 -- 410,442
Impairment loss - write off of goodwill -- -- 5,702,130
Expenses paid by warrants 17,121 -- 184,259
Expenses paid by preferred stock 102,375 -- 238,875
Expenses related to stock warrants issued 289,262 135,998 901,262
Expenses paid by common stock 2,595 -- 601,075
Equity in loss of subsidiary -- -- 178,936
Write-off of license agreement -- -- 152,866
Cumulative effect of change in accounting principle -- -- 25,821
Changes in assets and liabilities, net of effect of acquisitions:
(Increase) decrease in other assets 19,411 33,508 (123,846)
Increase in accounts payable and accrued
liabilities 549,524 273,978 624,867
Increase in sponsored research payable and
license obligation -- -- 924,318
-------------------------------------------------------
Net cash used in operating activities (777,486) (1,672,746) (7,224,528)
-------------------------------------------------------
Cash flows from investing activities:
Purchase of certificate of deposit -- -- (1,016,330)
Maturity of certificate of deposit -- 1,016,330 1,016,330
Purchases of property and equipment -- (13,389) (103,723)
Payment on obligation under license agreement -- -- (106,250)
Cash acquired in acquisition of subsidiary -- -- 64,233
Issuance of note receivable - related party -- -- (35,000)
Payments on note receivable 35,993 -- 405,993
Advance to subsidiary -- -- (90,475)
Cash transferred in rescission of acquisition -- -- (19,475)
Cash received in rescission of acquisition -- -- 230,000
-------------------------------------------------------
Net cash provided by investing activities 35,993 1,002,941 345,303
-------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of preferred stock 300,000 -- 3,500,000
Proceeds from sale of common stock -- 375,000 1,935,965
Proceeds from exercise and sale of warrants 286,675 47,741 334,416
Deposit 80,000 -- 80,000
Repurchase of warrants -- (55,279) (55,279)
Payment of financing and offering costs -- -- (98,976)
Payments of notes payable and long-term debt -- -- (71,961)
Proceeds from issuance of notes payable and detachable
warrants -- -- 1,344,718
-------------------------------------------------------
Net cash provided by financing activities 666,675 367,462 6,968,883
-------------------------------------------------------
Net increase (decrease) in cash and cash (74,818) (302,343) 89,658
equivalents
Cash and cash equivalents at beginning of period 164,476 467,878 --
-------------------------------------------------------
Cash and cash equivalents at end of period $ 89,658 165,535 89,658
=======================================================
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Financial Statements
Nine months ended September 30, 2002 and 2001
(Unaudited)
(1) DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Biokeys Pharmaceuticals, Inc., a Delaware corporation, (the Company) is
a development stage enterprise, which conducts biomedical research and
development focused on treatments for cancer and certain viral
infections, including HIV. The Company currently does not market any
product. Through its license agreements with University of Texas M.D.
Anderson Cancer Center (M.D. Anderson), University of Southern
California (USC), and the National Institutes of Health (NIH), the
Company has rights to drug candidates in varying early stages of
development.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information.
Accordingly, the interim statements do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. These interim unaudited consolidated financial statements
should be read in conjunction with the Company's annual financial
statements and related notes in the Company's Form 10-KSB.
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments (consisting only of normal
recurring adjustments) to present fairly the Company's financial
position, results of operations, and cash flows for the interim periods
presented.
Operating results for the three months and nine months ended September
30, 2002 are not necessarily indicative of the results expected for any
other interim period or for the entire year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of Biokeys Pharmaceuticals, Inc. and its wholly owned
subsidiary, Biokeys, Inc. All intercompany balances and
transactions have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that
the estimates utilized in preparing its financial statements are
reasonable and prudent. Actual results could differ from those
estimates.
The most significant accounting estimates relate to valuing
equity transactions. The values assigned to stock warrants
granted to nonemployees are accounted for in accordance with
Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, (SFAS No. 123), and Emerging Issues
Task Force 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services (EITF 96-18), which require that
such costs be measured at the end of each reporting period to
account for changes in the fair value of the Company's common
stock until the options or warrants are vested. The Company
values warrants using the Black-Scholes pricing model. Common
stock is valued using the market price of common stock on the
measurement date as defined in EITF 96-18. Preferred stock is
valued at its liquidation value.
(C) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for employee stock-based
compensation, and includes the required footnote disclosures of
SFAS No. 123 in its audited financial statements included in the
Company's Form 10-KSB.
The Company accounts for nonemployee stock-based compensation in
accordance with EITF 96-18. Amounts are based on the fair value
of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(D) CASH EQUIVALENTS
Highly liquid investments purchased with original maturities of
three months or less are considered to be cash equivalents.
(E) GOODWILL
Goodwill (excess of purchase price over fair value of net assets
acquired) was being amortized using the straight-line method over
two years. The Company recorded amortization of goodwill of
$1,900,709 and $5,702,127 during the three months and nine months
ended September 30, 2001. Through December 31, 2001, the Company
had not been able to raise sufficient capital to ensure future
funding of its research and development; consequently, the
Company reviewed the carrying value of goodwill for impairment
and reduced its carrying value to zero through a noncash charge
of $5,702,130 at December 31, 2001.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over
the estimated useful lives of the assets. The costs of
improvements that extend the lives of the assets are capitalized.
Repairs and maintenance are expensed as incurred.
(G) DEFERRED FINANCING COSTS
Costs associated with arranging debt financing are deferred and
amortized using the effective interest method over the term of
the notes payable.
(H) DEBT DISCOUNT
The discount on notes payable is being amortized using the
effective interest method through the stated due date.
(I) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred and
include Company-sponsored research and development.
(J) LICENSE AGREEMENTS
Costs of license agreements for patent rights and technology
rights that currently have no alternative future uses are
expensed as research and development costs.
(K) IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that property
and equipment and intangible or other noncurrent assets may be
impaired, an evaluation of the recoverability of currently
recorded costs will be made. If an evaluation is required, the
estimated value of undiscounted future net cash flows associated
with the asset is compared to the asset's carrying value to
determine if impairment exists. If such assets are considered to
be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets.
(L) INCOME TAXES
Income taxes are accounted for using the asset and liability
method under which deferred tax assets and liabilities are
recognized for estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases,
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. Deferred tax expense or benefit is recognized as
a result of the change in the asset or liability during the
period.
(M) SUPPLEMENTARY CASH FLOW INFORMATION
Noncash investing and financing transactions excluded from the
statements of cash flows for the nine months ended September 30,
2002 and 2001 are accrued Series A preferred stock dividends
payable of $328,220 and $277,000, respectively.
(N) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combination
(SFAS No. 141), which eliminates the pooling of interests method
of accounting and requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase
method. Adoption of SFAS No. 141 did not have an impact on the
Company's financial condition or results of operations.
The FASB also issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142),
which was effective for the Company as of January 1, 2002. SFAS
No. 142 requires that goodwill and other intangible assets with
indefinite lives no longer be amortized. SFAS No. 142 further
requires that the fair value of goodwill and other intangible
assets with indefinite lives be tested for impairment upon
adoption of this statement, annually, and upon the occurrence of
certain events and be written down to fair value if considered
impaired. Adoption of SFAS No. 142 did not have an impact on the
Company's financial condition or results of operations because,
as of December 31, 2001, it had no goodwill or other intangible
assets with indefinite lives.
The FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS No. 143),
which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement
applies to all entities that have legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development, or normal use of the
assets. SFAS No. 143 will be effective for the Company as of
January 1, 2003. The Company does not expect the adoption of SFAS
No. 143 will have a significant impact on its financial condition
or results of operations.
The FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, it retains many of the fundamental provisions of
that statement. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. SFAS No. 144 was
effective for the Company as of January 1, 2002. Adoption of SFAS
No. 144 did not have an impact on the Company's financial
condition or results of operations.
The FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statements No. 13 and Technical Corrections (SFAS No.
145), which provides guidance for income statement classification
of gains and losses on extinguishments of debt and accounting for
certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 will be
effective for the Company on January 1, 2003. The Company does
not expect the adoption of SFAS No. 145 will have a significant
impact on its financial condition or results of operations.
The FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Exit or Disposal Activities (SFAS No. 146),
which addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that
are currently accounted for pursuant to the guidance set forth in
EITF Issue No. 94-3, Liability Recognition of Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS
No. 146 will be effective for the Company on January 1, 2003. The
Company does not expect the adoption of SFAS No. 146 will have a
significant impact on its financial condition or results of
operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 and December 31, 2001 were
as follows:
USEFUL SEPTEMBER 30, DECEMBER 31,
LIVES 2002 2001
----------------- ------------------- -------------------
Office furniture and equipment 5 years $ 32,198 32,198
Computer software and equipment 3 years 9,160 9,160
------------------- -------------------
41,358 41,358
Less accumulated depreciation and
amortization (29,558) (27,746)
------------------- -------------------
$ 11,800 13,612
=================== ===================
(4) NOTES PAYABLE
In October and December 2001, the Company issued notes payable totaling
$300,000 and $150,000, respectively. The notes bear interest at 12% and
are due as follows: $300,000 and $150,000 on the earlier of November 1,
2002 and December 19, 2002, respectively, or the date of receipt by the
Company of gross proceeds of at least $600,000 from private placement
offerings. Interest accrues at 12% annually and will be paid in shares
of common stock when the notes are repaid, based on the five-day average
closing price of common stock preceding the date when interest is due.
The notes were issued with detachable warrants to purchase a total of
450,000 shares of common stock through November 2006 at an exercise
price of $4.00 per share through December 31, 2002, and thereafter at an
exercise price that will be fixed at the higher of $2.50 or the average
closing price of the Company's common stock during the 20 trading days
prior to December 31, 2002, not to exceed $4.00 per share.
The entire proceeds of $450,000 were allocated to the warrants. The fair
value of the warrants, calculated using the Black-Scholes pricing model,
is greater than the proceeds. Of the original debt discount of $450,000,
$118,668 and $356,003 was amortized during the three months and nine
months ended September 30, 2002, respectively, and the debt is reported
at $410,442, net of debt discount of $39,558, at September 30, 2002. The
discount is being amortized to the redemption value of the debt through
the stated due date of the notes payable.
(5) PREFERRED STOCK
Shares of Series A 8% Convertible Preferred Stock are convertible into
common stock at $4.00 per share. The preferred stock has a liquidation
preference of $1,000 per share plus accrued and unpaid dividends,
carries cumulative dividends at 8% per annum payable semi-annually, and
provides for future adjustments in conversion price if specified
dilutive events take place. The preferred stock is redeemable at the
option of the Company at any time the closing price of common stock
remains at a level of at least $8 per share for 20 consecutive days if
the Company is listed on the American Stock Exchange or NASDAQ at such
time, with the redemption price being equal to the liquidation
preference. In addition, at any time after July 1, 2003, the Company may
call all or any portion of the outstanding preferred stock for
redemption on at least 30 days' notice, at a redemption price equal to
105% of the liquidation preference plus all accrued and unpaid
dividends.
The Company entered into an agreement with a corporate investor under
which the investor purchased, for $300,000 in cash in April 2002,
200,000 shares of a new class of Series B Convertible Preferred Stock
which will be authorized and issued by the Company. The new Series B
shares will have a par value of $0.01 per share and a liquidation
preference of $1.50 per share and, at the election of the investor, will
be convertible into shares of common stock on a share-for-share basis
after a date to be determined. Under the agreement with the investor,
the Company will be obligated to issue and deliver the new Series B
shares to the investor, as well as five-year warrants entitling the
investor to purchase, after a date to be determined, up to 50,000 shares
of the Company's common stock at an exercise price of $2.50 per share.
(6) EQUITY TRANSACTIONS
In February 2001, the Company granted 100,000 shares of common stock
to a consulting firm for financial consulting services to be provided
in 2001. The Company recognized the value of these shares, $375,000,
as a noncash charge to expense during 2001.
In May 2001, the Company repurchased warrants to purchase 50,254 shares
of common stock and sold the same warrants in June 2001. The warrants
have an exercise price of $0.49 per share.
In August 2001, two warrant holders exercised warrants through a
cashless exercise. Warrants to purchase a total of 271,758 shares of
common stock were exchanged for a total of 218,493 shares of common
stock.
In October 2001, the Company issued 93,421 shares of common stock valued
at $213,000 to pay dividends on the Series A convertible preferred stock
through June 30, 2001.
In December 2001, the Company entered into a consulting agreement with a
third party for financial consulting services. The services are being
paid through the issuance of 273 shares of Series A preferred stock,
12,585 shares of common stock, and five-year warrants to purchase 34,125
shares of common stock at an exercise price of $5.00 per share. The
compensation vests 50% in December 2001 and 50% in December 2002. The
Company recognized the value of 50% of these equity instruments,
$179,911, as a noncash charge to expense in 2001. The warrants were
valued using the Black-Scholes pricing model. Common stock was valued
using the market price of common stock as defined in EITF 96-18. Series
A preferred stock was valued at the liquidation value of $1,000 per
share. The Company will measure the costs at the end of each reporting
period, until the second vesting date in December 2002, to account for
changes in the fair value of the unvested equity instruments. The
Company recognized expense of $23,453 and $110,905 for the three and
nine months ended September 30, 2002, respectively.
In March 2002, the Company transferred warrants which had previously
been held in escrow to three investors who immediately exercised the
warrants for the purchase of a total of 229,573 shares of common stock
at $0.49 per share. The Company recognized general and administrative
expense of $289,262, which represents the difference between the fair
value and exercise price on the date of the transfer.
In April 2002, warrants to purchase a total of 240,000 shares of common
stock at $.49 per share were exercised.
In June 2002, a warrant holder exercised warrants through a cashless
exercise. Warrants to purchase a total of 144,435 shares of common stock
were exchanged for a total of 100,201 shares of common stock.
In July 2002, warrants to purchase a total of 115,000 shares of common
stock at $0.49 per share were exercised.
At September 30, 2002, there were outstanding warrants to purchase a
total of 3,051,992 shares of common stock as follows:
EXERCISE
WARRANTS PRICE EXPIRATION DATE
---------------------- -------------------- ----------------------
80,404 $ 0.49 August 2002
100,506 0.49 May 2003
400,000 5.00 August 2003
747,078 0.49 December 2003
17,125 4.00 December 2003
620,622 0.49 September 2005
66,666 3.00 April 2006
502,528 0.49 June 2006
450,000 4.00* November 2006
17,063 5.00 December 2006
50,000 2.50 April 2007
*Subject to repricing, see note 4.
(7) LICENSE AGREEMENT
Pursuant to a patent license agreement dated August 1, 2002 between
the Company and the National Institutes of Health (NIH), the Company
acquired a license to two patents related to technology for an HIV
therapeutic and vaccine (the NIH License). This agreement grants the
Company an exclusive worldwide license to study, use, manufacture, and
market products covered by the subject patents. Under the NIH License,
the Company is obligated to pay the NIH for all out-of-pocket expenses
incurred in filing, prosecuting, enforcing, and maintaining the
licensed patent rights and all future patent-related expenses paid by
the NIH as long as the NIH License remains in effect.
The NIH's retained interest consists of an initial nonrefundable
license fee of $50,000; a minimum annual royalty of $25,000 regardless
of whether any sales have occurred; royalties on net sales (as defined
in the agreement) of 1.5% of net sales up to $200 million and 2% of
net sales in excess of $200 million; benchmark royalties due upon the
achievement of certain milestones that could total $1 million if all
milestones are met; and 10% of the fair market value of any
consideration received for granting each sublicense.
The NIH licensed this technology from a third party that retained a
nonexclusive license for activity in the United States of America. At
September 30, 2002, the Company has accrued the initial nonrefundable
license fee, the pro rata minimum annual royalty for 2002, and $60,000
of patent-related expenses incurred by the NIH to date.
(8) NOTE RECEIVABLE - RELATED PARTY
In August 2001, the Company loaned $35,000 to a company whose owner is
also the co-founder of Biokeys, Inc. The note accrued interest at prime
plus one percent. The note receivable on the December 31, 2001
consolidated balance sheet includes accrued interest. The note was
repaid with interest in July 2002.
(9) INCOME TAXES
Significant components of income tax expense for the three months and
nine months ended September 30, 2002 and 2001 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ ------------------ ----------------- ------------------
Deferred tax benefit $ 382,638 282,562 667,825 542,441
Increase in valuation
allowance for deferred
tax assets (382,638) (282,562) (667,825) (542,441)
------------------ ------------------ ----------------- ------------------
Income tax
expense $ -- -- -- --
================== ================== ================= ==================
The tax effects of temporary differences that give rise to deferred tax
assets at September 30, 2002 and December 31, 2001 are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------------- --------------------
Net operating loss carryforward $ 4,117,237 3,436,311
Organization costs and license agreement, due to differences
in amortization 31,437 44,538
-------------------- --------------------
Total deferred tax assets 4,148,674 3,480,849
Less valuation allowance (4,148,674) (3,480,849)
-------------------- --------------------
Net deferred tax assets $ -- --
==================== ====================
At September 30, 2002, the Company had an unused net operating loss carryforward of approximately
$12,110,000 for tax reporting purposes, which expires in 2011 through 2012 and 2018 through 2022.
(10) NET LOSS PER COMMON SHARE
The computation of basic and diluted net loss per share for the three months and nine months ended
September 30, 2002 and 2001 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
--------------- -------------- -------------- ---------------
Numerator:
Net loss $ (679,230) (2,479,163) (2,115,589) (7,823,331)
Less preferred stock dividends (64,702) (64,000) (200,220) (192,000)
--------------- -------------- -------------- ---------------
Numerator for basic and
diluted loss per share $ (743,932) (2,543,163) (2,315,809) (8,015,331)
=============== ============== ============== ===============
Denominator for basic and diluted loss per
share - weighted average shares 15,679,743 14,718,240 15,322,340 14,679,929
=============== ============== ============== ===============
Loss per common share - basic and diluted $ (0.05) (0.17) (0.15) (0.55)
=============== ============== ============== ===============
Net loss per common share is calculated according to Statement of
Financial Accounting Standards No. 128, Earnings per Share, using the
weighted average number of shares of common stock outstanding during the
period. Potentially dilutive shares relating to warrants and convertible
preferred stock, totaling 4,086,242 and 4,268,094 at September 30, 2002
and 2001, respectively, were not included in the computation of net loss
per common share - diluted, as their effect would have been
antidilutive.
(11) OPERATIONAL STATUS
The accompanying consolidated financial statements have been prepared on
a going-concern basis which contemplates the realization of assets and
satisfaction of liabilities and commitments in the normal course of
business. The Company has incurred losses since inception and had a net
loss of $2,115,589 for the nine months ended September 30, 2002.
To date, the Company has been principally engaged in licensing and
research and development efforts. The Company has no current revenues,
is not marketing any products, and projects a loss from operations for
2002. The Company will require additional capital, which it intends to
obtain through equity and debt offerings and/or strategic partnership in
order to continue to operate its business. The Company's ability to meet
its obligations as they become due and to continue as a going concern
must be considered in light of the expenses, difficulties, and delays
frequently encountered in operating a new business, particularly since
the Company will focus on research, development, and unproven technology
which may require a lengthy period of time and substantial expenditures
to complete. Even if the Company is able to successfully develop new
products or technologies, there can be no assurance that the Company
will generate sufficient revenues from the sale or licensing of such
products and technologies to be profitable. Management believes that the
Company's ability to meet its obligations as they become due and to
continue as a going concern are dependent upon obtaining additional
financing.
(12) LITIGATION
In the normal course of business, the Company may become subject to
lawsuits and other claims and proceedings. Such matters are subject to
uncertainty and outcomes are not predictable with assurance. Management
is not aware of any pending or threatened lawsuit or proceeding that
would have a material adverse effect on the Company's financial
position, liquidity, or results of operations.
(13) SUBSEQUENT EVENTS
(A) SERIES C CONVERTIBLE PREFERRED STOCK
On October 3 and 4, 2002, the Company issued 61,300 shares of
Series C Convertible Preferred Stock in exchange for gross
proceeds of $393,000 in cash and cancellation of $220,000 of
outstanding debt (see note 4). The shares of Series C Convertible
Preferred Stock are convertible by the holders at any time after
March 1, 2003 into common stock at the initial conversion rate of
200 shares of common stock per share of Series C Convertible
Preferred Stock. All outstanding shares of Series C Convertible
Preferred Stock will automatically convert into common stock on
June 30, 2003 at the then-applicable conversion price.
In connection with the Series C financing, the Company and five
investors executed amendments to warrants to purchase a total of
375,000 shares of common stock. Pursuant to the amendments, the
per share exercise price of each warrant was reduced to $0.50.
Prior to the execution of the amendments, each of these warrants
had a per share exercise price of $4.00 through December 31,
2002, and thereafter a per share exercise price equal to the
higher of $2.50 or the average closing price of the common stock
during the 20 trading days prior to December 31, 2002, not to
exceed $4.00.
The Company received $80,000 as a deposit for the purchase of
Series C Convertible Preferred Stock as of September 30, 2002.
(B) NOTES PAYABLE
In conjunction with the issuance of the Series C Convertible
Preferred Stock on October 3 and 4, 2002, lenders representing
$120,000 in notes payable (see note 4) agreed to extend the due
date of their notes payable with the Company until April 1, 2003.
On November 1, 2002, $60,000 in notes payable matured and was
repaid on November 19, 2002. The remaining balance of $50,000
matures December 19, 2002.
(C) STOCK OPTIONS
In October 2002, the Compensation Committee granted incentive
options to employees to purchase a total of 1,790,000 shares of
common stock at exercise prices of either $0.20 or $0.50 per
share. Options to purchase 1,290,000 shares vested upon grant.
The options to purchase 500,000 shares will vest at the closing
of either a joint venture for HIV products, a pharmaceutical
venture, or additional financing and may result in compensation
expense depending on the market price of the Company's common
stock at the measurement date. These options expire December 31,
2008.
(D) EXCHANGE OFFER
On October 31, 2002, the Company offered each holder of its
Series A 8% Convertible Preferred Stock the right to exchange
their shares of Series A 8% Convertible Preferred Stock for
shares of common stock at a conversion rate of 600 shares of
common stock for each share of Series A 8% Convertible Preferred
Stock. The exchange offer will expire on November 27, 2002. As of
November 25, 2002, none of the holders of Series A 8% Convertible
Preferred Stock had accepted the exchange offer and exchanged
their shares of Series A 8% Convertible Preferred Stock into
common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes included in this report. This Form
10-QSB contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which include, without limitation, statements
about the market for our technology, our strategy, competition, expected
financial performance, all information disclosed under Item 3 of this Part I.,
and other aspects of our business identified in the Company's most recent annual
report on Form 10-KSB filed with the Securities and Exchange Commission and in
other reports that we file from time to time with the Securities and Exchange
Commission. Any statements about our business, financial results, financial
condition and operations contained in this Form 10-QSB that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "expects,"
"intends," "projects," or similar expressions are intended to identify
forward-looking statements. Our actual results could differ materially from
those expressed or implied by these forward-looking statements as a result of
various factors. We undertake no obligation to update publicly any
forward-looking statements for any reason, except as required by law, even as
new information becomes available or other events occur in the future.
CoFactor(TM), BlockAide(TM), Thiovir(TM) and EradicAide(TM) are our trademarks.
Product names, trade names and trademarks of other entities are also referred
to in this report.
GENERAL
Biokeys Pharmaceuticals, Inc., a Delaware corporation formerly known as
BioQuest, Inc. (the "Company" or "we"), is a development stage enterprise which
conducts biomedical research and development focused on treatments for cancer
and certain viral infections, including HIV. The Company currently does not
market any product. Through its license agreements with the University of Texas
M.D. Anderson Cancer Center, the National Institutes of Health ("NIH"), and the
University of Southern California, the Company has rights to drug candidates in
varying early stages of development.
On October 10, 2000, a wholly-owned subsidiary of BioQuest, Inc. merged with
Biokeys, Inc., a Delaware corporation, the Company changed its name from
BioQuest, Inc. to Biokeys Pharmaceuticals, Inc. and the shareholders of
Biokeys, Inc. became stockholders of the Company. For financial reporting
purposes, the merger was accounted for as a purchase and the Company was
considered the acquirer for accounting purposes.
As a development-stage biomedical research company, we have not yet generated
any revenues from our anticancer and antiviral drug candidates and have had no
earnings since inception. Our expenses from inception have related to costs
incurred in research activities for the development of our drug candidates and
administrative expenses required to support these efforts. As of September 30,
2002 we have an accumulated development-stage deficit of $(26,158,931), which
includes charges totaling $15,205,675 during 2000 and 2001 for amortization of
goodwill and an impairment loss resulting in a write-off of the goodwill
resulting from the merger with Biokeys, Inc.
We expect losses to continue for the foreseeable future, and such losses will
likely increase as we approach human clinical trials for our CoFactor drug and
our HIV drugs. Future profitability will be dependent upon our ability to
complete the development of our pharmaceutical products, obtain necessary
regulatory approvals and effectively market such products. Also, the Company,
which has only limited resources, will be required to establish agreements with
other parties for the clinical testing, manufacturing, commercialization and
sale of its products.
The Company's efforts are currently being hampered by a lack of working
capital, and we will need to obtain significant additional financing in order
to conduct clinical trials and support our operations, as discussed below under
"Liquidity and Capital Resources." The Company is subject to the risks of not
being able to arrange such financing and the other risk factors listed under
"Management's Discussion and Analysis - Risk Factors" in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES
ACCOUNTING FOR EQUITY TRANSACTIONS
The most significant accounting estimates relate to recording equity
transactions. The values assigned to stock options or warrants granted to
non-employees are accounted for in accordance with SFAS No. 123 and Emerging
Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," which require that such costs be measured at the end of
each reporting period to account for changes in the fair value of the Company's
common stock until the options or warrants are vested.
Series A preferred stock is recorded at the liquidation preference of $1,000
per share and Series B Convertible Preferred Stock is recorded at its
liquidation preference of $1.50 per share. The value of the warrants issued
with the Series B Convertible Preferred Stock was deemed de minimus. Common
stock is valued using the market price of common stock on the measurement date
as defined in EITF 96-18. The Company values warrants using the Black-Scholes
pricing model. The model considers a number of factors, including the market
price and expected volatility of our common stock at the date of measurement or
re-measurement. The expense related to all equity transactions is amortized
over the vesting period of the related equity instruments.
The amount of compensation expense we record in future periods could fluctuate
significantly from period to period as a result of: (a) the periodic
re-measurement of equity instruments from non-employees principally as a result
of fluctuations in the market price of our common stock; (b) the method and
period over which the value is amortized as charges to operations;
(c)additional equity instruments granted; and (d) subsequent forfeitures or
cancellations of unvested instruments.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of costs incurred for Company-sponsored
as well as collaborative research and development activities. These costs
include direct and research-related overhead expenses and are expensed as
incurred. Patent costs and technology license fees for technologies that are
utilized in research and development and have no alternative future use are
expensed when incurred.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
The Company continued to have no revenues and only minimal interest income in
the calendar quarter and nine months ended September 30, 2002, compared with
$30,693 of interest income for the nine months ended September 30, 2001, earned
on the balance of funds from the Company's 2000 private placement which were
applied to operations.
During the third quarter of 2002, we continued our research and development
efforts in connection with our CoFactor product for colorectal cancer and our
EradicAide and BlockAide products for HIV/AIDS. We incurred research and
development expenses of $205,701 for the quarter, up from $81,840 in the
year-earlier period on account of the Company's new license agreement with the
NIH and additional amounts due to USC related to the Company's license agreement
for the product Thiovir for a minimum royalty payment and patent expenses.
On July 8, 2002, the Company announced it had been granted an exclusive
worldwide license by the NIH for an issued US patent and issued and applied for
foreign patents for Europe, Australia, Japan, Israel and Canada. The technology
covered by these patents and patent applications complements patents and
technology licensed to the Company from the University of Texas MD Anderson
Cancer Center for the development of the Company's viral entry inhibitor,
BlockAide/CR. The license agreement requires the Company to pay NIH previously
incurred patent expenses, ongoing patent maintenance fees, minimum annual
royalties, milestone payments related to the progress of the product from
preclinical status through various stages of human clinical trials and
application for marketing approval by the US Food and Drug Administration (FDA),
and royalties of 1.5 to 2.0 percent on net sales, if and when they occur.
General and Administrative expenses for the third quarter of 2002 decreased to
$331,644 from $502,970 in the year-earlier period. General and administrative
expenses for the nine months ended September 30, 2002 were $1,301,001 compared
to $1,555,539 in the year-earlier period.
Depreciation and amortization amounted to $128,272 for three months and
$384,815 for nine months ended September 30, 2002, compared with $1,902,367 for
the three months and $5,707,101 for the nine months ended September 30, 2001.
The larger amounts in 2001 included quarterly goodwill amortization expense of
$1,900,709 resulting from the October 2000 merger with Biokeys, Inc., which
expense is now eliminated for periods subsequent to December 31, 2001 because
of a write down of the carrying value of such goodwill through a non-cash
charge of $5,702,130 as of December 31, 2001. For nine months ended September
30, 2002, the Company amortized debt discount of $356,003 relating to $450,000
of notes payable that were issued in the fourth quarter of 2001.
Interest expense amounted to $13,613 for the three months and $40,393 for the
nine months ended September 30, 2002, compared with no such expense in the
year-earlier periods, as interest was accrued on $450,000 of notes issued to
investors in late 2001 to obtain working capital. Debt discount related to the
$450,000 of notes payable is being amortized through the stated due date of
November 1, 2002, and amortization of debt discount recorded during 2002 is
discussed above.
As a result of the substantial reduction in amortization expense primarily
related to goodwill resulting from the merger with Biokeys, Inc. and the other
factors noted above, the Company's loss for the third quarter declined to
$(679,230) from a loss of $(2,479,163) for the year-earlier period, and the
loss per share decreased to $(0.05) from $(0.17) per share in the year-earlier
period. For the nine-month period, the loss declined to $(2,115,589) or $(0.15)
per share from $(7,823,331) or $(0.55) per share in the first nine months of
2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred negative cash flows since its inception, and has
funded its activities primarily through short-term loans and sales of equity
securities. As of September 30, 2002, cash amounted to $89,658, compared with
$164,476 on December 31, 2001.
The Company does not have any bank or any other commercial financing
arrangements. The Company's operations since the merger with Biokeys, Inc. have
been funded primarily from the proceeds of its overseas private placement
offering consummated in August and September 2000, by which the Company raised
a total of $3.2 million through the issuance of its Series A 8% Convertible
Preferred Stock.
As previously reported, the Company intends to move its CoFactor product into
human clinical trials in the U.S., since the FDA has approved the Company's
Investigational New Drug Application ("IND") for Phase II studies. Also, the
Company intends to seek approval and begin trials in Sweden for Phase II and
Phase III testing of CoFactor during 2003, if it is able to finance the trials
directly or through an agreement with a development and marketing partner. In
addition, the Company intends to pursue a study of its BlockAide drug candidate
for HIV/AIDS beginning during the first half of 2003 and plans to file an IND
for its EradicAide product for HIV/AIDS by the second half of 2003. The Company
will need, and continues to seek, significant funding to conduct these trials
and studies, either through a commercial partnership, additional financing, or
a combination of both, the cost of which is expected to total between $8
million and $10 million for both product groups over the next 18 months.
In April 2002, the Company entered into a letter agreement (the "Series B
Agreement") with a corporate investor pursuant to which the investor purchased
200,000 shares of the Company's Series B Convertible Preferred Stock for
$300,000. Each share of Series B Convertible Preferred Stock is convertible at
the option of the holder into one share of Common Stock. Pursuant to the terms
of the Series B Agreement, the Company is also obligated to issue to the
investor a warrant, with a five year term, to purchase up to 50,000 shares of
Common Stock at an exercise price of $2.50 per share. The Company anticipates
issuing the warrant and a stock certificate representing 200,000 shares of
Series B Convertible Preferred Stock to the investor in the fourth quarter of
2002.
On October 3 and 4, 2002, the Company closed the sale of a total of 61,300
shares of its Series C Convertible Preferred Stock to 17 investors for gross
proceeds of $393,000 in cash and cancellation of $220,000 of outstanding debt.
Shares of Series C Convertible Preferred Stock are convertible at any time
after March 1, 2003 by the holders into shares of Common Stock of the Company
at the initial conversion rate of 200 shares of Common Stock per share of
Series C Convertible Preferred Stock (an effective initial conversion price of
$0.05 per share). All outstanding shares of Series C Convertible Preferred
Stock will automatically convert into Common Stock on June 30, 2003 at the
then-applicable conversion price.
In connection with the purchase and sale of Series C Convertible Preferred
Stock, the Company and five of the purchasers of Series C Convertible Preferred
Stock executed amendments to warrants to purchase a total of 375,000 shares of
Common Stock held by such purchasers. Pursuant to the amendments, the per share
exercise price of each warrant was reduced to $0.50. Prior to the execution of
the amendments, each of these warrants had a per share exercise price of $4.00
through December 31, 2002, and thereafter a per share exercise price equal to
the higher of $2.50 or the average closing price of the Common Stock during the
20 trading days prior to December 31, 2002, not to exceed $4.00.
The Company raised approximately $450,000 through the issuance of short-term
notes ("Bridge Notes") and warrants to nine accredited investors ("Bridge
Investors") in October and December 2001. In conjunction with the issuance of
the Series C Convertible Preferred Stock on October 3 and 4, 2002, five of the
Bridge Investors converted $220,000 of their Bridge Notes into shares of Series
C Convertible Preferred Stock. In addition, two of the Bridge Investors agreed
to extend the due date of $120,000 of their Bridge Notes until April 1, 2003.
On November 1, 2002, $60,000 of the remaining Bridge Notes became due and
payable, which amount the Company paid on November 19, 2002. The remaining
$50,000 of Bridge Notes will become due on December 19, 2002.
On September 12, 2002, the Company announced, in conjunction with BioDelivery
Sciences International ("BDSI") of Newark, New Jersey that the National
Institutes of Health awarded an SBIR (Small Business Innovation Research) grant
to BDSI to further develop the formulation of the Company's EradicAide HIV
drug. BDSI will work with the Company, via its researchers at the University of
Texas MD Anderson Cancer Center, to test technology for oral delivery of
EradicAide. BDSI will begin receiving funding from the grant during the first
quarter of 2003, in periodic installments totaling $300,000 per year over two
years, as work progresses. These funds will be divided approximately equally
between BDSI and MD Anderson Cancer Center on behalf of the Company, based upon
actual expenditures which will be reimbursed from the grant.
We continue to seek the additional capital necessary to fund the research
projects described above, as well as general and administrative expenses.
Continuation of our research and development activities can proceed only after
additional financing is obtained. We are currently formulating plans for such
financing and, while the Company is actively seeking such financing, no
commitments have been obtained. The Company anticipates obtaining additional
capital through equity or debt financing, strategic alliances with corporate
partners and others, or through other sources not yet identified. The Company
cannot guarantee that additional funding will be available on acceptable terms,
or at all. If adequate funds are not available, the Company may be required to
delay, scale-back or eliminate certain aspects of its operations or attempt to
obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies,
product candidates, products or potential markets.
The Company's dependence on obtaining additional capital will continue at least
until the Company is able to begin marketing its new technologies. The
Company's future capital requirements and the adequacy of its financing will
depend upon numerous factors, including the successful commercialization of the
Company's drug candidates, progress in its product development efforts,
progress with preclinical studies and clinical trials, government grants, the
cost and timing of production arrangements, the development of effective sales
and marketing activities, the cost of filing, prosecuting, defending and
enforcing intellectual property rights, competing technological and market
developments, and the development of strategic alliances for the marketing of
its products.
ITEM 3. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
significant deficiencies and material weaknesses exist in the
Company's disclosure controls and procedures that may adversely impact
and have adversely impacted the timely recording, processing,
summarization and reporting of information required to be disclosed by
the Company in the reports that it files or submits under the Exchange
Act, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(B) CHANGES IN INTERNAL CONTROLS
The Company has started implementing policies and procedures designed
to ensure that (i) appropriate reviews of accounting information are
performed on a timely basis, (ii) cash management tasks are segregated
among various officers and employees of the Company, and (iii)
corporate records, including minutes books and executed contracts, are
properly maintained. The Company has engaged an outside accounting
consultant, not associated with the independent auditors, to assist
and advise the Company in the implementation of policies and
procedures to correct the significant deficiencies and material
weaknesses identified by the Company's management pursuant to their
review and evaluation of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. The Company has
also determined to develop, in consultation with its outside
accounting consultant, a formal policies and procedures manual for
operational and accounting functions to better ensure that information
is timely recorded, processed, summarized and reported to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure in the reports that the Company files or submits under the
Exchange Act.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
On September 23, 2002, the Company filed a Certificate of Designation of Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock. The
Certificate of Designation authorizes the Company to issue up to 200,000 shares
of Series B Convertible Preferred Stock and 125,000 shares of Series C
Convertible Preferred Stock.
On October 3 and 4, 2002, the Company closed the sale of a total of 61,300
shares of its Series C Convertible Preferred Stock to 17 investors for gross
proceeds of $393,000 in cash and cancellation of $220,000 of outstanding debt.
Shares of Series C Convertible Preferred Stock are convertible at any time
after March 1, 2003 by the holders into shares of Common Stock of the Company
at the initial conversion rate of 200 shares of Common Stock per share of
Series C Convertible Preferred Stock (an effective initial conversion price of
$0.05 per share). All outstanding shares of Series C Convertible Preferred
Stock will automatically convert into Common Stock on June 30, 2003 at the
then-applicable conversion price. The purchasers of Series C Convertible
Preferred Stock represented their intention to acquire the shares for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends will be affixed to the share
certificates to be issued to the purchasers of Series C Convertible Preferred
Stock.
In connection with the purchase and sale of Series C Convertible Preferred
Stock, the Company and five of the purchasers of Series C Convertible Preferred
Stock executed amendments to warrants to purchase a total of 375,000 shares of
Common Stock held by such purchasers. Pursuant to the amendments, the per share
exercise price of each warrant was reduced to $0.50. Prior to the execution of
the amendments, each of these warrants had a per share exercise price of $4.00
through December 31, 2002, and thereafter a per share exercise price equal to
the higher of $2.50 or the average closing price of the Common Stock during the
20 trading days prior to December 31, 2002, not to exceed $4.00. The Company
received no remuneration for the amendment of the warrants.
On October 28, 2002, the Compensation Committee of the Board of Directors of
the Company authorized and directed the Company to issue to the Company's Chief
Executive Officer an option to purchase up to 1,500,000 shares of Common Stock
at $0.20 per share, the fair market value of a share of Common Stock as quoted
on the OTC Bulletin Board on October 28, 2002. The foregoing option will vest
as to 1,000,000 shares on the date of issuance and as to 500,000 shares upon a
significant milestone that has not yet been defined. The Compensation Committee
also authorized and directed the Company to issue to the Company's Chief
Executive Officer a fully-vested option to purchase up to 165,000 shares of
Common Stock at $0.50 per share. The Compensation Committee also authorized and
directed the Company to issue to an employee of the Company an option to
purchase up to 25,000 shares of Common Stock at $0.20 per share. The foregoing
option will vest as to 12,500 shares on the date of issuance and as to 12,500
shares on December 30, 2003. Each of the foregoing options will expire on
December 30, 2008.
On October 31, 2002, the Company offered each holder of its Series A 8%
Convertible Preferred Stock the right to exchange their shares of Series A 8%
Convertible Preferred Stock for shares of Common Stock at an exchange rate of
600 shares of Common Stock for each share of Series A 8% Convertible Preferred
Stock. The exchange offer will expire on November 27, 2002. As of November 25,
2002, none of the holders of Series A 8% Convertible Preferred Stock had
accepted the exchange offer and exchanged their shares of Series A 8%
Convertible Preferred Stock for shares of Common Stock. The Company will
receive no remuneration for the exchange of shares of Series A 8% Convertible
Preferred Stock for shares of Common Stock.
No commission was paid or given, or will be paid or given in the case of the
exchange offer, directly or indirectly for soliciting any of the above sales,
amendments, issuances or exchanges.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated under the Securities Act, as transactions by an issuer not
involving a public offering. Any issuance of Common Stock to a holder of Series
A 8% Convertible Preferred Stock pursuant to such holder's acceptance of the
Company's exchange offer will be deemed to be exempt from registration under
the Securities Act in reliance on Section 3(a)(9) of the Securities Act, as an
exchange by the Company with its security holders where no commission or other
remuneration is paid or given directly or indirectly for soliciting such
exchange.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of securities holders, through solicitation
of proxies or otherwise, during the first nine months of 2002.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT DESCRIPTION
NUMBER
2.1* Agreement and Plan of Merger dated May 19, 2000 among BioQuest, Inc.; BioQuest Acquisition
Corp.; and Biokeys, Inc.
3.1* Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc.
3.2* Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc.
3.3* Certificate of Merger of BioQuest Acquisition Corp. into Biokeys, Inc.
3.4* Certificate of Incorporation of BioQuest Acquisition Corp.
3.6* Amended and Restated Bylaws of Biokeys Pharmaceuticals, Inc.
4.1* Certificate of Designation of BioQuest, Inc.
4.2 Certificate of Designation of Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock of Biokeys Pharmaceuticals, Inc. effective September 23, 2002
10.1** Patent and Technology License Agreement with M.D. Anderson - June, 1996 (Request for confidential
treatment of certain data)
10.2** Amendment to M.D. Anderson Licensing Agreement June 15, 2000 (Request for confidential treatment of
certain data)
10.3** Option and License Agreement with USC - June 23, 1998 (Co Factor and Selone) (Request for
confidential treatment of certain data)
10.4* Amendment to Option and License Agreement with USC dated August 16, 2000 (Co Factor and Selone)
(Request for confidential treatment of certain data)
10.5** Option and License Agreement with USC dated August 17, 2000 (Thiovir) (Request for confidential
treatment of certain data)
10.6* Employment Agreement with Warren C. Lau
10.7 Patent License Agreement, effective August 1, 2002, between Biokeys, Inc. and the National Institute
of Health
11.1* Statement Regarding Computation of Per Share Earnings
24.1* Powers of Attorney (included on signature pages)
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
* Incorporated by reference to the same-numbered exhibit to the Company's
Registration Statement on Form 10-SB, filed October 2, 2001 (Commission file
No. 000-33219). ** Incorporated by reference to the same-numbered exhibit to
the Company's Registration Statement on Form 10-SB/A, filed January 11, 2002
(Commission file No. 000-33219).
(b) REPORTS ON FORM 8-K.
No Current Report on Form 8-K was filed by the Company during the
quarterly period ending September 30, 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 25, 2002
/s/ WARREN C. LAU
---------------------------------
Warren C. Lau
Chief Financial Officer
BIOKEYS PHARMACEUTICALS, INC.
CERTIFICATE PURSUANT TO
RULE 13A-14 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Nicholas J. Virca, Chief Executive Officer of Biokeys Pharmaceuticals, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Biokeys
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
November 25, 2002
/s/ NICHOLAS J. VIRCA
---------------------------------
Nicholas J. Virca
Chief Executive Officer
BIOKEYS PHARMACEUTICALS, INC.
CERTIFICATE PURSUANT TO
RULE 13A-14 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Warren C. Lau, Chief Financial Officer of Biokeys Pharmaceuticals, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Biokeys
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
November 25, 2002
/s/ WARREN C. LAU
---------------------------------
Warren C. Lau
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
2.1* Agreement and Plan of Merger dated May 19, 2000 among BioQuest, Inc.; BioQuest Acquisition Corp.;
and Biokeys, Inc.
3.1* Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc.
3.2* Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc.
3.3* Certificate of Merger of BioQuest Acquisition Corp. into Biokeys, Inc.
3.4* Certificate of Incorporation of BioQuest Acquisition Corp.
3.6* Amended and Restated Bylaws of Biokeys Pharmaceuticals, Inc.
4.1* Certificate of Designation of BioQuest, Inc.
4.2 Certificate of Designation of Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock of Biokeys Pharmaceuticals, Inc. effective September 23, 2002
10.1** Patent and Technology License Agreement with M.D. Anderson - June, 1996 (Request for confidential
treatment of certain data)
10.2** Amendment to M.D. Anderson Licensing Agreement June 15, 2000 (Request for confidential treatment of
certain data)
10.3** Option and License Agreement with USC - June 23, 1998 (Co Factor and Selone) (Request for
confidential treatment of certain data)
10.4* Amendment to Option and License Agreement with USC dated August 16, 2000 (Co Factor and Selone)
(Request for confidential treatment of certain data)
10.5** Option and License Agreement with USC dated August 17, 2000 (Thiovir) (Request for confidential
treatment of certain data)
10.6* Employment Agreement with Warren C. Lau
10.7 Patent License Agreement, effective August 1, 2002, between Biokeys, Inc. and the National Institute
of Health
11.1* Statement Regarding Computation of Per Share Earnings
24.1* Powers of Attorney (included on signature pages)
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
Exhibit 4.2
CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
AND
SERIES C CONVERTIBLE PREFERRED STOCK
OF
BIOKEYS PHARMACEUTICALS, INC.
(Pursuant to Section 151 of the General Corporation Law of the state of Delaware)
Warren C. Lau and Robert Whitworth hereby certify that they are,
respectively, the President and Secretary, of Biokeys Pharmaceuticals, Inc.
(the "Corporation"), a corporation organized and existing under the laws of the
State of Delaware, and that, pursuant to (i) authority conferred upon the Board
of Directors by the Corporation's Certificate of Incorporation and (ii) Section
151 of the Delaware General Corporation Law, the Board of Directors of the
Corporation has duly adopted the following resolution providing for the
designation of two series of Preferred Stock of the Corporation, as follows:
RESOLVED, that, pursuant to authority expressly granted to and vested
in the Board of Directors by the provisions of the Certificate of
Incorporation and Section 151 of the Delaware General Corporation Law, the
Board of Directors hereby designates a series of Preferred Stock
consisting of 200,000 shares of Series B Convertible Preferred Stock and a
series of Preferred Stock consisting of 125,000 shares of Series C
Convertible Preferred Stock of the Corporation, and hereby fixes the
powers, designation, preferences and rights of the shares of each such
series, and the qualifications, limitations, or restrictions thereof (in
addition to those provisions set forth in the Certificate of Incorporation
which may be applicable to the Preferred Stock), as follows:
FIRST: Pursuant to authority contained in the Corporation's Certificate of
Incorporation, Two Hundred Thousand (200,000) authorized but unissued shares of
the Corporation's Preferred Stock, $0.01 par value per share, have been duly
reclassified by the Board of Directors of the Corporation (the "Board") as
authorized but unissued shares of Series B Convertible Preferred Stock and One
Hundred Twenty-five Thousand (125,000) authorized but unissued shares of the
Corporation's Preferred Stock, $0.01 par value, have been duly reclassified by
the Board as authorized but unissued shares of Series C Convertible Preferred
Stock.
SECOND: A description of the Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock and of the powers, designation,
preferences and rights of the shares of such Series, and the qualifications,
limitations, or restrictions thereof, is as follows:
1. DESIGNATION AND PAR VALUE. The formal designation of the shares so
reclassified by the Board shall be Series B Convertible Preferred Stock (the
"Series B Preferred Stock") and Series C Convertible Preferred Stock (the
"Series C Preferred Stock"). The par value of each of the Series B Preferred
Stock and Series C Preferred Stock is $0.01 per share.
2. LIQUIDATION PREFERENCE.
(A) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the business and affairs of the Corporation, and after the
payment or the setting apart for payment of the Liquidation Preference (as
such term is defined in the Certificate of Designations, Preferences,
Rights and Limitations of Series A 8% Convertible Preferred Stock of the
Corporation) and before the holders of shares of Common Stock of the
Corporation ("Common Stock"), Series B Preferred Stock or any other class
or series of stock of the Corporation shall be entitled to any payment on
account of such shares, the holders of the shares of Series C Preferred
Stock then outstanding shall be entitled to receive, as a liquidation
preference, an amount equal to Ten Dollars ($10.00) per share (the "Series
C Original Cost"), plus any declared but unpaid dividends (the Series C
Original Cost plus such declared but unpaid dividends being referred to as
the "Series C Liquidation Preference") to which such stockholders have
become entitled and which have not theretofore been paid. After the
holders of Series C Preferred Stock shall have received such payment of
the Series C Liquidation Preference plus all accrued and unpaid dividends
in the course of such liquidation, dissolution or winding up, they shall
have no right or claim to any of the remaining assets of the Corporation.
(B) If upon any liquidation, dissolution or winding up, the
Corporation shall have insufficient funds to permit payment to the holders
of Series C Preferred Stock then outstanding of the entire amount to which
they are entitled as a Series C Liquidation Preference hereunder, then
such funds as are available for such purpose shall be distributed among
such holders on the basis of the number of shares of Series C Preferred
Stock held by each such holder so that, as nearly as may be practicable,
the amount each such holder shall receive shall represent the same
proportion of such available funds as such holder's total holding of
shares of Series C Preferred Stock represents of the total shares of
Series C Preferred Stock at the time outstanding.
(C) For purposes of this Section 2, a liquidation, dissolution or
winding up of the Company shall be deemed to occur in the event of a
merger, reorganization, consolidation or sale of all or substantially all
of the fair market value of the Company's property or business or any
other kind of transaction or series of related transactions in which more
than 50 percent of the outstanding voting power of the Company is
transferred by the stockholders of the Company (each a "Change of Control
Transaction"), provided that this Section 2(d) shall not apply to a merger
effected exclusively for the purpose of changing the domicile of the
Company, or to any Change of Control Transaction in which stockholders who
are the beneficial owners of 50 percent or more the Company's voting
shares prior to the transaction beneficially own more than 50 percent of
the outstanding voting shares of the Company, or the surviving corporation
or any merger or consolidation of the purchaser of the assets of the
Company or such purchaser's direct or indirect parent corporation. For
purposes of this section, the term "beneficial owner" shall be determined
in accordance with Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended.
3. DIVIDENDS.
(A) The holders of Series C Preferred Stock shall be entitled to
receive dividends, when, as and if declared by the Board, out of capital
surplus or earnings at the time legally available therefor, payable (at
the election of the holder) in cash or in fully-paid and non-assessable
shares of Common Stock which shall be valued, for this purpose, at an
amount equal to the Conversion Price (as herein defined).
(B) Except as may be otherwise provided in this Certificate of
Designation, so long as any shares of Series C Preferred Stock are
outstanding, no dividends shall be declared or paid or set aside for
payment, and no other distribution shall be declared or made, upon any
Common Stock, Series B Preferred Stock or upon any other shares of a class
or series of stock of the Corporation, other than shares of Series A 8%
Convertible Preferred Stock, unless (i) all amounts then due to the
holders of Series C Preferred Stock, including the dividends provided for
herein, have been paid, or (ii) if greater, an amount equal to that paid
on the shares of such other class or series of stock (as determined on a
per annum, as converted basis).
4. VOTING RIGHTS.
In addition to any other rights provided by law, so long as any shares of
Series C Preferred Stock shall be outstanding, except as otherwise required by
law, the Corporation, without first obtaining the affirmative vote or written
consent of the holders of at least a majority of the then outstanding shares of
Series C Preferred Stock, will not:
(I) amend the Certificate of Incorporation to change the preferences,
rights, privileges or powers of, or the restrictions provided for the
benefit of, the Series C Preferred Stock so as to adversely affect
the Series C Preferred Stock;
(II) increase or decrease the authorized number of shares of the
Series C Preferred Stock or the Preferred Stock;
(III) create, whether by reclassification or otherwise, any shares of
any class or series of stock having preferences, rights or privileges
senior to the Series C Preferred Stock;
(IV) amend or waive any provision of the Certificate of Incorporation
relating to the Series C Preferred Stock;
(V) enter into any agreement that would restrict the Corporation's
ability to perform under the stock purchase agreement between the
Corporation and the holders of the Series C Preferred Stock;
(VI) effect a Change of Control Transaction or any transaction in
which a substantial portion of the assets of the Corporation is sold;
(VII) effect a recapitalization or reclassification of the
Corporation's capital stock;
(VIII) repurchase or redeem any shares of the Common Stock or
Preferred Stock;
(IX) declare or pay any dividends on, or make any distribution on
account of, the Common Stock;
(X) permit a subsidiary of the Corporation to sell shares of its
capital stock to any third party; or
(XI) voluntarily liquidate, dissolve or wind up the Corporation.
5. CONVERSION RIGHTS. The Series B Preferred Stock and the Series C Preferred
Stock will be entitled to the following rights of conversion, subject to any
limitations and conditions provided in this Certificate of Designation:
(A) Each share of Series B Preferred Stock will be convertible, at
the option of the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $1.50 by
the Conversion Price then applicable to the Series B Preferred Stock.
After March 1, 2003, each share of Series C Preferred Stock will be
convertible, at the option of the holder thereof, into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing the Series C Original Cost by the Conversion Price then
applicable to the Series C Preferred Stock. As of September 23, 2002, the
Conversion Price per share shall be $1.50 for each share of Series B
Preferred Stock and $0.05 for each share of Series C Preferred Stock; such
Conversion Prices shall be subject to adjustment as set forth in Section
6.
(B) Each share of Series C Preferred Stock shall automatically
convert into shares of Common Stock at the then applicable Conversion
Price on June 30, 2003.
(C) The right to convert shares of Series B Preferred Stock or Series
C Preferred Stock into shares of Common Stock under this Section 5 shall
be exercised by a holder of such shares by delivering to the Corporation
during regular business hours, or to such agent as may be designated by
the Corporation, the original certificate or certificates for the shares
of Series B Preferred Stock or Series C Preferred Stock to be converted,
as the case may be, duly endorsed or assigned either in blank or to the
Corporation, accompanied by written notice in substantially the form
annexed hereto as Exhibit A, stating that the holder elects to convert
such shares and stating the name or names (with address and Social
Security or Federal Taxpayer Identification Number or other applicable
governmental identification) in which the certificate or certificates for
the shares of Common Stock are to be issued. Conversion shall be deemed to
have been effected on the date when the aforesaid delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation
shall issue and deliver to such holder (or upon the written order of such
holder) to the place designated by such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder
is entitled. The person in whose name the certificate or certificates for
Common Stock are to be issued shall be deemed to have become a stockholder
of record on the applicable Conversion Date unless the transfer books of
the Corporation are closed on that date, in which event such person shall
be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open. Upon conversion of only a
portion of the number of shares covered by a certificate representing
shares of Series B Preferred Stock or Series C Preferred Stock, as the
case may be, surrendered for conversion, the Corporation shall issue and
deliver to such holder, or upon the written order of the holder of the
certificate so surrendered for conversion, at the expense of the
Corporation, a new certificate covering the number of shares of Series B
Preferred Stock or Series C Preferred Stock, as the case may be,
representing the unconverted portion of the certificate so surrendered.
(D) The Corporation shall, at all times when Series B Preferred Stock
or Series C Preferred Stock shall be outstanding, reserve and keep
available out of its authorized but unissued stock, for the purpose of
effecting the conversion of Series B Preferred Stock and Series C
Preferred Stock, such number of its duly authorized shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock and Series C Preferred
Stock.
(E) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and non-assessable. No
adjustment shall be made for dividends on any share of Series B Preferred
Stock or Series C Preferred Stock which is being converted (unless such
dividends have been accrued and are unpaid as of the Conversion Date) or
on any share of Common Stock issued on exercise of a holder's Conversion
Right.
(F) All shares of Series B Preferred Stock or Series C Preferred
Stock which shall have been surrendered for conversion as herein provided
shall no longer be deemed to be outstanding, and all rights with respect
to such shares, including the rights, if any, to receive notices and to
vote, shall immediately cease and terminate on the Conversion Date. Except
only the right of the holders thereof to receive shares of Common Stock in
conversion thereof. Any shares of Series B Preferred Stock or Series C
Preferred Stock so converted shall be retired and canceled and shall not
be reissued, and the Corporation (without the need for stockholder action)
may from time to time take such appropriate action as may be necessary to
reduce the authorized number of shares of Series B Preferred Stock or
Series C Preferred Stock accordingly.
(G) The Corporation shall pay any and all issue and other taxes that
may be payable in respect of any issuance or delivery of shares of Common
Stock upon conversion of shares of Series B Preferred Stock or Series C
Preferred Stock pursuant to this Section 6. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of shares of Common Stock
in a name other than that in which the shares of Series B Preferred Stock
or Series C Preferred Stock so converted were registered, and no such
issuance or delivery shall be made unless and until the person or entity
requesting such issuance has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that
such tax has been paid.
6. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price of the Series B
Preferred Stock and Series C Preferred Stock shall be adjusted (to the nearest
cent) from time to time as follows:
(A) If the Corporation, at any time after the date of the first
issuance of shares of Series C Preferred Stock shall have subdivided its
outstanding shares of Common Stock by recapitalization, reclassification
or split-up thereof, or if the Corporation shall have declared a stock
dividend or distributed shares of Common Stock to its stockholders, then
in each such event the Conversion Price then in effect shall be
proportionately decreased; and if the Corporation, prior to such
conversion, shall have at any time combined the outstanding shares of
Common Stock by recapitalization, reclassification or comparable
combination thereof, then in each such event the Conversion Price then in
effect shall be proportionately increased.
(B) In case the Corporation shall consolidate with or merge into
another corporation or convey all or substantially all of its assets to
another corporation, then, and in each such case, the Conversion Price
shall be adjusted in such manner that the holder of shares of Series B
Preferred Stock or Series C Preferred Stock, upon the conversion thereof
as provided in Section 5 above, at any time after the consummation of such
consolidation, merger or conveyance, shall be entitled to receive the
securities or property to which such holder would have been entitled upon
such consummation if such holder had exercised his right to convert such
shares of Series B Preferred Stock or Series C Preferred Stock immediately
prior thereto.
(C) Notwithstanding anything to the contrary contained in this
Section 6 or elsewhere in this Certificate of Designation, the accrual or
payment in kind of dividends on the Series A Preferred Stock shall be
excluded from those events requiring any adjustment in accordance with
this Section 6.
(D) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series B Preferred Stock and
Series C Preferred Stock against impairment.
(E) Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Section 6, the Corporation at its
expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of Series B
Preferred Stock or Series C Preferred Stock a certificate setting forth
such adjustment or readjustment and showing the facts upon which such
adjustment or readjustment is based and the then effective Conversion
Price.
7. REDEMPTION. Shares of Series B Preferred Stock and Series C Preferred
Stock shall not be redeemable.
8. WAIVER. Any of the rights of the holders of Series C Preferred Stock set
forth herein may be waived by the affirmative vote of the holders of a majority
of the shares of Series C Preferred Stock then outstanding.
9. NOTICES.
(A) Any notices required to be given to any holder of Series B
Preferred Stock or Series C Preferred Stock shall be deemed properly given
if deposited in the United States mail, postage prepaid, or sent by
facsimile or by overnight or express delivery service, followed by
duplicate notice via United States first class mail, postage prepaid, and
addressed to the holder of record at such holder's address appearing at
the books of the Corporation.
(B) In case of any (i) capital reorganization of the Corporation, any
reclassification of the capital stock of the Corporation, any
consolidation or merger of the Corporation with or into another
corporation, or any conveyance of all or substantially all of the assets
of the Corporation to another corporation; (ii) voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; or (iii) other
event specified in this Certificate requiring the taking of such a record,
then, and in each such case, the Corporation shall mail or cause to be
mailed to each holder a notice specifying, as the case may be, the date on
which a record is to be taken for the foregoing purposes and providing the
information reasonably required in order enable the holders of record of
shares of Series B Preferred Stock and Series C Preferred Stock to
exercise the rights conferred by this Certificate of Designation.
10. LOST CERTIFICATES. The Corporation shall issue a new share certificate
representing shares of Series C Preferred Stock in the place of any certificate
theretofore issued by the Corporation, alleged to have been lost, stolen or
destroyed. The Corporation may require the holder of such lost, stolen or
destroyed certificate or the owner's legal representative to give the
Corporation a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
THIRD: The reclassification of authorized but unissued shares as set forth
in this Certificate of Designation does not increase the authorized capital of
the Corporation or the aggregate par value thereof.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation of Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock to be duly executed by its President and by its Secretary,
respectively, this 23rd day of September, 2002.
BIOKEYS PHARMACEUTICALS, INC.
By: /s/ WARREN C. LAU
-----------------
Warren C. Lau, President
By: /s/ ROBERT D. WHITWORTH
------------------------
Robert D. Whitworth, Secretary
EXHIBIT A
BIOKEYS PHARMACEUTICALS, INC.
NOTICE OF CONVERSION OF
SERIES B CONVERTIBLE PREFERRED STOCK OR
SERIES C CONVERTIBLE PREFERRED STOCK
(To be Executed by the Registered Holder in order to Convert shares of Series B
Preferred Stock or Series C Preferred Stock)
The undersigned Holder hereby irrevocably elects to convert ____ shares of
Series __ Convertible Preferred Stock, represented by stock certificate No(s).
___________ (the "Preferred Stock Certificates") into shares of Common Stock of
Biokeys Pharmaceuticals, Inc. ("Common Stock") according to the conditions set
forth in the Certificate of Designation of Series B Convertible Preferred Stock
and Series C Convertible Preferred Stock, as of the date written below. If
shares are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates. No fee will be charged to the holder for
any conversion, except for transfer taxes, if any. A copy of each of the
Preferred Stock Certificates being converted is attached hereto.
Date of Submission: _________________________
Number of Shares of Series __ Convertible Preferred Stock to be
Converted: ___________________
Name of Holder: _____________________________
By: _____________________________________
(Signature)
Title: _____________________________________
Address: ___________________________________
Social Security or Federal Taxpayer ID No:_______________________
IMPORTANT
No shares of Common Stock will be issued until the original stock
certificate(s) representing shares of Series B Convertible Preferred Stock or
Series C Convertible Preferred Stock to be converted and the Notice of
Conversion are received by the Corporation. The holder shall fax, or otherwise
deliver, a copy of this completed and fully executed Notice of Conversion to
the Corporation at the office of the Corporation or such other location
designated by the Corporation and shall deliver, at the same time, the original
stock certificate(s) representing such converted shares duly endorsed for
transfer.
EXHIBIT 10.7
PUBLIC HEALTH SERVICE
PATENT LICENSE AGREEMENT-EXCLUSIVE
COVER PAGE
For PHS internal use only:
Patent License Number:
L-284-98/0
Serial Number(s) of Licensed Patent(s) and/or Patent Application(s):
07/324,027 - U.S. Patent Number 5,562,905
07/148,692 - Abandoned in U.S. and pending or issued in foreign countries
Licensee:
Biokeys, Inc.
Additional Remarks:
The inventions named above were the subject of interference number J
03,499 between PHS and E.I. Du Pont de Nemours and Company. As a result
of a settlement agreement (OTT Reference No. L-182-95) PHS abandoned its
application and E.I. Du Pont de Nemours and Company granted an exclusive
license to PHS with the right to sublicense to the issued patent named
above.
Public Benefit(s):
Potential HIV therapeutic and/or vaccine,
This Patent License Agreement, hereinafter referenced to as the "Agreement",
consists of this Cover Page, an attached Agreement, a Signature Page, Appendix
A (List of Patent(s) and/or Patent Application(s), Appendix B (Fields of Use
and Territory), Appendix C (Royalties), Appendix D (Benchmarks and
Performance), Appendix E (Commercial Development Plan), and Appendix F
(Developing Countries), The Parties to this Agreement are:
1) The National Institutes of Health ("NIH"), the Centers for
Disease Control and Prevention ("CDC"), or the Food and Drug
Administration ("FDA"), hereinafter singly or collectively
referred to as "PHS", agencies of the United States Public Health
Service within the Department of Health and Human Services
("DHHS"); and
2) The person, corporation, or institution identified above and/or
on the Signature Page, having offices at the address indicated on
the Signature Page, hereinafter referred to as "Licensee",
PHS PATENT LICENSE AGREEMENT-EXCLUSIVE
PHS and Licensee agree as follows:
1. BACKGROUND
1.01 In the course of conducting biomedical and behavioral research, PHS and
E.I. Du Pont de Nemours and Company investigators made inventions that may have
commercial applicability.
1.02 The inventions were the subject of interference number 103.499 between PHS
and E.I. Du Pont de Nemours and Company. Under a settlement agreement (OTT
Reference No. L-182-95) PHS abandoned its U.S. application and E.I. Du Pont de
Nemours and Company granted an exclusive license to PHS with the right to
sublicense. E.I. Du Pont de Nemours and Company retains a nonexclusive license
limited to the United States to make, have made, use, offer to sell. sell and
import without the right to sublicense.
1.03 By assignment of non U.S. rights from PHS employees and other inventors to
DHHS and U.S. rights from E.I. Du Pont de Nemours and Company employees to E.I.
Du Pont de Nemours and Company, DHHS and E.I. Du Pont de Nemours and Company,
on behalf of the United States Government and E.I. Du Pont de Nemours and
Company, own intellectual property rights claimed in any United States and/or
foreign patent applications or patents corresponding to the assigned
inventions.
1.04 The Secretary of DHHS has delegated to PHS the authority to enter into
this Agreement for the licensing of rights to these inventions.
1.05 PHS desires to transfer these inventions to the private sector through
commercialization licenses to facilitate the commercial development of products
and processes for public use and benefit.
1.06 Licensee desires to acquire commercialization rights to certain of these
inventions in order to develop processes, methods, and/or marketable products
for public use and benefit.
2. DEFINITIONS
2.01 "Benchmarks" mean the performance milestones that are set forth in
Appendix D.
2.02 "Commercial Development Plan" means the written commercialization plan
attached as Appendix E.
2.03 "First Commercial Sale" means the initial transfer by or on behalf of
Licensee or its sublicensees of Licensed Products or the initial practice of a
Licensed Process by or on behalf of Licensee or its sublicensees in exchange
for cash or some equivalent to which value can be assigned for the purpose of
determining Net Sales.
2.04 "Government" means the Government of the United States of America.
2.05 "Licensed Fields of Use" means the fields of use identified in Appendix B.
2.06 "Licensed Patent Rights" shall mean:
A) Patent applications (including provisional patent applications and PCT
patent applications) and/or patents listed in Appendix A, all divisions and
continuations of these applications, all patents issuing from such
applications, divisions, and continuations, and any reissues, reexaminations
and extensions of all such patents;
B) to the extent that the following contain one or more claims directed to the
invention or inventions disclosed in a) above: i) continuations-in-part of a)
above; ii) all divisions and continuations of these continuations-in-part; iii)
all patents issuing from such continuations-in-part. divisions. and
continuations; iv) priority patent application(s) of a) above; and v) any
reissues, reexaminations, and extensions of all such patents;
C) to the extent that the following contain one or more claims directed to the
invention or inventions disclosed in a) above: all counterpart foreign and U.S.
patent applications and patents to a) and b) above, including those listed in
Appendix A.
Licensed Patent Rights shall not include b) or c) above to the extent that they
contain one or more claims directed to new matter which is not the subject
matter disclosed in a) above.
2.07 "Licensed Process(es)" means processes which, in the course of being
practiced would be within the scope of one or more claims of the Licensed
Patent Rights that have not been held unpatentable, invalid or unenforceable by
an unappealed or unappealable judgment of a court of competent jurisdiction.
2.08 "Licensed Product(s)" means tangible materials which, in the course of
manufacture, use, sale, or importation would be within the scope of one or more
claims of the Licensed Patent Rights that have not been held unpatentable,
invalid or unenforceable by an unappealed or unappealable judgment of a court
of competent jurisdiction.
2.09 "Licensed Territory" means the geographical area identified in Appendix B.
2.10 "Net Sales" means the total gross receipts for sales of Licensed Products
or practice of Licensed Processes by or on behalf of Licensee or its
sublicensees, and from leasing, renting, or otherwise making Licensed Products
available to others without sale or other dispositions, whether invoiced or
not, less returns and allowances, packing costs, insurance costs, freight out,
taxes or excise duties imposed on the transaction (if separately invoiced), and
wholesaler and cash discounts in amounts customary in the trade to the extent
actually granted. No deductions shall be made for commissions paid to
individuals, whether they be with independent sales agencies or regularly
employed by Licensee, or sublicensees, and on its payroll, or for the cost of
collections.
2.11 "Practical Application" means to manufacture in the case of a composition
or product, to practice in the case of a process or method, or to operate in
the case of a machine or system; and in each case, under such conditions as to
establish that the invention is being utilized and that its benefits are to the
extent permitted by law or Government regulations available to the public on
reasonable terms.
2.12 "Research License" means a nontransferable, nonexclusive license to make
and to use the Licensed Products or Licensed Processes as defined by the
Licensed Patent Rights for purposes of research and not for purposes of
commercial manufacture or distribution or in lieu of purchase.
2.13 "Public Sector" means the government of a Developing Country, or any
entity empowered by the government of a Developing Country to act for said
government in matters applicable to this Agreement, organizations within the
United Nations system, including the World Health Organization and UNICEF, and
other non-profit agencies which may purchase (drugs or vaccines) for delivery,
manufacture and/or sale in Developing Countries.
2.14 "Developing Country" means countries eligible for support from the Global
Alliance for Vaccine and Immunization (GA VI), which at the effective date of
this Agreement are those countries with a Gross National Product of less than
US $1.000 per capita per year and at the effective date of this Agreement
include the countries designated in Appendix F of this Agreement.
3. GRANT OF RIGHTS
3.01 PHS hereby grants and Licensee accepts, subject to the terms and
conditions of this Agreement, an exclusive license under the Licensed Patent
Rights in the Licensed Territory to make and have made, to use and have used,
to sell and have sold, to offer to sell, and to import any Licensed Products in
the Licensed Fields of Use and to practice and have practiced any Licensed
Processes in the Licensed Fields of Use. Licensee acknowledges that the above
grant of rights is subject to limitation as per 1.02.
3.02 This Agreement confers no license or rights by implication, estoppel. or
otherwise under any patent applications or patents of PHS other than Licensed
Patent Rights regardless of whether such patents are dominant or subordinate to
Licensed Patent Rights.
4. SUBLICENSING
4.01 Upon written approval by PHS, which approval will not be unreasonably
withheld, Licensee may enter into sublicensing agreements under the Licensed
Patent Rights.
4.02 Licensee agrees that any sublicenses granted by it shall provide that the
obligations to PHS of Paragraphs 5.01-5.04, 8.01. 10.01,10.02,12.05, and
13.07-13.09 of this Agreement shall be binding upon the sublicensee as if it
were a party to this Agreement. Licensee further agrees to attach copies of
these Paragraphs to all sublicense agreements.
4.03 Any sublicenses granted by Licensee shall provide for the termination of
the sublicense, or the conversion to a license directly between such
sublicensees and PHS, at the option of the sublicensee, upon termination of
this Agreement under Article 13. Such conversion is subject to PHS approval,
which shall not be unreasonably denied, and contingent upon acceptance by the
sublicensee of the remaining provisions of this Agreement.
4.04 Licensee agrees to forward to PHS a copy of each fully executed sublicense
agreement postmarked within thirty (30) days of the execution of such
agreement. To the extent permitted by law, PHS agrees to maintain each such
sublicense agreement in confidence.
5. STATUTORY AND PHS REQUIREMENTS AND RESERVED GOVERNMENT RIGHTS
5.01 PHS reserves on behalf of the Government an irrevocable, nonexclusive,
nontransferable, royalty-free license for the practice of all inventions
licensed under the Licensed Patent Rights throughout the world by or on behalf
of the Government and on behalf of any foreign government or international
organization pursuant to any existing or future treaty or agreement to which
the Government is a signatory. Prior to the First Commercial Sale, Licensee
agrees to provide PHS reasonable research quantities of Licensed Products or
materials made through the Licensed Processes for PHS research use.
5.02 Licensee agrees that products used or sold in the United States embodying
Licensed Products 01 produced through use of Licensed Processes shall be
manufactured substantially in the United States, unless a written waiver is
obtained in advance from PHS.
5.03 Licensee acknowledges that PHS may enter into future Cooperative Research
and Development Agreements (CRADAs) under the Federal Technology Transfer Act
of 1986 that relate to the subject matter of this Agreement. Licensee agrees
not to unreasonably deny requests for a Research License from such future
collaborators with PHS when acquiring such rights is necessary in order to make
a Cooperative Research and Development Agreement (CRADA) project feasible.
Licensee may request an opportunity to join as a party to the proposed
Cooperative Research and Development Agreement (CRADA).
5.04 In addition to the reserved license of Paragraph 5.01 above, PHS reserves
the right to grant nonexclusive Research Licenses directly or to require
Licensee to grant nonexclusive Research Licenses on reasonable terms. The
purpose of this Research License is to encourage basic research, whether
conducted at an academic or corporate facility. In order to safeguard the
Licensed Patent Rights, however, PHS shall consult with Licensee before
granting to commercial entities a Research License or providing to them
research samples of materials made through the Licensed Processes; provided,
however, that PHS will not provide materials obtained from Licensee under
paragraph 5.01 to third parties, except with Licensee's consent; Licensee shall
not unreasonably deny such consent.
5.05 PHS retains the right to grant additional nonexclusive licenses to the
Public Sector for manufacturing and sales of an HIV vaccine made from Licensed
Products.
6. ROYALTIES AND REIMBURSEMENT
6.01 Licensee agrees to pay to PHS a noncreditable, nonrefundable license issue
royalty as set forth in Appendix C within thirty (30) days from the date that
this Agreement becomes effective.
6.02 Licensee agrees to pay to PHS a nonrefundable minimum annual royalty as
set forth in Appendix C. The minimum annual royalty is due and payable on
January I of each calendar year and may be credited against any earned
royalties due for sales made in that year. The minimum annual royalty due for
the first calendar year of this Agreement may be prorated according to the
fraction of the calendar year remaining between the effective date of this
Agreement and the next subsequent January 1.
6.03 Licensee agrees to pay PHS earned royalties as set forth in Appendix C.
6.04 Licensee agrees to pay PHS benchmark royalties as set forth in Appendix C.
6.05 Licensee agrees to pay PHS sublicensing royalties as set forth in Appendix
C.
6.06 A patent or patent application licensed under this Agreement shall cease
to fall within the Licensed Patent Rights for the purpose of computing earned
royalty payments in any given country on the earliest of the dates that a) the
application has been abandoned and not continued, b) the patent expires or
irrevocably lapses, or c) the claims have been held to be invalid or
unenforceable by an unappealed or unappealable decision of a court of competent
jurisdiction or administrative agency.
6.07 No multiple royalties shall be payable because any Licensed Products or
Licensed Processes are covered by more than one of the Licensed Patent Rights.
6.08 On sales of Licensed Products by Licensee to sublicensees or on sales made
in other than an arm's-length transaction, the value of the Net Sales
attributed under this Article 6 to such a transaction shall be that which would
have been received in an arm's-length transaction, based on sales of like
quantity and quality products on or about the time of such transaction.
6.09 With regard to expenses associated with the preparation, filing,
prosecution, and maintenance of all foreign (non U.S.) patent applications and
patents included within the Licensed Patent Rights incurred by PHS prior to the
effective date of this Agreement, Licensee shall pay to PHS, as an additional
royalty, within sixty (60) days of PHS' submission of a statement and request
for payment to Licensee, an amount equivalent to such patent expenses
previously incurred by PHS.
6.10 With regard to expenses associated with the preparation, filing,
prosecution, and maintenance of all foreign (non U.S.) patent applications and
patents included within the Licensed Patent Rights incurred by PHS on or after
the effective date of this Agreement, PHS, at its sole option, may require
Licensee:
(a) to pay PHS on an annual basis, within sixty (60) days of PHS' submission of
a statement and request for payment, a royalty amount equivalent to all such
foreign (non U.S.) patent expenses incurred during the previous calendar
year(s); or
(b) to pay such foreign (non U.S.) patent expenses directly to the law firm
employed by PHS to handle such functions. However, in such event, PHS and not
Licensee shall be the client of such law firm.
In limited circumstances, Licensee may be given the right to assume
responsibility for the preparation, filing, prosecution, or maintenance of any
foreign (non U.S.) patent application or patent included with the Licensed
Patent Rights. In that event, Licensee shall directly pay the attorneys or
agents engaged to prepare, file, prosecute, or maintain such foreign (non U.S.)
patent applications or patents and shall provide to PHS copies of each invoice
associated with such services as well as documentation that such invoices have
been paid.
6.11 Licensee may elect to sun-ender its rights in any country of the Licensed
Territory under any Licensed Patent Rights upon ninety (90) days written notice
to PHS and owe no payment obligation under Article 6.10 for patent-related
expenses incurred in that country after ninety (90) days of the effective date
of such written notice.
6.12 In making royalty payments under Article 6 of this Agreement not
specifically identified as a United States or foreign royalty obligation under
Licensed Patent Rights. Licensee attributes the value of such payments equally
between the United States and foreign portions of the Licensed Patent Rights.
7. PATENT FILING, PROSECUTION, AND MAINTENANCE
7.01 Except as otherwise provided in this Article 7. PHS agrees to take
responsibility for, but to consult with, the Licensee in the preparation.
filing, prosecution. and maintenance of any and all patent applications or
patents included in the Licensed Patent Rights and shall furnish copies of
relevant patent-related documents to Licensee.
7.02 Upon PHS's written request, Licensee shall assume the responsibility for
the preparation, filing, prosecution, and maintenance of any and all patent
applications or patents included in the Licensed Patent Rights and shall on an
ongoing basis promptly furnish copies of all patent-related documents to PHS.
In such event, Licensee shall, subject to the prior approval of PHS, select
registered patent attorneys or patent agents to provide such services on behalf
of Licensee and PHS. PHS shall provide appropriate powers of attorney and other
documents necessary to undertake such actions to the patent attorneys or patent
agents providing such services. Licensee and its attorneys or agents shall
consult with PHS in all aspects of the preparation. filing, prosecution and
maintenance of patent applications and patents included within the Licensed
Patent Rights and shall provide PHS sufficient opportunity to comment on any
document that Licensee intends to file or to cause to be filed with the
relevant intellectual property or patent office.
7.03 At any time, PHS may provide Licensee with written notice that PHS wishes
to assume control of the preparation, filing, prosecution, and maintenance of
any and all patent applications or patents included in the Licensed Patent
Rights. If PHS elects to assume such responsibilities, Licensee agrees to
cooperate fully with PHS. Its attorneys, and agents in the preparation, filing,
prosecution, and maintenance of any and all patent applications or patents
included in the Licensed Patent Rights and to provide PHS with complete copies
of any and all documents or other materials that PHS deems necessary to
undertake such responsibilities. Licensee shall be responsible for all costs
associated with transferring patent prosecution responsibilities to an attorney
or agent of PHS's choice.
7.04 Each party shall promptly inform the other as to all matters that come to
its attention that may affect the preparation, tiling, prosecution, or
maintenance of the Licensed Patent Rights and permit each other to provide
comments and suggestions with respect to the preparation, tiling, prosecution,
and maintenance of Licensed Patent Rights, which comments and suggestions shall
be considered by the other party.
8. RECORD KEEPING
8.01 Licensee agrees to keep accurate and correct records of Licensed Products
made, used, sold, or imported and Licensed Processes practiced under this
Agreement appropriate to determine the amount of royalties due PHS. Such
records shall be retained for at least five (5) years following a given
reporting period and shall be available during normal business hours for
inspection at the expense of PHS by an accountant or other designated auditor
selected by PHS for the sole purpose of verifying reports and payments
hereunder. The accountant or auditor shall only disclose to PHS information
relating to the accuracy of reports and payments made under this Agreement. If
an inspection shows an underreporting or underpayment in excess of five percent
(5%) for any twelve (12) month period, then Licensee shall reimburse PHS for
the cost of the inspection at the time Licensee pays the unreported royalties,
including any late charges as required by Paragraph 9.08 of this Agreement. All
payments required under this Paragraph shall be due within thirty (30) days of
the date PHS provides Licensee notice of the payment due.
8.02 Licensee agrees to have an audit of sales and royalties conducted by an
independent auditor at least every two (2) years if annual sales of the
Licensed Product or Licensed Processes are over two (2) million dollars. The
audit shall address, at a minimum, the amount of gross sales by or on behalf of
Licensee during the audit period, terms of the license as to percentage or
fixed royalty to be remitted to the Government, the amount of royalty funds
owed to the Government under this Agreement, and whether the royalty amount
owed has been paid to the Government and is reflected in the records of the
Licensee. The audit shall also indicate the PHS license number, product, and
the time period being audited. A report certified by the auditor shall be
submitted promptly by the auditor directly to PHS on completion. Licensee shall
pay for the entire cost of the audit.
9. REPORTS ON PROGRESS, BENCHMARKS, SALES, AND PAYMENTS
9.01 Prior to signing this Agreement, Licensee has provided to PHS the
Commercial Development Plan at Appendix E, under which Licensee intends to
bring the subject matter of the Licensed Patent Rights to the point of
Practical Application. This Commercial Development Plan is hereby incorporated
by reference into this Agreement. Based on this plan, performance Benchmarks
are determined as specified in Appendix D.
9.02 Licensee shall provide written annual reports on its product development
progress or efforts to commercialize under the Commercial Development Plan for
each of the Licensed Fields of Use within sixty (60) days after December 31 of
each calendar year. These progress reports shall include, but not be limited
to: progress on research and development, status of applications for regulatory
approvals, manufacturing, sublicensing, marketing, importing, and sales during
the preceding calendar year, as well as plans for the present calendar year.
PHS also encourages these reports to include information on any of Licensee's
public service activities that relate to the Licensed Patent Rights. If
reported progress differs from that projected in the Commercial Development
Plan and Benchmarks, Licensee shall explain the reasons for such differences.
In any such annual report, Licensee may propose amendments to the Commercial
Development Plan, acceptance of which by PHS may not be denied unreasonably.
Licensee agrees to provide any additional information reasonably required by
PHS to evaluate Licensee's performance under this Agreement. Licensee may amend
the Benchmarks at any time upon written consent by PHS. PHS shall not
unreasonably withhold approval of any request of Licensee to extend the time
periods of this schedule if such request is supported by a reasonable showing
by Licensee of diligence in its performance under the Commercial Development
Plan and toward bringing the Licensed Products to the point of Practical
Application as defined in 37 CFR 404.3(d). Licensee shall amend the Commercial
Development Plan and Benchmarks at the request of PHS to address any Licensed
Fields of Use not specifically addressed in the plan originally submitted.
9.03 Licensee shall report to PHS the dates for achieving Benchmarks specified
in Appendix D and the First Commercial Sale in each country in the Licensed
Territory within thirty (30) days of such occurrences.
9.04 Licensee shall submit to PHS within sixty (60) days after each calendar
half-year ending June 30 and December 31 a royalty report setting forth for the
preceding half-year period the amount of the Licensed Products sold or Licensed
Processes practiced by or on behalf of Licensee in each country within the
Licensed Territory, the Net Sales, and the amount of royalty accordingly due.
With each such royalty report, Licensee shall submit payment of the earned
royalties due. If no earned royalties are due to PHS for any reporting period,
the written report shall so state. The royalty report shall be certified as
correct by an authorized officer of Licensee and shall include a detailed
listing of all deductions made under Paragraph 2.10 to determine Net Sales made
under Article 6 to determine royalties due.
9.05 Licensee agrees to forward semi-annually to PHS a copy of such reports
received by Licensee from its sublicensees during the preceding half-year
period as shall be pertinent to a royalty accounting to PHS by Licensee for
activities under the sublicense.
9.06 Royalties due under Article 6 shall be paid in U.S. dollars. For
conversion of foreign currency to U.S. dollars, the conversion rate shall be
the New York foreign exchange rate quoted in The Wall Street Journal on the day
that the payment is due. All checks and bank drafts shall be drawn on United
States banks and shall be payable, as appropriate, to "NIH/Patent Licensing."
All such payments shall be sent to the following address: NIH, P.O. Box 360120.
Pittsburgh, PA 15251-6120. Any loss of exchange, value, taxes, or other
expenses incurred in the transfer or conversion to U.S. dollars shall be paid
entirely by Licensee. The royalty report required by Paragraph 9.04 of this
Agreement shall accompany each such payment. and a copy of such report shall
also be mailed to PHS at its address for notices indicated on the Signature
Page of this Agreement.
9.07 Licensee shall be solely responsible for determining if any tax on royalty
income is owed outside the United States and shall pay any such tax and be
responsible for all filings with appropriate agencies of foreign governments.
9.08 Interest and penalties may be assessed by PHS on any overdue payments in
accordance with the Federal Debt Collection Act. The payment of such late
charges shall not prevent PHS from exercising any other rights it may have as a
consequence of the lateness of any payment.
9.09 All plans and reports required by this Article 9 and marked "confidential"
by Licensee shall, to the extent permitted by law, be treated by PHS as
commercial and financial information obtained from a person and as privileged
and confidential, and any proposed disclosure of such records by the PHS under
the Freedom of Information Act (FOIA), 5 U.S.C. ss. 552 shall be subject to the
predisclosure notification requirements of 45 CFR ss. 5.65(d).
10. PERFORMANCE
10.01 Licensee shall use its reasonable best efforts to bring the Licensed
Products and Licensed Processes to Practical Application. "Reasonable best
efforts" for the purposes of this provision shall include adherence to the
Commercial Development Plan at Appendix E and performance of the Benchmarks at
Appendix D. The efforts of a sublicensee shall be considered the efforts of
Licensee.
10.02 Upon the First Commercial Sale, until the expiration of this Agreement.
Licensee shall use its Reasonable best efforts to make Licensed Products and
Licensed Processes reasonably accessible to the United States Public.
10.03 Following regulatory approval for marketing Licensed Products in the
United States, Licensee Agrees to set up an indigent patient access program for
Licensed Products (or to include Licensed Products in an existing indigent
patient access program) such that Licensed Products may be provided to
qualified indigent citizens of the United States who are not covered under any
public or private health plan.
11. INFRINGEMENT AND PATENT ENFORCEMENT
11.01 PHS and Licensee agree to notify each other promptly of each infringement
or possible infringement of the Licensed Patent Rights, as well as any facts
which may affect the validity, scope, or enforceability of the Licensed Patent
Rights of which either Party becomes aware.
11.02 Pursuant to this Agreement and the provisions of Chapter 29 of title 35,
United States Code, Licensee may: a) bring suit in its own name, at its own
expense, and on its own behalf for infringement of presumably valid claims in
the Licensed Patent Rights; b) in any such suit, enjoin infringement and
collect for its use, damages, profits, and awards of whatever nature
recoverable for such infringement; and c) settle any claim or suit for
infringement of the Licensed Patent Rights provided, however, that PHS and
appropriate Government authorities shall have the first right to take such
actions. If Licensee desires to initiate a suit for patent infringement,
Licensee shall notify PHS in writing. If PHS does not notify Licensee of its
intent to pursue legal action within ninety (90) days, Licensee will be free to
initiate suit. PHS shall have a continuing right to intervene in such suit.
Licensee shall take no action to compel the Government either to initiate or to
join in any such suit for patent infringement. Licensee may request the
Government to initiate or join in any such suit if necessary to avoid dismissal
of the suit. Should the Government be made a party to any such suit initiated
by Licensee, Licensee shall reimburse the Government for any costs, expenses,
or fees which the Government incurs as a result of such motion or other action,
including any and all costs incurred by the Government in opposing any such
motion or other action. In all cases, Licensee agrees to keep PHS reasonably
apprised of the status and progress of any litigation. Before Licensee
commences an infringement action, Licensee shall notify PHS and give careful
consideration to the views of PHS and to any potential effects of the
litigation on the public health in deciding whether to bring suit.
11.03 In the event that a declaratory judgment action alleging invalidity or
non-infringement of any of the Licensed Patent Rights shall be brought against
Licensee or raised by way of counterclaim or affirmative defense in an
infringement suit brought by Licensee under Paragraph 1.02, pursuant to this
Agreement and the provisions of Chapter 29 of Title 35, United States Code or
other statutes, Licensee may: a) defend the suit in its own name, at its own
expense, and on its own behalf for presumably valid claims in the Licensed
Patent Rights; b) in any such suit, ultimately to enjoin infringement and to
collect for its use, damages, profits, and awards of whatever nature
recoverable for such infringement; and c) settle any claim or suit for
declaratory judgment involving the Licensed Patent Rights-provided, however,
that PHS and appropriate Government authorities shall have the first right to
take such actions and shall have a continuing right to intervene in such suit.
If PHS does not notify Licensee of its intent to respond to the legal action
within a reasonable time, Licensee will be free to do so. Licensee shall take
no action to compel the Government either to initiate or to join in any such
declaratory judgment action. Licensee may request the Government to initiate or
to join any such suit if necessary to avoid dismissal of the suit. Should the
Government be made a party to any such suit by motion or any other action
initiated by Licensee, Licensee shall reimburse the Government for any costs,
expenses, or fees which the Government incurs as a result of such motion or
other action. If Licensee elects not to defend against such declaratory
judgment action, PHS, at its option, may do so at its own expense. In all
cases, Licensee agrees to keep PHS reasonably apprised of the status and
progress of any litigation. Before Licensee commences an infringement action,
Licensee shall notify PHS and give careful consideration to the views of PHS
and to any potential effects of the litigation on the public health in deciding
whether to bring suit.
11.04 In any action under Paragraphs 11.02 or 11.03, the expenses including
costs, fees, attorney fees, and disbursements, shall be paid by Licensee. The
value of any recovery made by Licensee through court judgment or settlement
shall be treated as Net Sales and subject to earned royalties.
11.05 PHS shall cooperate fully with Licensee in connection with any action
under Paragraphs 11.02 or 11.03. PHS agrees promptly to provide access to all
necessary documents and to render reasonable assistance in response to a
request by Licensee.
12. NEGATION OF WARRANTIES AND INDEMNIFICATION
12.01 PHS offers no warranties other than those specified in Article I.
12.02 PHS does not warrant the validity of the Licensed Patent Rights and makes
no representations whatsoever with regard to the scope of the Licensed Patent
Rights, or that the Licensed Patent Rights may be exploited without infringing
other patents or other intellectual property rights of third parties.
12.03 PHS MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OF ANY SUBJECT MATTER DEFINED BY THE CLAIMS OF
THE LICENSED PATENT RIGHTS OR TANGIBLE MATERIALS RELATED THERETO.
12.04 PHS does not represent that it will commence legal actions against third
parties infringing the Licensed Patent Rights.
12.05 Licensee shall indemnify and hold PHS, its employees, students, fellows,
agents, and consultants harmless from and against all liability, demands,
damages, expenses, and losses, including but not limited to death, personal
injury, illness, or property damage in connection with or arising out of a) the
use by or on behalf of Licensee, its sublicensees, directors, employees. or
third parties of any Licensed Patent Rights; or b) the design, manufacture,
distribution, or use of any Licensed Products, Licensed Processes or materials
by Licensee, or other products or processes developed in connection with or
arising out of the Licensed Patent Rights; provided, however, that Licencee's
indemnification obligations hereunder shall not extend to any exercise by PHS
or any third parties of a Research License provided by PHS or rights to
Licensed Products or Licensed Processes provided to PHS or third parties under
Paragraph 5.04 or any other provision of this Agreement. Licensee agrees to
maintain a liability insurance program consistent with sound business practice.
13. TERM. TERMINATION AND MODIFICATION OF RIGHTS
13.01 This Agreement is effective when signed by all parties and shall extend
to the expiration of the last to expire of the Licensed Patent Rights unless
sooner terminated as provided in this Article 13.
13.02 In the event that either party is in default in the performance of any
material obligations under this Agreement, including but not limited to the
obligations listed in Article 13.05, and if the default has not been remedied
within ninety (90) days after the date of notice in writing of such default,
the other party may terminate this Agreement by written notice. In the event
that PHS terminates this Agreement because of Licensee's default, PHS may
pursue outstanding amounts owed through procedures provided by the Federal Debt
Collection Act.
13.03 In the event that Licensee becomes insolvent, files a petition in
bankruptcy, has such a petition Filed against it, determines to file a petition
in bankruptcy, or receives notice of a third party's Intention to file an
involuntary petition in bankruptcy, Licensee shall immediately notify PHS in
writing. Furthermore, PHS shall have the right to terminate this Agreement
immediately upon Licensee's receipt of written notice.
13.04 Licensee shall have a unilateral right to terminate this Agreement and/or
any licenses in any country or territory by giving PHS sixty (60) days written
notice to that effect.
13.05 PHS shall specifically have the right to terminate or modify, at its
option, this Agreement, if PHS determines that the Licensee: I) is not
executing the Commercial Development Plan submitted with its request for a
license and the Licensee cannot otherwise demonstrate to PHS's reasonable
satisfaction that the Licensee has taken, or can be expected to take within a
reasonable time, effective steps to achieve Practical Application of the
Licensed Products or Licensed Processes; 2) has not achieved the Benchmarks as
may be modified under Paragraph 9.02; 3) has willfully made a false statement
of, or willfully omitted, a material fact in the license application or in any
report required by the license Agreement; 4) has committed a material breach of
a covenant or agreement contained in the license; 5) is not keeping Licensed
Products or Licensed Processes reasonably available to the public after
commercial use commences; 6) cannot reasonably satisfy unmet health and safety
needs; or 7) cannot reasonably justify a failure to comply with the domestic
production requirement of Paragraph 5.02 unless waived. In making this
determination, PHS will take into account the normal course of such commercial
development programs conducted with sound and reasonable business practices and
judgment and the annual reports submitted by Licensee under Paragraph 9.02.
Prior to invoking this right, PHS shall give written notice to Licensee
providing Licensee specific notice of, and a ninety (90) day opportunity to
respond to, PHS's concerns as to the previous items]) to 7). If Licensee fails
to alleviate PHS's concerns as to the previous items]) to 7) or fails to
initiate corrective action to PHS's satisfaction, PHS may terminate this
Agreement.
13.06 When the public health and safety so require, and after written notice to
Licensee providing Licensee a sixty (60) day opportunity to respond, PHS shall
have the right to require Licensee to grant sublicenses to responsible
applicants, on reasonable terms, in any Licensed Fields of Use under the
Licensed Patent Rights, unless Licensee can reasonably demonstrate that the
granting of the sublicense would not materially increase the availability to
the public of the subject matter of the Licensed Patent Rights. PHS will not
require the granting of a sublicense unless the responsible applicant has first
negotiated in good faith with Licensee.
13.07 PHS reserves the right according to 35 U.S.C. ss. 209(0(4) to terminate
or modify this Agreement if it is determined that such action is necessary to
meet requirements for public use specified by federal regulations issued after
the date of the license and such requirements are not reasonably satisfied by
Licensee.
13.08 Within thirty (30) days of receipt of written notice of PHS's unilateral
decision to modify or terminate this Agreement, Licensee may, consistent with
the provisions of 37 CFR 404.11, appeal the decision by written submission to
the designated PHS official. The decision of the designated PHS official shall
be the final agency decision. Licensee may thereafter exercise any and all
administrative or judicial remedies that may be available.
13.09 Within ninety (90) days of expiration or termination of this Agreement
under this Article 13, a final report shall be submitted by Licensee. Any
royalty payments, including those incurred but not yet paid (such as the full
minimum annual royalty), and those related to patent expense, due to PHS shall
become immediately due and payable upon termination or expiration. If
terminated under this Article 13, sublicensees may elect to convert their
sublicenses to direct licenses with PHS pursuant to Paragraph 4.03. Unless
otherwise specifically provided for under this Agreement. Upon termination or
expiration of this Agreement, Licensee shall return all Licensed Products or
other materials included within the Licensed Patent Rights to PHS or provide
PHS with certification of the destruction thereof.
14. GENERAL PROVISIONS
14.01 Neither Party may waive or release any of its rights or interests in this
Agreement except in writing. The failure of the Government to assert a right
hereunder or to insist upon compliance with any term or condition of this
Agreement shall not constitute a waiver of that right by the Government or
excuse a similar subsequent failure to perform any such term or condition by
Licensee.
14.02 This Agreement constitutes the entire agreement between the Parties
relating to the subject matter of the Licensed Patent Rights, and all prior
negotiations, representations, agreements, and understandings are merged into,
extinguished by, and completely expressed by this Agreement.
14.03 The provisions of this Agreement are severable, and in the event that any
provision of this Agreement shall be determined to be invalid or unenforceable
under any controlling body of law, such determination shall not in any way
affect the validity or enforceability of the remaining provisions of this
Agreement.
14.04 If either Party desires a modification to this Agreement, the Parties
shall, upon reasonable notice of the proposed modification by the Party
desiring the change. Confer in good faith to determine the desirability of such
modification. No modification will be effective until a written amendment is
signed by the signatories to this Agreement or their designees.
14.05 The construction, validity, performance, and effect of this Agreement
shall be governed by Federal law as applied by the Federal courts in the
District of Columbia.
14.06 All notices required or permitted by this Agreement shall be given by
prepaid, first class, registered or certified mail or by an express/overnight
delivery service provided by a commercial carrier, properly addressed to the
other Party at the address designated on the following Signature Page, or to
such other address as may be designated in writing by such other Party. Notices
shall be considered timely if such notices are received on or before the
established deadline date or sent on or before the deadline date as verifiable
by U.S. Postal Service postmark or dated receipt from a commercial carrier.
Parties should request a legibly dated U.S. Postal Service postmark or obtain a
dated receipt from a commercial carrier or the U.S. Postal Service. Private
metered postmarks shall not be acceptable as proof of timely mailing.
14.07 This Agreement shall not be assigned by Licensee except: a) with the
prior written consent of PHS, such consent not to be withheld unreasonably; or
b) as part of a sale or transfer of substantially the entire business of
Licensee relating to operations which concern this Agreement. Licensee shall
notify PHS within ten (10) days of any assignment of this Agreement by
Licensee, and Licensee shall pay PHS, as an additional royalty, five percent
(5%) of the fair market value of any consideration received for any assignment
of this Agreement within thirty (30) days of such assignment.
14.08 Licensee agrees in its use of any PHS-supplied materials to comply with
all applicable statutes, regulations, and guidelines, including PHS and OHHS
regulations and guidelines. Licensee agrees not to use the materials for
research involving human subjects or clinical trials in the United States
without complying with 21 CFR Part 50 and 45 CFR Part 46. Licensee agrees not
to use the materials for research involving human subjects or clinical trials
outside of the United States without notifying PHS, in writing, of such
research or trials and complying with the applicable regulations of the
appropriate national control authorities. Written notification to PHS of
research involving human subjects or clinical trials outside of the United
States shall be given no later than sixty (60) days prior to commencement of
such research or trials.
14.09 Licensee acknowledges that it is subject to and agrees to abide by the
United States laws and regulations (including the Export Administration Act of
1979 and Arms Export Control Act) controlling the export of technical data,
computer software, laboratory prototypes, biological material, and other
commodities. The transfer of such items may require a license from the
cognizant Agency of the U.S. Government or written assurances by Licensee that
it shall not export such items to certain foreign countries without prior
approval of such agency. PHS neither represents that a license is or is not
required or that, if required, it shall be issued.
14.10 Licensee agrees to mark the Licensed Products or their packaging sold in
the United States with all applicable U.S. patent numbers and similarly to
indicate "Patent Pending" status. All Licensed Products manufactured in.
shipped to, or sold in other countries shall be marked in such a manner as to
preserve PHS patent rights in such countries.
14.11 By entering into this Agreement, PHS does not directly or indirectly
endorse any product or service provided, or to be provided, by Licensee whether
directly or indirectly related to this Agreement. Licensee shall not state or
imply that this Agreement is an endorsement by the Government, PHS, any other
Government organizational unit, or any Government employee. Additionally,
Licensee shall not use the names of NIH. CDC, PHS, or DHHS or the Government or
their employees in any advertising, promotional, or sales literature without
the prior written consent of PHS.
14.12 The Parties agree to attempt to settle amicably any controversy or claim
arising under this Agreement or a breach of this Agreement, except for appeals
of modifications or termination decisions provided for in Article 13. Licensee
agrees first to appeal any such unsettled claims or controversies to the
designated PHS official, or designee, whose decision shall be considered the
final agency decision. Thereafter, Licensee may exercise any administrative or
judicial remedies that may be available.
14.13 Nothing relating to the grant of a license, nor the grant itself, shall
be construed to confer upon any person any immunity from or defenses under the
antitrust laws or from a charge of patent misuse, and the acquisition and use
of rights pursuant to 37 CFR Part 404 shall not be immunized from the operation
of state or Federal law by reason of the source of the grant.
14.14 Paragraphs 4.03.8.01.9.05-9.07,12.01-12.05,13.08.13.09, and 14.12 of this
Agreement shall survive termination of this Agreement.
SIGNATURES BEGIN ON NEXT PAGE
PHS PATENT LICENSE AGREEMENT-EXCLUSIVE
SIGNATURE PAGE
For PHS:
/s/ JACK SPIEGEL 06/24/2002
- ---------------- ----------
Jack Speigel, Ph.D. Date
Director Development and Transfer
Office of Technology Transfer
National Institutes of Health
Mailing Address for Notices:
Office of Technology Transfer
National Institutes of Health
6011 Executive Boulevard, Suite 325
Rockville, Maryland 20852-3804 U.S.A.
For Licensee (Upon, information and belief, the undersigned expressly certifies
or affirms that the contents of any statements of Licensee made or referred to
in this document are truthful and accurate.):
by:
/s/ WARREN C. LAU 08/01/2002
- ----------------- ----------
Signature of Authorized Official Date
Warren C. Lau
- -------------
Printed Name
Vice President and CFO
- ----------------------
Title
Official and Mailing Address for Notices:
Biokeys Pharmaceuticals, Inc.
9948 Hibert St., Suite 100
San Diego, CA 92131
Any false or misleading statements made, presented, or submitted to the
Government, including any relevant omissions, under this Agreement and during
the course of negotiation of this Agreement are subject to all applicable civil
and criminal statutes including Federal statutes 31 U.S.C. ss.ss. 3801-3812
(civil liability) and 18 U.S.C. ss. 1001 (criminal liability including fine(s)
and/or imprisonment).
APPENDIX A-Patent(s) or Patent Application(s)
Patent(s) or Patent Applications
07/324,027 - U.S. Patent number 5,562,905 issued October 8,1996 and
entitled "Human Immunodeficiency Virus (HIV) EN V-Coded Peptide
Capable of Eliciting HIV-Inhibiting Antibodies in Mammals"
07/148,692 - U.S. application entitled "Synthetic Antigen Evoking
Anti-HIV Response" was abandoned. European Application Number
89903389.8 and Patent Number 0400076 issued May 15, 1996.
This application was formalized in Germany, Austria, Italy,
Belgium, Great Britain, France, Switzerland, Sweden,
Luxembourg and the Netherlands.
Australian Patent Application Number 37878/93
Japanese Patent Application Number 502867.1989
Israeli Patent Number 89102
Canadian Patent Application Number 588,557
APPENDIX B-Licensed Fields of Use and Territory
Licensed Fields of Use:
Treatment or prevention of HIV using the specific 15 amino acid
peptide RIQRGPGRAFVTIGK, unconjugated to other peptides or carriers.
Licensed Territory:
Worldwide
APPENDIX C--Royalties
Royalties:
Licensee agrees to pay to PHS a noncreditable, nonrefundable license issue
royalty in the amount of Fifty Thousand Dollars ($50,000). Licensee agrees to
pay to PHS Twenty Five thousand Dollars ($25,000) of the license issue royalty
within thirty (30) days from the date that this Agreement becomes effective and
another Twenty Five Thousand Dollars ($25,000) on the one year anniversary of
the date that this Agreement becomes effective.
Licensee agrees to pay to PHS a nonrefundable minimum annual royalty in the
amount of Twenty Five Thousand Dollars ($25,000).
Licensee agrees to pay PHS earned royalties on Net Sales by or on behalf of
Licensee and its sublicensees as follows:
One and One Half Percent (1.5%) of the Net Sales from $0 to Two Hundred
Million dollars ($0-$200,000,000).
And
Two Percent (2.0%) of the Net Sales over Two Hundred Million dollars
(>$200,000,000).
Two Licensee agrees to pay PHS benchmark royalties (due 30 days from achieving
benchmark) as follows:
1) Benchmark royalty of $25,000.00 (Twenty Five Thousand Dollars) upon the
initiation of first phase I clinical trials for HIV therapeutic or
vaccine.
2) Benchmark royalty of $75,000.00 (Seventy Five Thousand Dollars) upon the
initiation of the first phase II clinical trials for HIV therapeutic or
vaccine.
3) Benchmark royalty of $150,000.00 (One Hundred and Fifty Thousand Dollars)
upon the initiation of the first phase III clinical trials for HIV
therapeutic or vaccine.
4) Benchmark royalty of $750,000.00 (Seven Hundred and Fifty Thousand
Dollars) upon first approval of Product License Application for HIV
therapeutic or vaccine in the U.S. and an additional 5750,000.00 (Seven
Hundred and Fifty Thousand Dollars) for first approval of product license
application in Europe.
Licensee agrees to pay PHS additional sublicensing royalties (due within 30
days of Licensee's receipt of consideration) as follows:
$200,000,000).
Ten percent (10%) of the fair market value of any consideration received for
granting each sublicense.
APPENDIX D--Benchmarks and Performance
Licensee agrees to the following Benchmarks for its performance under this
Agreement and, within thirty (30) days of achieving a Benchmark, shall notify
PHS that the Benchmark has been achieved.
Filing of IND By February, 2003
Safety Study in Germany by November, 2002
Phase IA Begin by September. 2002
Phase IB Begin by December. 2002
Phase IC Begin by March. 2003
Phase II Begin by June, 2003
Phase III Begin by April, 2004
Approval By April, 2006
Launch By July, 2006
Within 6 months of NDA/PLA approval in the US or its equivalent in Europe,
Licensee shall send a written report to PHS detailing the potential Public
Sector market to fulfill the public health need for the approved drug or
vaccine in Developing Countries, including the impact of any approved competing
drug or vaccine. The report shall also include Licensee's amendment to the
Commercial Development Plan, Appendix E, and the Benchmarks and Performance,
Appendix D, to satisfy said potential Public Sector market either directly with
Licensee's own resources and/or through joint ventures with third parties.
Acceptance of this report and amendment is required by PHS in writing, such
acceptance will not be unreasonably denied.
Licensee agrees:
a) To the extent that Licensee shall satisfy the potential Public Sector market
through its own resources, Licensee shall deliver the first allotment of a safe
and effective drug or vaccine to the Public Sector for distribution and/or sale
in Developing Countries within two years of First Commercial Sale and
thereafter Licensee agrees to use commercially reasonable efforts to meet any
delivery date and in the quantities required in an order placed by the Public
Sector.
b) To the extent that Licensee shall satisfy the potential Public Sector market
through joint ventures with third parties, Licensee shall:
i. Within one year after First Commercial Sale, make reasonable efforts to
negotiate with third parties in order to effect joint ventures or other
partnership agreements to make and sell the Licensed Products and Licensed
Processes and to provide know-how and effect technology transfer to said third
parties that will allow them to manufacture a safe and effective drug or
vaccine for distribution and/or sale in Developing Countries.
ii. Within two years of First Commercial Sale, have entered into at least
one joint venture or other partnership agreement with at least one third party
for the purpose of manufacturing a safe and effective drug or vaccine for
distribution and/or sale in Developing Countries.
iii. Within four years of First Commercial Sale, ensure that said third
party(ies) have delivered a first allotment of a safe and effective drug or
vaccine to the Public Sector for distribution and/or sale in Developing
Countries, and thereafter ensure that said third party(ies) use commercially
reasonable efforts to meet any delivery date(s) and in the quantities required
in an order placed by the Public Sector.
APPENDIX E--Commercial Development Plan
See License Application (attached).
Appendix F - Developing Countries
For the purpose of this Agreement, Developing Country will include the
following countries:
1 Afghanistan 53 Nigeria
2 Albania 54 Pakistan
3 Angola 55 Papua New Guinea
4 Annenia 56 Rwanda
5 Azerbaijan 57 Sao Thome
6 Bangladesh 58 Senegal
7 Benin 59 Sierra Leone
8 Bhutan 60 Solomon Islands
9 Bolivia 61 Somalia
10 Bosnia & Herzegov 62 Sri Lanka
11 Burkina Faso 63 Sudan
12 Burundi 64 Tajikistan
13 Cambodia 65 Tanzania
14 Cameroon 66 Togo
15 Central Afr Rep 67 Turkmenistan
16 Chad 68 Ukraine
17 China 69 Uganda
18 Comoros 70 Uzbekistan
19 Congo, Oem Rep 71 Vietnam
20 Congo, Rep 72 Yemen
21 Cote d'lvoire 73 Zambia
22 Cuba 74 Zimbabwe
23 Djibouti
24 Eritrea
25 Ethiopia
26 Gambia
27 Georgia
28 Ghana
29 Guinea
30 Guinea-Bissau
31 Guyana
32 Haiti
33 Honduras
34 India
35 Indonesia
36 Kenya
37 Korea, DPR
38 Kyrgyz Republic
39 Lao PDR
40 Lesotho
41 Liberia
42 Madagascar
43 Malawi
44 Mali
45 Mauritania
46 Moldova
47 Mongolia
48 Mozambique
49 Myanmar
50 Nepal
51 Nicaragua
52 Niger
EXHIBIT 99.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
Section 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB of Biokeys
Pharmaceuticals, Inc. (the "Company") for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), each of Nicholas J. Virca, Chief Executive Officer of
the Company, and Warren C. Lau, Vice President and Chief Financial Officer of
the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ NICHOLAS J. VIRCA
- --------------------------------
Nicholas J. Virca
Chief Executive Officer
November 25, 2002
/s/ WARREN C. LAU
- --------------------------------
Warren C. Lau
Vice President and Chief Financial Officer
November 25, 2002
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
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