Filing
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____________ to ___________
Commission file number 000-33219
BIOKEYS PHARMACEUTICALS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-1318182
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9948 HIBERT STREET, SUITE 100
SAN DIEGO, CALIFORNIA 92131
(Address of principal executive offices)
(858) 271-9671
(Issuer's telephone number, including area code)
As of April 30, 2003, 32,751,824 shares of the issuer's common stock, par
value $0.001 per share, were outstanding.
Transitional Small Business Disclosure Format (Check One): YES [ ] NO [X]
BIOKEYS PHARMACEUTICALS, INC.
FORM 10-QSB
MARCH 31, 2003
INDEX
PART I FINANCIAL INFORMATION..............................................................................1
Item 1. Financial Statements...........................................................................1
a. Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002.........1
b. Consolidated Statements of Operations for the three months ended March 31, 2003 and
2002 and for the period from inception through March 31, 2003 (Unaudited)..................2
c. Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and
2002 and for the period from inception through March 31, 2003 (Unaudited)..................3
d. Notes to Consolidated Financial Statements (Unaudited).....................................4
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................15
Item 3. Controls and Procedures.......................................................................24
PART II Other Information.................................................................................24
Item 1. Legal Proceedings.............................................................................24
Item 2. Changes In Securities.........................................................................25
Item 3. Defaults Upon Senior Securities...............................................................26
Item 4. Submission of Matters to a Vote of Security Holders...........................................26
Item 5. Other Information.............................................................................26
Item 6. Exhibits and Reports on Form 8-K..............................................................26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
(unaudited)
MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
ASSETS
Current asset - cash and cash equivalents $ 456,033 $ 103,928
Property and equipment, net 11,940 13,434
Other assets 16,673 12,983
------------------ -----------------
$ 484,646 $ 130,345
Total assets ================== =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 455,729 $ 579,146
Accrued salary and related taxes 111,089 115,021
Accrued dividends payable 44,420 34,960
Current portion of notes payable 210,767 197,075
------------------ -----------------
Total current liabilities 822,005 926,202
Notes payable, net of current portion 43,181 56,873
------------------ -----------------
Total liabilities 865,186 983,075
------------------ -----------------
Commitments and contingencies -- --
Shareholders' deficit:
Series A cumulative convertible preferred stock, $0.01 par value.
Authorized 8,000 shares; issued and outstanding, 473
shares (aggregate involuntary liquidation preference
$473,000 at March 31, 2003 and December 31, 2002) 4 4
Series B convertible preferred series stock, $0.01 par value.
Authorized 200,000 shares; issued and outstanding, 200,000
shares in 2002 2,000 2,000
Series C convertible preferred stock, $0.01 par value.
Authorized 125,000 shares; issued and outstanding, 70,109.3
shares in 2002 (aggregate involuntary liquidation preference
$701,093 at December 31, 2002) -- 701
Common stock, $0.001 par value. Authorized 50,000,000 shares;
issued 33,352,427 and outstanding 32,751,824 shares in 2003
and issued and outstanding 17,496,257 shares in 2002 33,351 17,496
Additional paid-in capital 26,189,520 25,276,138
Deficit accumulated during the development stage (26,554,563) (26,149,069)
Treasury stock, at cost (50,852) --
------------------ -----------------
Total shareholders' deficit (380,540) (852,730)
------------------ -----------------
Total liabilities and shareholders' deficit $ 484,646 $ 130,345
================== =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
(unaudited)
INCEPTION
(JUNE 12, 1996)
THROUGH
THREE MONTHS ENDED MARCH 31, MARCH 31,
------------------------------
2003 2002 2003
--------------- ------------ ----------------
Net sales $ -- $ -- $ 174,830
Cost of goods sold -- -- 51,094
-------------- ------------ ----------------
Gross margin -- -- 123,736
Grant revenue 3,603 -- 129,733
-------------- ------------ ----------------
Interest income 675 500 90,642
4,278 500 344,111
-------------- ------------ ----------------
Operating expenses:
Research and development (16,188) 38,178 3,964,741
General and administrative 423,504 571,765 7,252,752
Depreciation and amortization 1,494 128,486 10,091,231
Impairment loss - write off of goodwill -- -- 5,702,130
Interest expense 962 13,315 178,666
Equity in loss of investee -- -- 178,936
-------------- ------------ ----------------
Total operating expenses 409,772 751,744 27,368,456
-------------- ------------ ----------------
Loss before cumulative effect of
change in accounting principle (405,494) (751,244) (27,024,345)
Cumulative effect of change in accounting
principle -- -- (25,821)
-------------- ------------ ----------------
Net loss (405,494) (751,244) (27,050,166)
Preferred stock dividends (9,460) (66,740) (592,860)
-------------- ------------ ----------------
Net loss applicable to common stock $ (414,954) $ (817,984) $ (27,643,026)
============== ============ ================
Loss per common share - basic and
diluted $ (.02) $ (.05)
============== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(unaudited)
INCEPTION
(JUNE 12, 1996)
THROUGH
THREE MONTHS ENDED MARCH 31, MARCH 31,
2003 2002 2003
Cash flows from operating activities:
Net loss $ (405,494) $ (751,244) $ (27,050,166)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,494 9,819 9,641,231
Amortization of debt discount -- 118,667 450,000
Forgiveness of employee receivable -- -- 30,036
Impairment loss - write off of goodwill -- -- 5,702,130
Expenses paid by warrants 105,883 31,222 436,129
Expenses paid by preferred stock -- 34,125 142,501
Expenses related to stock warrants issued -- 289,262 612,000
Expenses related to employee stock options issued 49,919 -- 379,215
Expenses paid by issuance of common stock 68,750 2,753 679,499
Equity in loss of investee -- -- 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 in other assets (3,690) (496) (156,041)
Increase (decrease) in accounts payable and accrued
liabilities (100,703) 23,836 18,703
Increase in sponsored research payable and
license obligation -- -- 924,318
------------ ------------ --------------
Net cash used in operating activities (283,841) (242,056) (7,832,822)
------------ ------------ --------------
Cash flows from investing activities:
Purchase of certificate of deposit -- -- (1,016,330)
Maturity of certificate of deposit -- -- 1,016,330
Purchases of property and equipment -- -- (106,093)
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 -- -- 405,993
Advance to investee -- -- (90,475)
Cash transferred in rescission of acquisition -- -- (19,475)
Cash received in rescission of acquisition -- -- 230,000
------------ ------------ --------------
Net cash provided by investing activities -- -- 342,933
------------ ------------ --------------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- -- 4,200,993
Proceeds from sale of common stock 635,946 -- 2,571,911
Proceeds from sale or exercise of warrants -- 112,472 334,516
Repurchase of warrants -- -- (55,279)
Payment of financing and offering costs -- -- (98,976)
Payments of notes payable and long-term debt -- -- (351,961)
Proceeds from issuance of notes payable and detachable warrants -- -- 1,344,718
------------ ------------ --------------
Net cash provided by financing activities 635,946 112,472 7,945,922
------------ ------------ --------------
Net increase (decrease) in cash and cash equivalents 352,105 (129,584) 456,033
Cash and cash equivalents at beginning of period 103,928 164,476 --
------------ ------------ --------------
Cash and cash equivalents at end of period $ 456,033 $34,892 $ 456,033
============ ============ ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Financial Statements
Three months ended March 31, 2003 and 2002
(Unaudited)
(1) DESCRIPTION OF THE COMPANY
Biokeys Pharmaceuticals, Inc., a Delaware corporation, (the Company),
is a development stage enterprise, that conducts biomedical research
and development focused on treatments for cancer and certain viral
infections, including HIV. The Company currently does not manufacture,
market, sell or distribute 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 Company's shares trade in the over-the-counter market under the
symbol BKYS.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 as described below. The value assigned to stock 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 (EITF 96-18). 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. Series A and Series B
preferred stock are valued at the liquidation value of $1,000 and $10
per share, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Statement of Financial Accounting Standards No.
123 and related interpretations in accounting for employee stock-based
compensation, and includes the required footnote disclosures thereon.
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.
The value assigned to stock 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. 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. Series A and
Series B preferred stock are valued at the liquidation value of $1,000
and $10 per share, respectively.
4
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months
when purchased or less are considered to be cash equivalents.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, certificate of
deposit, advances to employees, note receivable, and accounts payable
are a reasonable estimate of their fair values at the balance sheet
dates due to the short-term nature of these instruments. The fair
value of notes payable at the date of issuance and at March 31, 2003
was not determinable.
The Company maintains cash and cash equivalents with banks, which from
time to time may exceed federally insured limits. The Company
periodically assesses the financial condition of the institutions and
believes that the risk of any loss is minimal.
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.
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.
DEBT DISCOUNT
The discount on notes payable is being amortized using the effective
interest method through the stated due dates of each note.
REVENUE RECOGNITION
The Company recognizes revenue at the time service is performed on
commercial contracts and collectability is reasonably assured. Revenue
from government grants is a reimbursement for expenditures associated
with the research. The Company submits bills to the grant agency and
revenue is recognized at the time the expenses are reimbursed.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred, including
Company-sponsored research and development and cost of patent rights
and technology rights under license agreements that have no
alternative future use when incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that property and
equipment and intangible or other long-lived assets with finite lives
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.
5
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 temporary
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.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest of $961 and $13,315 was paid during the three months ended
March 31, 2003 and 2002, respectively. No income taxes were paid
during 2003 and 2002.
Noncash investing and financing transactions excluded from the
consolidated statements of cash flows for the three months ended March
31, 2003 and 2002 are as follows:
2003 2002
Dividends accrued $ 9,460 $ 66,740
Conversion of accrued interest into common stock 26,649 --
Issuance of common stock upon conversion of preferred stock 701,093 --
Issuance of warrants for return of common stock 50,852 --
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has 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. SFAS No. 142 eliminates the annual amortization expense
related to goodwill. The adoption of SFAS No. 142 did not have a
material impact on the Company's financial statements.
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 was effective
for the Company as of January 1, 2003. The adoption of SFAS No. 143
did not have a significant impact on the Company's 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 APB 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. The adoption of SFAS No. 144 did not have a
significant impact on the Company's financial condition or results of
operations.
6
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of FASB Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is
effective for the fiscal years beginning after December 15, 2002.
The adoption of these new pronouncements did not have a material
effect on the Company's consolidated financial position or results of
operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2003 and December 31, 2002 were as
follows:
USEFUL 2003 2002
LIVES
-------------- -------------- ---------------
Office furniture and equipment 5 years $ 31,883 $ 31,883
Computer software and equipment 3 years 11,845 11,845
-------------- ---------------
43,728 43,728
Less accumulated depreciation and
amortization (31,788) (30,294)
-------------- ---------------
$ 11,940 $ 13,434
============== ===============
(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 were originally due on the earlier of November 1, 2002 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 was to be paid in shares of common stock when the notes
were to be 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 and
debt discount. The fair value of the warrants, calculated using the
Black-Scholes pricing model, is greater than the proceeds. The fair
value of the notes payable was not determinable at the dates of
issuance. Of the original debt discount of $450,000, amortized to the
redemption value of the debt through the initial stated due date of
the notes payable, $118,667 was amortized during the three months
ended March 31, 2002.
Between October and December 2002, the notes and warrants were amended
and $220,000 in notes were converted to preferred stock in the
Company. $60,000 in notes were repaid and the due date of the $170,000
in remaining notes were extended to April 1, 2003. The exercise price
of the warrants was amended to $.50 per share. The outstanding balance
on the notes was $170,000 at March 31, 2003 and December 31, 2002.
Subsequent to March 31, 2003, the Company converted a trade payable
into a note payable in the amount of $83,948. The note carries
7
interest at 10% per year and calls for eighteen monthly payments of
$5,000 per month beginning July 1, 2003. The trade payable was
reclassified as of March 31, 2003 with current and long term portions
of $40,767 and $43,181, respectively.
The maturity of notes payable in years subsequent to March 31, 2003
are as follows:
Twelve Months Ended March 31, Amount
2004 $ 210,767
2005 43,181
-------------------
Total $ 253,948
===================
(5) INCOME TAXES
Significant components of income tax expense for the three months
ended March 31, 2003 and 2002 are as follows:
2003 2002
--------------- ---------------
Deferred tax benefit $ 49,728 $ 125,093
Increase in valuation allowance for deferred tax assets (49,728) (125,093)
--------------- ---------------
Income tax expense $ -- $ --
=============== ===============
The tax effects of temporary differences that give rise to deferred
tax assets at March 31, 2003 and December 31, 2002 are as follows:
2003 2002
--------------- ---------------
Net operating loss carryforward $ 4,102,057 $ 4,051,425
Organization costs and license agreement, due to
differences in amortization 29,631 30,534
--------------- ---------------
Total deferred tax assets 4,131,688 4,081,959
Less valuation allowance (4,131,688) (4,081,959)
--------------- ---------------
Net deferred tax assets $ -- $ --
=============== ===============
At March 31, 2003, the Company had unused net operating loss
carryforwards of approximately $11,950,000 for tax reporting purposes,
which expire from 2112 through 2114 and from 2119 through 2123.
(6) EQUITY TRANSACTIONS
In a private placement offering to European investors pursuant to
Regulation S of the Securities and Exchange Commission, the Company
sold a total of 3,200 shares of its Series A 8% Convertible Preferred
Stock for gross proceeds of $3,200,000 between August and September
2000. In addition to the shares of Series A Convertible Preferred
Stock (Series A preferred stock), which are convertible into common
stock at $4.00 per share, the offering included warrants to purchase a
total of 400,000 shares of common stock at $5.00 per share. The Series
A 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
8
Series A 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 Series A 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 incurred consulting fees totaling $76,500, paid to a
stockholder who acted as a finder and agent in this transaction.
In May 2000, the Company issued warrants to two of its research
scientists for the purchase of a total of 100,506 shares of common
stock. The fair value of the warrants on the date of issue, $140,000,
has been recorded as a noncash research and development expense. The
warrants are exercisable at $0.49 per share and expire in May 2003. No
such warrants have been exercised as of March 31, 2003.
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 for $55,279 and sold the same warrants in June
2001 for $47,741. 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 Series A preferred stock that
had accrued 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 with a fair value of $273,000, 12,585 shares of common stock
with a fair value of $24,541, and five-year warrants to purchase
34,125 shares of common stock at an exercise price of $5.00 per share
with a fair value of $62,280. The compensation vested 50% in December
2001 and 50% in December 2002. The Company recognized the value of 50%
of these equity instruments in 2002 and 2001 and recorded a noncash
charge to expense of $154,769 and $315,909, respectively. 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.
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.
In April 2002, warrants to purchase a total of 240,000 shares of
common stock at $0.49 per share were exercised for $117,600 in
proceeds to the Company.
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 for $46,000 in proceeds to the
Company.
In October and December 2002, the Company issued an aggregate of
70,109.3 shares of Series C Convertible Preferred Stock with a par
value of $0.01 per share. The Series C preferred stock is convertible
into common stock at $0.05 per share and has a liquidation preference
of $10 per share plus accrued and unpaid dividends. The purchase price
of 22,000 shares of Series C preferred stock was paid by the
conversion of $220,000 of notes payable. In addition, warrants that
were issued in conjunction with the converted notes payable were
amended to modify the purchase price of the common stock to $0.50 per
share.
On November 21, 2002, the Company exchanged 3,000 shares of Series A
preferred stock for 1,800,000 shares of common stock. In conjunction
9
with this transaction the Company purchased 375,000 warrants from the
preferred stockholder for $100. In conjunction with the exchange,
accumulated preferred dividends in the amount of $335,440, which had
been accrued through the date of the exchange, were forgiven by the
shareholder.
In January 2003, the Company initiated a private placement offering in
an effort to raise $1,200,000 in additional capital. Through March 31,
2003, the Company has raised $635,946 in connection with this offering
through the issuance of 1,589,856 shares of common stock.
In January 2003, the Company paid accrued interest on notes payable
through the issuance of 119,454 shares of common stock, having a fair
market value on the date of issuance of $26,649.
In March 2003, the holders of 70,109.3 shares of Series C convertible
preferred stock elected to convert their shares of Series C preferred
stock into 14,021,860 shares of common stock.
In March 2003, the Company paid two consulting firms for services
rendered with 125,000 shares of common stock with a fair market value
on the date of issuance of $68,750, and two warrants to purchase
37,500 shares of Common Stock at an exercise price of $0.50 per share.
Each warrant will expire on March 25, 2006. The fair market value of
the warrants was $33,777.
In March 2003, the Company issued four warrants to four individuals
in consideration of certain investment banking advice. The four
warrants represent the right to purchase 25,783, 50,000, 50,000 and
10,000 shares of Common Stock at an exercise price of $0.50 per
share. Each warrant will expire on March 25, 2006. The fair market
value of the warrants was $61,151.
In March 2003, the Company issued a warrant to a former executive in
consideration of certain covenants related to his separation from the
Company. In exchange the former executive returned 649,747 shares of
common stock previously held by the former executive. The warrant
represents the right to purchase 150,000 shares of Common Stock at an
exercise price of $1.25 per share. The warrant will expire on December
12, 2005. The Company recorded the resulting treasury stock using the
cost method at the value of the warrant, $50,852.
During the three months ended March 31, 2003, $10,955 was recognized
in conjunction with the vesting of warrants previously issued for
consulting services.
Nonemployee stock-based compensation that is not valued at the fair
value of consideration received is valued, as of the grant date, using
the Black-Scholes pricing model with the following assumptions for
grants in 2003 and 2002: no dividend yield for either year; expected
volatility of 125% to 199%; risk-free interest rates 2.78% to 6.8%;
and expected lives of three and seven years, respectively.
At March 31, 2003, there were outstanding warrants to purchase a total
of 2,898,587 shares of common stock as follows:
EXERCISE
WARRANTS PRICE EXPIRATION DATE
---------------------- -------------------- --------------------------
100,506 $ 0.49 May 2003
50,000 4.00 August 2003
25,000 5.00 August 2003
689,148 0.49 December 2003
620,622 0.49 September 2005
450,000 0.50 October 2005
150,000 1.25 December 2005
210,783 0.50 March 2006
100,000 3.00 April 2006
502,528 0.49 June 2006
10
(7) STOCK COMPENSATION PLANS
In October 2002, the Company granted to employees three non-statutory
stock options to purchase an aggregate of 1,525,000 shares and one
non-statutory stock option to purchase 165,000 shares of common stock
at $.20 and $.50 per share, respectively.
In March 2003, the Company granted non-statutory stock options to
purchase 1,900,000 shares of the Company's stock at $.50 per share.
The options were valued using the Black-Scholes pricing model. The
value of the options on the date of the grant was $948,846. The
Company recognized compensation expense of $49,919 in the three months
ended March 31, 2003 related to the portion of the options which
vested in that period.
MARCH 31, 2003
SHARES WEIGHTED-AVERAGE
NON-STATUTORY STOCK OPTIONS (000) EXERCISE PRICE
Outstanding at January 1, 2003 1,690 $0.23
Granted 1,900 $0.50
Exercised -- --
Forfeited -- --
------------
Outstanding at March 31, 2003 3,590 $0.373
============
Options exercisable at March 31, 2003 1,277
Weighted-average fair value of options
granted during the quarter $0.50
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 3/31/03 LIFE PRICE AT 3/31/03 PRICE
------------------ ---------------- ------------------ -------------- ---------------- ---------------
$0.20 to $0.50 3,590,000 5.99 years $0.373 1,277,500 $0.262
None of the foregoing options were issued pursuant to a stock option
plan. The options expire on December 30, 2008 and vest as follows:
OPTIONS EXERCISE VESTING DATE
PRICE
---------------------- ------------------- -------------------------
1,012,500 $ 0.20 October 2002
165,000 0.50 October 2002
100,000 0.50 March 2003
200,000 0.50 April 2003
325,000 0.50 July 2003
325,000 0.50 October 2003
12,500 0.20 December 2003
325,000 0.50 January 2004
425,000 0.50 April 2004
200,000 0.50 July 2004
200,000 0.50 October 2004
200,000 0.50 January 2005
100,000 0.50 April 2005
11
(8) NET LOSS PER COMMON SHARE
The computation of basic and diluted net loss per share for the three
months ended March 31, 2003 and 2002 is as follows:
2003 2002
-------------- -------------
Numerator:
Net loss $ (405,494) $ (751,244)
Preferred stock dividends (9,460) (66,740)
-------------- -------------
Numerator for basic and diluted loss per share $ (414,954) $ (817,984)
============== =============
Denominator for basic and diluted loss per share - weighted 17,916,027 15,038,467
average common shares outstanding
============== =============
Loss per common share - basic and diluted $ (0.02) $ (0.05)
============== =============
Net loss per common share is calculated according to Statement of
Financial Accounting No. 128, Earnings per Share, using the weighted
average number of shares of common stock outstanding during the
period. At March 31, 2003 and 2002, 2,823,586 and 2,537,803,
respectively, potentially dilutive shares, respectively, were not
included in the computation of net loss per common share - diluted, as
their effect would have been antidilutive due to the Company's net
loss incurred in 2003 and 2002.
(9) LICENSE AGREEMENTS
M.D. ANDERSON
Pursuant to a patent and technology license agreement dated June 14,
1996 between M.D. Anderson and the Company (the M.D. Anderson License
Agreement), the Company acquired a license to seven patents and patent
applications related to technology for HIV/AIDS therapy and
prevention. Under the M.D. Anderson License Agreement, the Company is
obligated to pay M.D. Anderson 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 M.D. Anderson as
long as the M.D. Anderson License Agreement remains in effect.
The M.D. Anderson License Agreement was amended effective June 15,
2000 (the Amendment). The Amendment incorporated additional licensed
subject matter, revised certain royalty rates due to M.D. Anderson
upon commercialization, and settled past due patent and research and
development amounts from the Company to M.D. Anderson. The Company
gave consideration valued at approximately $172,000 through the
issuance of 71,555 shares of common stock to reimburse M.D. Anderson
for patent costs incurred through June 15, 2000. The Company also
issued 414,829 shares of common stock to M.D. Anderson valued at
$1,000,000, based on the market value of the Company's stock at the
date of the settlement agreement, to settle past due research and
development obligations. In addition, the Company committed to funding
at least $1,000,000 of research and development activity through
December 31, 2001. Finally, the Amendment defined a milestone payment
of common stock with a value of $1,000,000 due to M.D. Anderson upon
the enrollment of the first patient in the first FDA Phase I human
trial of any product that utilizes licensed subject matter.
Under the amended M.D. Anderson License Agreement, the Company has the
right to a royalty-bearing, exclusive license to manufacture, have
manufactured, and use and/or sell licensed products. M.D. Anderson's
retained interest consists of royalties on net sales of licensed
products and a share of consideration received by the Company from all
sublicenses and assignments. No royalties were paid under this
agreement during the quarters ended March 31, 2003 and 2002,
respectively. The M.D. Anderson License Agreement continues in effect
until all patent rights have expired.
12
USC
Under an Option and License Agreement with USC dated January 23, 1998,
amended August 16, 2000, Biokeys acquired license rights to a total of
three patents, two relating to Biokeys' CoFactor product and one
relating to Selone, both of which are intended for use in connection
with cancer chemotherapy. In addition, under a second Option and
License Agreement dated August 17, 2000, Biokeys acquired rights under
four patents related to its Thiovir anti-viral technologies. These
agreements with USC (the USC License Agreements) grant Biokeys
exclusive worldwide licenses to study, use, manufacture and market
drug products covered by the subject patents. Under the USC License
Agreements, Biokeys is obligated to pay USC for out-of-pocket expenses
incurred in filing, prosecuting, enforcing, and maintaining the
licensed patent rights and all future patent-related expenses paid by
USC as long as the USC License Agreements remain in effect and until
the patent rights have expired. USC's retained interest consists of
royalties on net sales of licensed products and a share of
consideration received by Biokeys from all sublicenses and
assignments. No royalties have been paid under this agreement. The USC
License Agreements continue in effect until all patent rights have
expired.
NIH AGREEMENT
During December 2002, the Company entered into a worldwide exclusive
patent license agreement with the Public Health Service National
Institutes of Health (NIH) concerning composition of matter for its
drug, BlockAide/CR. Under the terms of the agreement, the Company
agrees to pay minimum royalty payments during the first year of the
license and minimum annual royalties thereafter or the higher amount
based upon a percentage of net sales. In addition, there are benchmark
royalties based upon: initiation of Phase I trials, initiation of
Phase II trials, initiation of Phase III trials, and upon first
approval of a Product License Application for an HIV therapeutic or
vaccine in the US and for first approval in Europe.
(10) SPONSORED RESEARCH
Since September 1996, the Company has entered into a total of four
Sponsored Research Agreements (SRAs) with M.D. Anderson. Under the
SRAs, M.D. Anderson agreed to conduct specific research activities for
the Company, at the expense of the Company, into various aspects of
treating HIV infections using technologies made available under the
M.D. Anderson License Agreement. All amounts due to M.D. Anderson
under the first three SRAs were paid or settled as of December 31,
2000, and such SRAs have been terminated. The most recent SRA with
M.D. Anderson, entered into September 7, 2000, provides for studies to
test the ability of a mixture of synthetic HIV derived peptides to
elicit an antibody-negative cell mediated immune response. The testing
will seek to determine if this immune response can protect against new
infection and if the preparation can be administered after HIV
infection as a therapeutic. This SRA requires a total of $814,490
payable in two equal installments for research to be conducted through
2001 and into 2002. The first installment was paid by the Company in
2000 and the second in 2001.
(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
net losses of $405,494 and $2,105,727 for the three months ended March
31, 2003 and the year ended December 31, 2002, respectively. In
addition the Company had a working capital deficiency and a
stockholders' deficit at March 31, 2003.
Through March 31, 2003 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 2003. 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.
13
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
through at least December 31, 2003 is dependent upon obtaining
additional financing. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
(12) COMMITMENTS AND CONTINGENCIES
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 often 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, results of operations or cash flows.
EMPLOYMENT CONTRACTS
Effective January 1, 2002 the Company entered into a letter agreement
with its Chief Financial Officer to retain his services for a period
of one year at a monthly cost of $5,000. The letter agreement will
automatically renew for additional one-year terms unless either the
Company or the Chief Financial Officer gives notice to the other party
at least 60 days prior to the end of the then current term of such
party's termination of the letter agreement.
OPERATING LEASES
The Company is obligated under operating leases for office space and
equipment. A lease for office space expired in November 2000 and was
continued on a month to month basis through October 31, 2002. Rent
expense was $15,039 and $15,573 during the three months ended March
31, 2003 and 2002, respectively.
In February 2001, the Company leased office facilities in San Diego,
California. The lease requires a monthly payment of $3,028 and expires
in January 2004.
Future rental commitments under all operating leases amounts to
$30,262 in 2004.
(13) SUBSEQUENT EVENTS
Effective April 1, 2003, the Company employed a Chief Technical
Officer at an annual salary of $170,000 per year, plus benefits.
On April 11, 2003, the Company issued 25,783 shares of common stock to
an entity in consideration of such entity's introduction of the
Company to investors that purchased shares of common stock in January
2003.
In April 2003, pursuant to the terms of notes payable issued by the
Company in October and December 2001, the Company issued an aggregate
of 23,411 shares of common stock to the holders of such notes in
payment of accrued interest that was due such holders.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This Management Discussion and Analysis or Plan of Operation should be read in
conjunction with the accompanying consolidated financial statements and notes
included in this report. This Quarterly Report on 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 products and technology, our strategy, competition, expected
financial performance and other aspects of our business identified in this
Quarterly Report, as well as 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 Annual
Report 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, including the risk
factors described in Risk Factors and elsewhere in this report. 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
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements and notes included in this report.
CoFactorTM, BlockAideTM, ThiovirTM, EradicAideTM and SeloneTM are our
trademarks. Product names, trade names and trademarks of other entities are
also referred to in this report.
GENERAL
In this report, the terms "Company," "we," "us" and "our" refer to Biokeys
Pharmaceuticals, Inc. The term "Common Stock" refers to the Company's Common
Stock, par value $0.001 per share.
We were initially organized as a corporation under the Delaware General
Corporation Law in December 1995. In October 2000, we closed the merger of our
wholly owned subsidiary, Biokeys Acquisition Corp., with and into Biokeys, Inc.
In consideration of the merger, we issued an aggregate of 6,999,990 shares of
Common Stock to the holders of capital stock of Biokeys, Inc.
The Company is a development stage enterprise which conducts biomedical
research and development focused on treatments for cancer and certain viral
infections, including HIV. Our business is in the development stage; we have
not generated any significant revenues and we have not yet marketed any
product. Pursuant to license agreements with the University of Texas M.D.
Anderson Cancer Center ("M.D. Anderson"), the National Institutes of Health
("NIH") and the University of Southern California ("USC"), we have been granted
development, commercialization, manufacturing and marketing rights to a number
of drug candidates in the fields of antiviral and anticancer therapy, which are
in varying stages of development. Our goal is to become a leading developer of
drug therapies for the treatment of the Human Immunodeficiency Virus ("HIV"),
Acquired Immune Deficiency Syndrome ("AIDS") and cancer.
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
March 31, 2003 we have an accumulated development stage deficit of
$(26,554,563).
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.
15
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, 2002.
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 $10 per share. The value of the warrants issued with
the Series B Convertible Preferred Stock was deemed de minimus. Series C
Convertible Preferred Stock is recorded at its liquidation preference of $10
per share. 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 ENDED MARCH 31, 2003
The Company continued to have no significant revenues and only minimal
interest income in the calendar quarters and three months ended March 31, 2003
and 2002, earned on the balance of funds maintained in the Company's bank
accounts.
During the first quarter of 2003, 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 $(16,188) for the quarter; down from
$38,178 in the year-earlier period on account of the Company's revised license
agreement with 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 United States Public Health Service National
Institutes of Health (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
16
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 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 first quarter of 2003
decreased by $148,261 to $423,504 from $571,765 in the year-earlier period due
to interest expense recorded in the prior period that was not incurred in the
current period and the expensing of a warrant donated to the Company during the
three months ended March 31, 2002 and subsequently sold during the three months
ended March 31, 2002, valued at $289,262. General and administrative expenses
for the three months ended March 31, 2003 were $423,504 compared to $571,765 in
the year-earlier period.
Depreciation and amortization amounted to $1,494 and $128,486 for three
months ended March 31, 2003 and 2002, respectively. The larger amount in 2002
included amortized debt discount relating to $450,000 of notes payable that
were issued in the fourth quarter of 2001 of $118,667 and amortized other
assets of $9,000.
Interest expense amounted to $962 and $13,315 for the three months ended
March 31, 2003 and 2002, respectively. The decrease is due to the maturation
and retirement of $280,000 of $450,000 in notes payable during 2002.
As a result of the increase in compensation expense recorded related to
the issuance and recording of employee stock options and the reduction in debt
discount amortization, and the other factors noted above, the Company's loss
for the first quarter decreased to $(405,494) from a loss of $(751,244) for the
year-earlier period, and the loss per share decreased to $(0.02) from $(0.05)
per share in the year-earlier period.
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 March 31, 2003, cash amounted to $456,033, compared with
$103,928 on December 31, 2002.
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 equity placements during the
preceding twelve months.
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 second half of 2003 and plans
to file an IND for its EradicAide product for HIV/AIDS during 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.
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.
17
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.
RISK FACTORS
If any of the following risks actually occur, our business, results of
operations and financial condition could suffer significantly.
WE HAVE A SUBSTANTIAL ACCUMULATED DEFICIT AND LIMITED WORKING CAPITAL.
The Company had an accumulated deficit of $26,554,563 as of March 31,
2003. Since the Company presently has no source of revenues and is committed to
continuing its product research and development program, significant
expenditures and losses will continue until development of new products is
completed and such products have been clinically tested, approved by the FDA
and successfully marketed. In addition, the Company has funded its operations
primarily through the sale of Company securities, and has had limited working
capital for its product development and other activities.
WE HAVE NO CURRENT PRODUCT SALES REVENUES OR PROFITS.
The Company has devoted its resources to developing a new generation of
therapeutic drug products, but such products cannot be marketed until clinical
testing is completed and governmental approvals have been obtained.
Accordingly, there is no current source of revenues, much less profits, to
sustain the Company's present activities, and no revenues will likely be
available until, and unless the new products are clinically tested, approved by
the FDA and successfully marketed, either by the Company or a marketing
partner, an outcome which the Company is not able to guarantee.
IT IS UNCERTAIN THAT THE COMPANY WILL HAVE ACCESS TO FUTURE CAPITAL OR
GOVERNMENT GRANTS.
It is not expected that the Company will generate positive cash flow from
operations for at least the next several years. As a result, substantial
additional equity or debt financing or the receipt of one or more government
grants for research and development and/or clinical development may be required
to fund our activities. We cannot assure that we will be able to consummate any
such financing on favorable terms, if at all, or receive any such government
grants or that such financing or government grants will be adequate to meet our
capital requirements. Any additional equity financing could result in
substantial dilution to stockholders, and debt financing, if available, may
involve restrictive covenants which preclude the Company from making
distributions to stockholders and taking other actions beneficial to
stockholders. If adequate funds are not available, the Company may be required
to delay or reduce the scope of its drug development program or attempt to
continue development by entering into arrangements with collaborative partners
or others that may require the Company to relinquish some or all of its rights
to proprietary drugs. The inability to fund its capital requirements would have
a material adverse effect on the Company.
18
THE COMPANY IS NOT CERTAIN THAT IT WILL BE SUCCESSFUL IN THE DEVELOPMENT
OF ITS DRUG CANDIDATES.
The successful development of any new drug is highly uncertain and is
subject to a number of significant risks. Our drug candidates, which are in a
development stage, require significant, time-consuming and costly development,
testing and regulatory clearance. This process typically takes several years
and can require substantially more time. Risks include, among others, the
possibility that a drug candidate will (i) be found to be ineffective or
unacceptably toxic, (ii) have unacceptable side effects, (iii) fail to receive
necessary regulatory clearances, (iv) not achieve broad market acceptance, (v)
be subject to competition from third parties who may market equivalent or
superior products, or (vi) be affected by third parties holding proprietary
rights that will preclude the Company from marketing a drug product. There can
be no assurance that the development of drug candidates will demonstrate the
efficacy and safety of a drug candidate as a therapeutic drug, or, even if
demonstrated, that there will be sufficient advantages to its use over other
drugs or treatments so as to render the drug product commercially viable. In
the event that the Company is not successful in developing and commercializing
one or more drug candidates, investors are likely to realize a loss of their
entire investment.
POSITIVE RESULTS IN PRECLINICAL AND EARLY CLINICAL TRIALS DO NOT ENSURE
THAT FUTURE CLINICAL TRIALS WILL BE SUCCESSFUL OR THAT DRUG CANDIDATES WILL
RECEIVE ANY NECESSARY REGULATORY APPROVALS FOR THE MARKETING, DISTRIBUTION OR
SALE OF SUCH DRUG CANDIDATES.
Success in preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical trials
and to submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict.
THE COMPANY WILL FACE INTENSE COMPETITION FROM OTHER COMPANIES IN THE
PHARMACEUTICAL INDUSTRY.
The Company is engaged in a segment of the pharmaceutical industry that is
highly competitive and rapidly changing. If successfully developed and
approved, any of the Company's drug candidates will likely compete with several
existing therapies. In addition, other companies are pursuing the development
of pharmaceuticals that target the same diseases as are targeted by the drugs
being developed by the Company. The Company anticipates that it will face
intense and increasing competition in the future as new products enter the
market and advanced technologies become available. We cannot assure that
existing products or new products developed by competitors will not be more
effective, or more effectively marketed and sold than those by the Company.
Competitive products may render the Company's drugs obsolete or noncompetitive
prior to the Company's recovery of development and commercialization expenses.
Many of the Company's competitors will also have significantly greater
financial, technical and human resources and will likely be better equipped to
develop, manufacture and market products. In addition, many of these
competitors have extensive experience in preclinical testing and clinical
trials, obtaining FDA and other regulatory approvals and manufacturing and
marketing pharmaceutical products. A number of these competitors also have
products that have been approved or are in late-stage development and operate
large, well-funded research and development programs. Smaller companies may
also prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and biotechnology companies.
Furthermore, academic institutions, government agencies and other public and
private research organizations are becoming increasingly aware of the
commercial value of their inventions and are actively seeking to commercialize
the technology they have developed. Accordingly, competitors may succeed in
commercializing products more rapidly or effectively than the Company, which
would have a material adverse effect on the Company.
THERE IS NO ASSURANCE THAT THE COMPANY'S PRODUCTS WILL HAVE MARKET
ACCEPTANCE.
The success of the Company will depend in substantial part on the extent
to which a drug product achieves market acceptance. The degree of market
acceptance will depend upon a number of factors, including (i) the receipt and
scope of regulatory approvals, (ii) the establishment and demonstration in the
medical community of the safety and efficacy of a drug product, (iii) the
19
product's potential advantages over existing treatment methods and (iv)
reimbursement policies of government and third party payors. We cannot predict
or guarantee that physicians, patients, healthcare insurers or maintenance
organizations, or the medical community in general, will accept or utilize any
drug product of the Company.
THE UNAVAILABILITY OF HEALTH CARE REIMBURSEMENT FOR ANY OF OUR PRODUCTS
WILL LIKELY ADVERSELY IMPACT OUR ABILITY TO EFFECTIVELY MARKET SUCH PRODUCTS
AND WHETHER HEALTH CARE REIMBURSEMENT WILL BE AVAILABLE FOR ANY OF OUR PRODUCTS
IS UNCERTAIN.
The Company's ability to commercialize its technology successfully will
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. The Company cannot guarantee that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return
on its investments in developing new therapies. Government, private health
insurers, and other third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new therapeutic products approved for marketing by the FDA. Accordingly, even
if coverage and reimbursement are provided by government, private health
insurers, and third-party payors for uses of the Company's products, the market
acceptance of these products would be adversely affected if the amount of
reimbursement available for the use of the Company's therapies proved to be
unprofitable for health care providers.
UNCERTAINTIES RELATED TO HEALTH CARE REFORM MEASURES MAY AFFECT THE
COMPANY'S SUCCESS.
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services, including
prescription drugs, to government control and to make other changes to U.S.
health care system. It is uncertain which legislative proposals will be adopted
or what actions federal, state, or private payors for health care treatment and
services may take in response to any health care reform proposals or
legislation. The Company cannot predict the effect health care reforms may have
on its business, and there is no guarantee that any such reforms will not have
a material adverse effect on the Company.
FURTHER TESTING OF OUR DRUG CANDIDATES WILL BE REQUIRED AND THERE IS NO
ASSURANCE OF FDA APPROVAL.
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products, through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product.
The effect of government regulation and the need for FDA approval may be
to delay marketing of new products for a considerable period of time, to impose
costly procedures upon the Company's activities, and to provide an advantage to
larger companies that compete with the Company. There can be no assurance that
FDA or other regulatory approval for any products developed by the Company will
be granted on a timely basis or at all. Any such delay in obtaining, or failure
to obtain, such approvals would materially and adversely affect the marketing
of any contemplated products and the ability to earn product revenue. Further,
regulation of manufacturing facilities by state, local, and other authorities
is subject to change. Any additional regulation could result in limitations or
restrictions on the Company's ability to utilize any of its technologies,
thereby adversely affecting the Company's operations.
Human pharmaceutical products are subject to rigorous preclinical testing
and clinical trials and other approval procedures mandated by the FDA and
foreign regulatory authorities. Various federal and foreign statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of pharmaceutical products. The process
of obtaining these approvals and the subsequent compliance with appropriate
U.S. and foreign statutes and regulations are time-consuming and require the
expenditure of substantial resources. In addition, these requirements and
processes vary widely from country to country.
Among the uncertainties and risks of the FDA approval process are the
following: (i) the possibility that studies and clinical trials will fail to
prove the safety and efficacy of the drug, or that any demonstrated efficacy
20
will be so limited as to significantly reduce or altogether eliminate the
acceptability of the drug in the marketplace, (ii) the possibility that the
costs of development, which can far exceed the best of estimates, may render
commercialization of the drug marginally profitable or altogether unprofitable,
and (iii) the possibility that the amount of time required for FDA approval of
a drug may extend for years beyond that which is originally estimated. In
addition, the FDA or similar foreign regulatory authorities may require
additional clinical trials, which could result in increased costs and
significant development delays. Delays or rejections may also be encountered
based upon changes in FDA policy and the establishment of additional
regulations during the period of product development and FDA review. Similar
delays or rejections may be encountered in other countries.
THE COMPANY'S SUCCESS WILL BE DEPENDENT ON LICENSES AND PROPRIETARY RIGHTS
IT RECEIVES FROM OTHER PARTIES, AND ON ANY PATENTS IT MAY OBTAIN.
Our success will depend in large part on the ability of the Company and
its licensors to (i) maintain license and patent protection with respect to
their drug products, (ii) defend patents and licenses once obtained, (iii)
maintain trade secrets, (iv) operate without infringing upon the patents and
proprietary rights of others and (iv) obtain appropriate licenses to patents or
proprietary rights held by third parties if infringement would otherwise occur,
both in the U.S. and in foreign countries. The Company has obtained licenses to
patents and other proprietary rights from M.D. Anderson, USC and the NIH.
The patent positions of pharmaceutical companies, including those of the
Company, are uncertain and involve complex legal and factual questions. There
is no guarantee that the Company or its licensors have or will develop or
obtain the rights to products or processes that are patentable, that patents
will issue from any of the pending applications or that claims allowed will be
sufficient to protect the technology licensed to the Company. In addition, we
cannot assure that any patents issued to or licensed by the Company will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide competitive disadvantages to the Company.
Litigation, which could result in substantial cost, may also be necessary
to enforce any patents to which the Company has rights, or to determine the
scope, validity and unenforceability of other parties' proprietary rights,
which may affect the rights of the Company. U.S. patents carry a presumption of
validity and generally can be invalidated only through clear and convincing
evidence. There can be no assurance that the Company's licensed patents would
be held valid by a court or administrative body or that an alleged infringer
would be found to be infringing. The mere uncertainty resulting from the
institution and continuation of any technology-related litigation or
interference proceeding could have a material adverse effect on the Company
pending resolution of the disputed matters.
The Company may also rely on unpatented trade secrets and know-how to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can be
no assurance that these agreements will not be breached or terminated, that the
Company will have adequate remedies for any breach, or that trade secrets will
not otherwise become known or be independently discovered by competitors.
THE COMPANY'S LICENSE AGREEMENTS CAN BE TERMINATED IN THE EVENT OF A
BREACH.
The license agreements pursuant to which the Company has licensed its core
technologies for its potential drug products permit the licensors, respectively
M.D. Anderson, NIH and USC, to terminate the agreement under certain
circumstances, such as the failure by the licensee to use its reasonable best
efforts to commercialize the subject drug or the occurrence of any other
uncured material breach by the licensee. The license agreements also provide
that the licensor is primarily responsible for obtaining patent protection for
the technology licensed, and the licensee is required to reimburse it for the
costs it incurs in performing these activities. The license agreements also
require the payment of specified royalties. Any inability or failure to observe
these terms or pay these costs or royalties could result in the termination of
the applicable license agreement in certain cases. The termination of any
license agreement would have a material adverse effect on the Company.
21
PROTECTING OUR PROPRIETARY RIGHTS IS DIFFICULT AND COSTLY.
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions. Accordingly,
we cannot predict the breadth of claims allowed in these companies' patents or
whether the Company may infringe or be infringing these claims. Patent disputes
are common and could preclude the commercialization of our products. Patent
litigation is costly in its own right and could subject us to significant
liabilities to third parties. In addition, an adverse decision could force us
to either obtain third-party licenses at a material cost or cease using the
technology or product in dispute.
THE COMPANY'S SUCCESS IS DEPENDENT ON ITS KEY PERSONNEL.
The Company is dependent on a small management group and on independent
researchers, some of whom are inventors of the patents licensed to the Company
for core technologies and drugs developed at M.D. Anderson and USC. Scientific
personnel may from time to time serve as consultants to the Company and may
devote a portion of their time to the Company's business, as well as continue
to devote substantial time to the furtherance of the Company's sponsored
research at M.D. Anderson, USC and other affiliated institutions as may be
agreed to in the future, but such personnel are not employees of the Company
and are not bound under written employment agreements. The services of such
persons are important to the Company, and the loss of any of these services may
adversely affect the Company.
WE MAY BE UNABLE TO RETAIN SKILLED PERSONNEL AND MAINTAIN KEY
RELATIONSHIPS.
The success of our business depends, in large part, on our ability to
attract and retain highly qualified management, scientific and other personnel,
and on our ability to develop and maintain important relationships with leading
research institutions and consultants and advisors. Competition for these types
of personnel and relationships is intense from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There
can be no assurance that the Company will be able to attract and retain such
individuals on commercially acceptable terms or at all, and the failure to do
so would have a material adverse effect on the Company.
WE CURRENTLY HAVE NO SALES OR MARKETING CAPABILITY.
The Company does not have marketing or sales personnel. The Company will
have to develop a sales force, or rely on marketing partners or other
arrangements with third parties for the marketing, distribution and sale of any
drug product which is ready for distribution. There is no guarantee that the
Company will be able to establish marketing, distribution or sales capabilities
or make arrangements with third parties to perform those activities on terms
satisfactory to the Company, or that any internal capabilities or third party
arrangements will be cost-effective.
In addition, any third parties with which the Company may establish
marketing, distribution or sales arrangements may have significant control over
important aspects of the commercialization of a drug product, including market
identification, marketing methods, pricing, composition of sales force and
promotional activities. There can be no assurance that the Company will be able
to control the amount and timing of resources that any third party may devote
to the products of the Company or prevent any third party from pursuing
alternative technologies or products that could result in the development of
products that compete with, and/or the withdrawal of support for, the products
of the Company.
THE COMPANY DOES NOT HAVE MANUFACTURING CAPABILITIES AND MAY NOT BE ABLE
TO EFFICIENTLY DEVELOP MANUFACTURING CAPABILITIES OR CONTRACT FOR SUCH SERVICES
FROM THIRD PARTIES ON COMMERCIALLY ACCEPTABLE TERMS.
The Company will not have any manufacturing capacity. When required, the
Company will seek to establish relationships with third-party manufacturers for
the manufacture of clinical trial material and the commercial production of a
drug product just as it has with Merck Eprova AG and Multiple Peptide Systems,
Inc. There can be no assurance that the Company will be able to establish
relationships with third-party manufacturers on commercially acceptable terms
or that third-party manufacturers will be able to manufacture a drug product on
a cost-effective basis in commercial quantities under good manufacturing
practices mandated by the FDA.
The dependence upon third parties for the manufacture of products may
adversely affect future costs and the ability to develop and commercialize a
drug product on a timely and competitive basis. Further, there can be no
22
assurance that manufacturing or quality control problems will not arise in
connection with the manufacture of the drug product or that third party
manufacturers will be able to maintain the necessary governmental licenses and
approvals to continue manufacturing such products. Any failure to establish
relationships with third parties for its manufacturing requirements on
commercially acceptable terms would have a material adverse effect on the
Company.
THE COMPANY DOES NOT HAVE ITS OWN RESEARCH FACILITIES AND WILL BE
DEPENDENT ON THIRD PARTIES FOR DRUG DEVELOPMENT.
The Company does not have its own research and development facilities and
engages consultants and independent contract research organizations to design
and conduct clinical trials in connection with the development of a drug. As a
result, these important aspects of a drug's development will be outside the
direct control of the Company. In addition, there can be no assurance that such
third parties will perform all of their obligations under arrangements with the
Company or will perform those obligations satisfactorily.
IN THE FUTURE, WE ANTICIPATE THAT WE WILL NEED TO OBTAIN ADDITIONAL OR
INCREASED PRODUCT LIABILITY INSURANCE COVERAGE AND IT IS UNCERTAIN THAT SUCH
INCREASED OR ADDITIONAL INSURANCE COVERAGE CAN BE OBTAINED ON COMMERCIALLY
REASONABLE TERMS.
The business of the Company will expose it to potential product liability
risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical products. There can be no assurance that product liability
claims will not be asserted against the Company. The Company intends to obtain
additional limited product liability insurance for its clinical trials,
directly or through its marketing development partners or CRO (contract
research organization) partners, when they begin in the U.S. and to expand its
insurance coverage if and when the Company begins marketing commercial
products. However, there can be no assurance that the Company will be able to
obtain product liability insurance on commercially acceptable terms or that the
Company will be able to maintain such insurance at a reasonable cost or in
sufficient amounts to protect against potential losses. A successful product
liability claim or series of claims brought against the Company could have a
material adverse effect on the Company.
INSURANCE COVERAGE IS INCREASINGLY MORE DIFFICULT TO OBTAIN OR
MAINTAIN.
Obtaining insurance for our business, property and products is
increasingly more costly and narrower in scope, and we may be required to
assume more risk in the future. If we are subject to third-party claims or
suffer a loss or damage in excess of our insurance coverage, we may be required
to share that risk in excess of our insurance limits. Furthermore, any first-
or third-party claims made on any of our insurance policies may impact our
ability to obtain or maintain insurance coverage at reasonable costs or at all
in the future.
THE MARKET PRICE OF OUR SHARES, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES,
IS HIGHLY VOLATILE.
Market prices for the Company's Common Stock and the securities of other
medical and biomedical technology companies have been highly volatile and may
continue to be highly volatile in the future. Factors such as announcements of
technological innovations or new products by the Company or its competitors,
government regulatory action, litigation, patent or proprietary rights
developments, and market conditions for medical and high technology stocks in
general can have a significant impact on any future market for the Common
Stock.
WE ARE NOT PAYING DIVIDENDS ON OUR COMMON STOCK.
The Company has never paid cash dividends on Common Stock, and does not
intend to do so in the foreseeable future.
THE ISSUANCE OF SHARES OF OUR PREFERRED STOCK MAY ADVERSELY AFFECT OUR
COMMON STOCK.
The Board of Directors is authorized to designate one or more series and
to fix the rights, preferences, privileges and restrictions thereof, without
any action by the stockholders. The designation and issuance of such shares of
our preferred stock may adversely affect the Common Stock, if the rights,
23
preferences and privileges of such preferred stock (i) restrict the declaration
or payment of dividends on Common Stock, (ii) dilute the voting power of Common
Stock, (iii) impair the liquidation rights of the Common Stock or (iv) delay or
prevent a change in control of the Company from occurring, among other
possibilities.
UNDER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW, THE COMPANY'S MANAGEMENT MAY BE ABLE TO BLOCK OR IMPEDE A CHANGE
IN CONTROL.
The Company's Certificate of Incorporation authorizes the Board of
Directors (the "Board") to issue shares of undesignated preferred stock without
stockholder approval on such terms as the Board may determine. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any such preferred stock that may be issued in
the future. Moreover, the issuance of preferred stock may make it more
difficult for a third party to acquire, or may discourage a third party from
acquiring, a majority of the voting stock. These and other provisions of the
Certificate of Incorporation and the by-laws, as well as certain provisions of
Delaware law, could delay or impede the removal of incumbent directors and
could make more difficult a merger, tender offer or proxy contest involving a
change of control of the Company, even if such events could be beneficial to
the interest of the stockholders as a whole. Such provisions could limit the
price that certain investors might be willing to pay in the future for the
Common Stock.
OFFICERS' AND DIRECTORS' LIABILITIES ARE LIMITED UNDER DELAWARE LAW.
Pursuant to the Company's Certificate of Incorporation and by-laws, as
authorized under applicable Delaware law, directors are not liable for monetary
damages for breach of fiduciary duty, except in connection with a breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or for any transaction in which a
director has derived an improper personal benefit. The Certificate of
Incorporation and by-laws provide that the Company must indemnify its officers
and directors to the fullest extent permitted by Delaware law for all expenses
incurred in the settlement of any actions against such persons in connection
with their having served as officers or directors.
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 Company's principal executive and financial officers concluded
that the Company's disclosure controls and procedures are effective in timely
providing them with material information relating to the Company, as 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
There were no significant changes in the Company's internal controls or
other factors that could significantly affect those controls subsequent to the
date of the Company's evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
24
ITEM 2. CHANGES IN SECURITIES.
In January 2003, pursuant to the terms of promissory notes issued by the
Company in October and December 2001, the Company issued an aggregate of
119,454 shares of Common Stock to the holders of such notes in payment of
accrued interest that was due such holders.
In March 2003, the Company issued a warrant to a former executive in
consideration of certain covenants related to his separation from the Company.
In exchange the former executive returned 649,747 shares of common stock
previously held by the former executive. The warrant represents the right to
purchase 150,000 shares of Common Stock at an exercise price of $1.25 per
share. The warrant will expire on December 12, 2005. The Company recorded the
resulting treasury stock using the cost method at the value of the warrant,
$50,852.
On March 4, 2003, the Board of Directors of the Company granted an option
to Evan M. Levine, our Chief Operating Officer, to purchase up to 1,000,000
shares of Common Stock at an exercise price of $0.50 per share, which right
vested with respect to 125,000 shares on April 1, 2003 and will continue to
vest with respect to 125,000 shares each quarterly anniversary thereafter until
fully-vested. The Board of Directors also granted an option to Joan Robbins,
our Chief Technical Officer, to purchase up to 300,000 shares of Common Stock
at an exercise price of $0.50 per share, which right vested with respect to
100,000 shares on the date of grant, will vest with respect to 100,000 shares
on March 4, 2004 and will vest with respect to 100,000 shares on March 4, 2005.
Each of the foregoing options will expire on December 30, 2008 and each of the
foregoing options provide that the optionholder may exercise the option on a
"net issue" or "cashless" basis.
On March 25, 2003, the Company issued four warrants to four individuals in
consideration of certain investment banking advice. The four warrants represent
the right to purchase 25,783, 50,000, 50,000 and 10,000 shares of Common Stock
at an exercise price of $0.50 per share. Each warrant will expire on March 25,
2006. The fair market value of the warrants was $61,151.
On March 25, 2003, the Company issued 75,000 shares of Common Stock and
two warrants to one entity in consideration of such entity's introduction of
the Company to investors that purchased shares of Common Stock between January
2003 and March 2003. Each of the two warrants represents the right to purchase
37,500 shares of Common Stock at an exercise price of $0.50 per share. Each
warrant will expire on March 25, 2006. The fair market value of the common
stock and warrants was $41,250 and $37,777, respectively.
In March 2003, the Company issued 50,000 shares of Common Stock to a
company in consideration of such company's marketing efforts on behalf of the
Company. The fair market value of the common stock was $27,500.
On March 26, 2003, the Board of Directors of the Company granted an option
to M. Ross Johnson, Ph.D., our Chairman of the Board, to purchase up to 500,000
shares of Common Stock at an exercise price of $0.50 per share, which right
vested with respect to 62,500 shares on April 1, 2003 and will continue to vest
with respect to 62,500 shares each quarterly anniversary thereafter until
fully-vested. The Board of Directors also granted an option to Steven M. Plumb,
CPA, our Chief Financial Officer, to purchase up to 100,000 shares of Common
Stock at an exercise price of $0.50 per share, which right vested with respect
to 12,500 shares on April 1, 2003 and will continue to vest with respect to
12,500 shares each quarterly anniversary thereafter until fully-vested. Each of
the foregoing options will expire on December 30, 2008 and each of the
foregoing options provide that the optionholder may exercise the option on a
"net issue" or "cashless" basis.
Between January 9, 2003 and March 31, 2003, the Company closed sales of an
aggregate of 1,589,856 shares of Common Stock to eight investors for gross
proceeds of $635,949 in cash. These purchasers of Common 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 these
purchasers of Common Stock.
In March 2003, all of the holders of Series C Preferred Stock converted
all of their shares of Series C Preferred Stock into an aggregate of 14,021,860
shares of Common Stock pursuant to the terms of our Certificate of Designation
25
of Series B Convertible Preferred Stock and Series C Convertible Preferred
Stock filed with the Secretary of State of the state of Delaware on September
23, 2002. As of March 31, 2003, no shares of Series C Preferred Stock were
outstanding.
On April 11, 2003, the Company issued 25,785 shares of Common Stock to an
entity in consideration of such entity's introduction of the Company to
investors that purchased shares of Common Stock in January 2003.
In April 2003, pursuant to the terms of promissory notes issued by the
Company in October and December 2001, the Company issued an aggregate of 23,411
shares of Common Stock to the holders of such notes in payment of accrued
interest that was due such holders.
Except as otherwise noted above, no commission was paid or given, directly
or indirectly, for soliciting any of the above sales, amendments, issuances,
exchanges or conversions.
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, as transactions by an
issuer not involving a public offering or, in the case of the conversion of all
of the outstanding shares of Series C Preferred Stock into Common Stock, in
reliance on 3(a)(9) of the Securities Act, as an exchange by the Company with
one of 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 three months of 2003.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
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)
26
EXHIBIT
NUMBER DESCRIPTION
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 Not currently in use
10.7*** Patent License Agreement, effective August 1, 2002, between Biokeys,
Inc. and the National Institutes of Health
10.8+ Letter Agreement, effective January 1, 2003, between Biokeys
Pharmaceuticals, Inc. and Steven M. Plumb, P.C.
10.9+ Offer Letter, dated March 5, 2003, from Biokeys Pharmaceuticals, Inc.
to Joan M. Robbins, Ph.D.
11.1* Statement Regarding Computation of Per Share Earnings
21.1+ Subsidiaries of Biokeys Pharmaceuticals, Inc.
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.
** Incorporated by
reference to the same-numbered exhibit to the Company's Registration Statement
on Form 10-SB/A, filed January 11, 2002.
*** Incorporated by reference to the same-numbered exhibit to the Company's
Quarterly Report on Form 10-QSB, filed November 26, 2002.
+ Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-KSB filed April 16, 2003.
(B) REPORTS ON FORM 8-K.
On February 10, 2003, we filed a current report on Form 8-K to report a
change in independent accountants.
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.
May 15, 2003 /s/ Steven M. Plumb
---------------------------------
Steven M. Plumb, CPA
Chief Financial Officer
27
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) evaluatedthe 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) presentedin 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.
May 15, 2003 /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, Steven M. Plumb, 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) evaluatedthe 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) presentedin 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.
May 15, 2003 /s/ STEVEN M. PLUMB
---------------------------------
Steven M. Plumb, CPA
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 Not currently in use
10.7*** Patent License Agreement, effective August 1, 2002, between
Biokeys, Inc. and the National Institutes of Health
10.8+ Letter Agreement, effective January 1, 2003, between Biokeys
Pharmaceuticals, Inc. and Steven M. Plumb, P.C.
10.9+ Offer Letter, dated March 5, 2003, from Biokeys Pharmaceuticals,
Inc. to Joan M. Robbins, Ph.D.
11.1* Statement Regarding Computation of Per Share Earnings
21.1+ Subsidiaries of Biokeys Pharmaceuticals, Inc. as of December 31,
2002
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.
** Incorporated by reference to the same-numbered exhibit to the Company's
Registration Statement on Form 10-SB/A, filed January 11, 2002.
*** Incorporated by reference to the same-numbered exhibit to the Company's
Quarterly Report on Form 10-QSB, filed November 26, 2002. + Incorporated by
reference to the same numbered exhibit to the Company's Annual Report on Form
10-KSB filed April 16, 2003.
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 March 31,
2003 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 Steven M. Plumb, 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
May 15, 2003
/s/ STEVEN M. PLUMB
- --------------------------------
Steven M. Plumb
Chief Financial Officer
May 15, 2003
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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